Libor Scandal

I recently read a post from Angus Armstrong, Director, Macroeconomic Research, NIESR regarding this Libor Scandal. I think he summarises the situation well...in much better terms than I am qualified to do.
I have quoted below a few paragraph's of his story to help give an understanding of the scandal:

"The damage to the City of London of the revelations of manipulation in the London interbank market cannot be overestimated. The City is the global centre of foreign exchange trading (37% of global turnover), the home of the money markets and half of the $650 trillion global over-the-counter derivatives market.[1] The London Interbank Offer Rate (LIBOR) is the benchmark interest rate on which these transactions are priced, as well corporate loans and even mortgages. According to the IMF’s Article IV Spillover Report the UK's dominance in finance is reinforced by its "robust" market infrastructure, including the setting of LIBOR - the global benchmark interest rate.

LIBOR is not an actual borrowing rate. It is a (trimmed) average of interest rates that banks report that they could borrow funds in a reasonable size just prior to 11am each day.  So in periods of distress there is an incentive for banks which borrow at typical rates (so not trimmed) to submit lower interest rates to avoid this perverse signalling effect. Collusion could be an even more powerful way of forcing interest rates lower. Moreover, modern banks also hold very large positions in over-the-counter derivatives which are priced relative to LIBOR. This creates a second direct incentive to influence the reference rate."

My personal concern about this story is the effect on the reputation of the City and our banks. The speed with which we can deal with this situation will be fundamental in determining the international reaction to it. If we let this rumble on, which may be because we end up with a full legal, judge led inquiry, then we may face unforeseen repercussions which have an impact on the City.

If we were not in the middle of a financial crisis, at a time when bankers are still receiving large bonuses even though they are the cause of this chaos, then there would probably not have been as large a backlash as there has been.

I just hope the situation is dealt with efficiently, with any other banks involved being fined appropriately, and criminal charges brought as necessary.
http://notthetreasuryview.blogspot.co.uk/2012/07/libor-scandal-and-reforming-banking.html#more