The Justice Department and the SEC are investigating whether banks colluded to hold down a key interest rate before and during the financial crisis, sources tell the Wall Street Journal. The London interbank offered rate, or Libor, is calculated based on banks' self-reported borrowing costs. But from 2006 to 2008 some banks, most notably Bank of America and Citigroup, reported remarkably similar costs, even though each company had different pressures operating on it.
Banks had plenty of reason to fudge their responses—if any of them was seen as borrowing at a higher cost than competitors, it would send a signal of weakness to the market. Keeping Libor low by underreporting wouldn’t hurt borrowers, but it could hurt lenders, and lead to mispriced derivatives. Still, collusion will be tough to prove, experts say. Investigators would likely need either smoking-gun emails or documents, or testimony from multiple witnesses. (More Libor stories.)
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