During the housing boom, borrowers constantly tried to get as much house as they could afford. They wanted Interest Only loans, Adjustable Rate Mortgages, Limited Documentation, Stated Documentation, NO Documentation. Whatever the lenders were offering that would get them into that house, get them approved for that mortgage - they went after it.
Adjustable Rate Mortgages (or ARMs - any mortgage that the interest rate of the loan is not fixed), along with Student Loans, financial derivatives and a lot of other financial products were tied to the LIBOR index, or the London Interbank Offered Rate. This is the interest rate one bank will loan money to another. LIBOR is used around the world as a signature index.
In July 2012, the news broke that the index was being manipulated by the banks and their employees. The banks used the index to boost their credit worthiness and to increase their income by falsely manipulating the index.
The manipulation had a serious effect on ARM loans. According to Libor Scandal information on the Wikipedia website, the index consistently rose on the first day of the month between 2000 and 2009.
This puts the responsibility of a lot of foreclosures suffered in the United States directly into the laps of the London banks. By manipulating the index, the caused untold millions of homeowners to miss their mortgage payments during the first adjustment period. Once the homeowner misses the first payment, it becomes more and more difficult to get back in control of their mortgage payment. The way mortgage work today, you cannot refinance your home if you have been late more than 1 month late on your mortgage in a 12 month period. Homeowners then decided to try to get their loans modified, but that system was rigged as well - TO GO AGAINST THE HOMEOWNER. No wonder there were so many foreclosures - and more to come. The ENTIRE system was set up for the homeowner to fail...
The first bank to receive a fine for wrong doing was Barclays Bank. Their fine of $450 million is nothing compared to the $1.5 billion fine levied against UBS. While Barclays manipulated LIBOR to boost it's rating, UBS used the index to line it's pockets.
After reading this, I truly wonder how many other scandals are waiting to be uncovered. I believe that borrowers were greedy, and they purchased way more house than they could afford during the housing boom. But the cards were stacked against them from the beginning. From liar loans to liar interest rates, they never had a chance. Modern day financing is the current day Wild Wild West. People who are allowed to make their own rules often choose to not have any...
I wonder what we will find out next ?
**UPDATE** Since I started this blog, Deutshe Bank, according to Mark Gongloff with the Huffington Post, has reported via Wall Street Journal that the bank turned nearly $654 million in profits on small bets connected to LIBOR in 2008.
This story is going to continue to grow. Watch and see...