Skip: Hello everyone this is Skip Montreux signing in from Tokyo, Japan.

Dez: And this is Dez Morgan still in the sweltering city of Abu Dhabi, at
least for a couple of days longer.
Skip: Welcome Dez and a great big warm welcome to all of our listeners
to an all new episode of Down to Business English.
Skip: So Dez, you say that you only have a couple of more days left in the
heat of the UAE?
Dez: Thats right, Im off to London in a few days.
Skip: Oh great, will you be taking in some of the Olympics?
Dez: Im not planning on it as my main focus will be looking for a house.
Skip: Arent houses in London incredibly expensive, Dez?
Dez: They are, which is why I will be looking for something very small on the outskirts somewhere. I
have the mortgage agreement in place although the interest rates that Im being charged is a bit
higher as I am an expat.
Skip: I guess you are more risky than someone living in their home country. Your mortgage isnt with
Barclays I hope, as they have been involved in quite the nancial scandal recently.
Dez: No its with another bank so seems to be safe enough. I heard about that scandal too and thought
that we must do a show on that as in parts its quite hard to understand.
Skip: Dont worry Dez I am up on all of the details. So lets do it lets get D2B...Down to Business with the
Libor rate manipulation scandal: What does LIBOR actually mean and how and why was it
manipulated?
Dez: I will get things started by explaining what the LIBOR rate is and then will pass you over to Skip for
the story.
Skip: Sounds like a good plan.
Dez: LIBOR stands for London Interbank Offered Rate and is the rate that banks in London charge each
other to borrow money.
Skip: Okay.
Dez: Now, because these banks trade in different currencies and over different periods of time, there are
rates for 10 different currencies and 15 periods of time.
Skip: And who decides what the rates are?
Down to Business English
The LIBOR Scandal
July 20,2012
www.downtobusinessenglish.com
p.1 of 5 www.downtobusinessenglish.com downtobusinessenglish@gmail.com
Dez: Well the LIBOR rate is decided by Thompson Reuters in association with the biggest banks in the
UK. And another important acronym is the Euribor which is the ........
Skip: I know, the same type of rate but for the Euro, I would imagine, and I guess its decided by the major
European banks?
Dez: Well deduced there Skip. Going back to the Libor for a bit, the libor rate decides interests rates not
only in pounds but also to a great extent the US dollar market as well.
Skip: It really is an important number then.
Dez: It is and importantly it is the 350 trillion dollars in derivatives that base their rates on the Libor rate.
Skip: Now that is a term we hear a lot these days, but can you explain what exactly a derivative is?
Dez: Good, but difcult question. Basically its anything that gets or derives its price based on something
else. Options and futures are good examples because their price is derived on the time of the
contract and the value of the underlying stock or commodity.
Skip: You mean like when farmers sell their crops or animals six months or a year before they are ready
for sale to take the uncertainty out?
Dez: Exactly and even my mortgage rate is partially based on the Libor rate plus some other calculations
such as the risk to the lender.
Skip: Okay,thanks for all of that background Dez. Now let's look at the recent scandal involving Barclays
Bank. The main question is how could one bank alter the rate when all of the banks are involved
together in setting the rate?
Dez: I wondered that.
Skip: What happens is all of the major banks estimate what they think the rate should be. Then Thompson
Reuters takes out the top and bottom numbers and averages the ones in the middle. If one bank
always goes for the top or the bottom number, even though it is removed, they are able to move the
rate fractionally higher or lower.
Dez: You mean that because the second lowest number gets to stay in the calculation because the rate
that, in this case Barclays put in, was taken as the lowest and so then removed.
Skip: Now that would only make the rate very slightly lower, but a trader who had enough money on the
line could make millions on the trade because he would be able to predict the direction that the
rate was moving in.
Dez: I see. So who lost out?
Skip: Pension funds, and basically anyone that needed to make a return from the interest gures that were
based on the Libor rate but interestingly anyone with a variable rate mortgage probably actually
made money.
Dez: So why did you warn me against getting a mortgage through Barclays then?
Skip: Inuencing the Libor rate intentionally is, as you can imagine, illegal and as it has been going on
since at least 2008, the nes that Barclays will face are going to be quite substantial.
p.2 of 5 www.downtobusinessenglish.com
The LIBOR Scandal
downtobusinessenglish@gmail.com
Dez: For four years! Why did no one stop it then?
Skip: Sir Mervyn Kin, the head of the bank of England, said in 2008 that he couldnt nd any evidence of
wrongdoing even though the then head of the New York Fed, Timothy Geitner, advised him
otherwise.
Dez: So in 2008 Barclays was underreporting gures and then trading on that?
Skip: Not exactly. In 2008 the banking system was in crisis. If a bank was seen to be demanding a
particularly high rate then it would look like it was in trouble whereas a lower rate implied the
bankers were condent.
Dez: And of course someone else at Barclays later gured out how to make money from the trade.
Skip: That seems to be how it worked. Now to get back to the nes, Barclays has been ned $200 million
by the Commodity Futures Trading Commission, $160 million by the US Department of Justice and
almost 60 million by the Financial Services Authority in the UK.
Dez: That certainly seems like a lot.
Skip: Well, that is before anyone comes after them for compensation though.
Dez: The pension funds that lost money for example.
Skip: Among others yes.
Dez: Thanks for that Skip and just before we go, was Barclays doing this alone?
Skip: Certainly not. Over a dozen of the worlds biggest banks are under investigation for the same crime.
Names that we all know like; Citi, HSBC, RBS, UBS, Deutsche .
Dez: Thanks Skip I think we certainly get the picture. Now would be a good time for us to get
D2V...Down to Vocabulary.
Skip: Let's start today's vocabulary with a word that Dez used in the opening of the show. He told us that
he was looking to buy a house on the outskirts of London because prices are too expensive in the
center of the city. As you can probably imagine from the context, outskirts means on the edge of a
city.
Dez: It can apply to holding an opinion as well, that is away from the center or majority. For example, in
today's meeting, I found myself on the outskirts of a discussion. I just do not agree with everyone
else.
Skip: Another related phrase is to skirt the issue. This means to not directly answer the question at hand,
but rather try to avoid the issue. Maybe we can demonstrate this. Dez, how much will your
upcoming vacation cost you?
Dez: That's a good question Skip. I'll be spending time in the South of England with relatives and then Ill
be off to London to go house hunting for a few days. If I have a chance and things work out, I might
take a train up north to visit some friends.
Skip: Come on Dez, you are skirting the issueexactly how much is this trip going to cost?
p.3 of 5 www.downtobusinessenglish.com downtobusinessenglish@gmail.com
The LIBOR Scandal
Dez: Okay, I think everyone gets the picture. Moving on
Skip: Youre still skirting the issue.
Dez: Moving on! Now let's look at the word deduce, which simply means to reach a conclusion based
on the information you have around you. In the report, I complimented Skip for deducing what the
Euribor was, which he did simply from what I had told him about the Libor.
Skip: So it is basically like taking a guess?
Dez: Actually no the opposite. A guess is based on a lack of information. When you take a guess it is
based more on your experience or intuition. When you deduce something, it means you are basing
your answer on known facts and reaching a logical conclusion.
Skip: I see. Well, can you give us a business example of deduce?
Dez: Certainly. The entire reason for a company to use a focus group when testing a new product, is to
gather enough marketing information to deduce what consumers will spend money on. It looks like
Apple has deduced that there is room in the market place for a smaller sized iPad. I just read that
they will be releasing a 7 inch iPad mini later this year.
Skip: Well, I will believe that when I see it. Anyway, moving on today, I'd like to explain the phrase to
have something on the line.
Dez: A very useful phrase.
Skip: Yes. To put or to have something on the line means that something is at risk. In the story, I
mentioned that a trader who had millions of dollars of investments on the line, stood to make a lot
of money. In other words, with millions of dollars at risk, the smallest movement in the Libor meant
very large gains. Dez, can you give us another example?
Dez: Certainly, Research in Motion has a lot on the line at the moment. With their market share
completely taken over by Android & Apple, they really have to come out with a super product in
order to survive. At least in North America and Europe.
Skip: Good example. Unfortunately, it doesn't look very good for RIM does it?
Dez: No, it doesn't I'm afraid. Next up today is the verb to underreport. This is a common business term
that means that the full amount of something; a sales gure, a loss, a revenue stream, anything
really, has not been fully reported. The entire Libor scandal revolves around Barclays
underreporting their estimated lending rate. Another example Skip?
Skip: Sure. Even though the US unemployment rate stands at just over 8%, most economists believe that
it is being underreported because so many people have simply given up looking for work. They
think the actual gure is closer to 15%.
Dez: Good luck in November Mr. Obama. What's our nal word today Skip?
Skip: Last up today is the noun compensation. Compensation refers to monies paid by a company or
organization to parties they have harmed in some way. In the story, I mentioned that so far Barclays
has only been penalized by regulators, that no one has yet come forward asking for compensation.
In other words, none of the investors who have lost money due to Barclays illegal actions has asked
for money to cover their losses.
p.4 of 5 www.downtobusinessenglish.com downtobusinessenglish@gmail.com
The LIBOR Scandal
Dez: I'm sure it is only a matter a time. Another example comes from where you are Skip. I was just
reading the other day how the Japanese government has given TEPCO billions of dollars in aid to
recover from the disaster they created at Fukushima, but the people who lived in that area have only
been compensated a very small amount.
Skip: That is true Dez. It really is a very sickening issue that is not getting much attention. In fact, while
you are away from the microphones this summer, I will be releasing a D2B report on the
compensation issue surrounding TEPCO and the Japanese nuclear disaster.
Dez: I look forward to hearing that. But for today, that is all the time we have for vocabulary.
Skip: Well Dez, thanks so much for all the information and for squeezing in the time to record one last
episode before you hit the road for your summer vacation.
Dez: My pleasure Skip. I hope you, as well as everyone listening, has a great summer.
Skip: Thanks Dez. While youre away, I know you will be spending some time researching topics for
future shows, and may even be able to put a Newsletter together?
Dez: Yes, thats right. Everyone, please be sure to drop by the D2B website and sign up for the newsletter.
Skip: And while you are there, feel free to download a copy of the audio script for todays show. Our
address is www.downtobusinessenglish.com . Thats www.downtobusinessenglish.com
Dez: I would also like to encourage everyone to stop by the Down to Business English Facebook page. Its
another great way to follow the show.
Skip: And nally, if you havent already, please be sure to subscribe to Down to Business English in
iTunes. The more people who are subscribed, the more visible we become in iTunes, and the more
people become aware of the show.
Dez: Thanks for listening everyone. Bye for now.
Skip: Yes, thanks everyone, see you next time.
p.5 of 5 www.downtobusinessenglish.com downtobusinessenglish@gmail.com
The LIBOR Scandal