Some Banks Lied Daily to Set the Rate Tied to Many Loans

Every day, what Gary Gensler remembered as 16 banks put in a rate in London. Each submission was supposed to say what it would cost to borrow and lend that day in the market for interest rates between banks.

Gary Gensler, a former Goldman Sachs banker who later ran the Commodity Futures Trading Commission, the federal agency that polices derivatives markets, remembers what investigators found. Gensler said "a number of them were just lying" and others were colluding.

The number was called the London interbank offered rate. Many home mortgages and other loans used that benchmark to set floating rates. Gensler said, "It matters to your mortgage. It matters to your employer. It matters to your auto loan, your student loan."

That is why the false reports mattered for many people's loans. A low submission could make a bank look healthier in a stressful period, and it could help the bank's traders because their bets on interest rates would pay more if the benchmark moved their way.

Gensler is blunt about what his team found. "We found a bunch of cheats," he said. "I don't know what else to call it."

He described the daily process in plain terms. The banks would say, in Gensler's account, "on a daily basis this is what we will borrow and lend" to describe borrowing and lending tied to the London interbank offered rate.

After the 2008 financial crisis, President Obama put together a team to stabilize the economy and seek reforms to make failures less likely. Gensler's agency worked with the rest of the administration and congressional leaders on provisions for derivatives markets, and then helped implement them. He says 67 different rules were written, with 85% bipartisan support, and that about 15 years later they have not been overturned. The credit default swap market and the interest rate swap markets are operating more cheaply, with narrower spreads in the interest rate swap market.

For the London rate, Gensler said, "I think we helped clean that market up." Regulators exposed the practice, and the benchmark was later phased out, with most versions ending in 2023.