Here is Spitzer and Taibbi having an orgasm about the scandal.
What's wrong with this take:
There is no way in hell that banks can "set" interest rates. Interest rates are market prices. If banks got together and claimed to be paying less than they were, which resulted in lower rates overall, this would result in a situation where the demand for loans would be greater than the supply. If banks claimed they were paying more than they were, then the demand for loans would be less than the supply.
Can banks attempt to game the system against other banks? Sure. Traders try to do this every day in all kinds of markets.
Here's WaPo on what Barclay's did:
First, from 2005 and 2007, the bank allegedly varied the rates it reported to the BBA and Thomson Reuters so as to improve its margins on internal trades. For example, it could have placed bets that the LIBOR rate would increase, and then reported artificially high rates which in turn artificially increased the LIBOR averages, so that the bets were likelier to pay off. This not only screwed the investors on the other side of the trade, but bumped up mortgage rates – however infinitesimally – for consumers even when the risk of the loans hadn’t changed at all...Second, in late 2008 Barclay’s – and, Diamond alleges, other banks – apparently low-balled the rates they reported for LIBOR averaging so as to make the banks’ finances look more stable than they were. The idea was to put out a false image of stability to prevent market panic and stave off calls for additional regulation or even nationalization, a solution that looked increasingly likely during the height of the financial crisis. The direct effect for consumers here was to make loans cheaper, but the indirect effect, or the intended one at least, was to lessen chances of government action against the banks
Note the "however infinitesimally", infinitesimal is correct. If Barclay's attempted anything else, it would have resulted in distorted markets. Which means other banks, who used LIBOR as a base rate from which to charge more, would have just simply adjusted their premiums downward off of LIBOR, or simply ditched LIBOR itself. The fact that LIBOR is used by most banks as a base rate suggests that it has proven overall to be a pretty damn good tool to judge supply and demand for loans. Again, if it wasn't, it would have distorted the supply and demand for loans around the world.
Bottom line: This "scandal" is not very important. If anything, the fact that it was executed after 2008 to provide an indication of lower rates, to keep governments off the back of banks, suggests how expensive government regulations are that banks would indicate lower rates rather than have to deal with government. (Again, to the degree that the LIBOR rate in this case resulted in a distorted market, other banks who used LIBOR as a base would simply adjust the premium that was charged over LIBOR, BUT that banks use LIBOR seems to be an indication that they are pretty happy with LIBOR as a base indication of true supply and demand for loans, or they wouldn't use it in the first place.)
Of course, while all this nonsense about Braclay's and LIBOR grabs the headlines (especially in Europe), it should be noted that there is little discussion of real interest rate manipulators, central banks, which can print money that really distorts interest rates and the economy and creates the business cycle and price inflation. That's the real scandal.
(video via Jaison De Montalegre)