What is Libor?

Libor is the average cost of borrowing for banks, which is re-calculated daily. Banks are asked to report their borrowing costs, and an average is taken (excluding the highest and lowest four rates). This figure is then used to price loans and financial products all over the world.

What did Barclays do wrong?

In 2005, traders in Barclays investment bank asked Barclays treasury function to report false Libor rates, in order to give their profits a boost. Barclays reversed this in 2007, and started deliberately understating their Libor rates, after they started to worry that high Libor rates were making it look risky in the wake of the run on Northern Rock.

What was the effect?

When Barclays misreported their borrowing rates, the average was slightly skewed. As Libor is used to price hundreds of trillions of pounds of financial stock, this effect was hugely magnified. Every time Barclays artificially altered their Libor for gain, another financial party lost out. This loss was distributed over the whole economy, and ultimately taken by the tax payer. Company loans are often calculated straight from Libor, meaning added problems here.