One of the most used indecies to set interest rates on such instruments as Adjustable Rate Mortgages and Loans is the London Interbank Offered Rate or LIBOR.
This is the index upon which the annual or monthly adjustment of many loans is based, however, what happens if this index is corrupted by intentional manipulation by a bank or a number of banks?
The LIBOR has long been used as a basis to adjust interest paid on your home loan, home equity loan, and other loans based on an adjustable rate. News has come out that Barclay's Bank participated in the manipulation of this rate and there is evidence that Barclay's is not the sole participant in this scheme to rig the most important of rates for consumers in the United States.
The next question is, if the LIBOR has been manipulated, how does this manipulation affect my loan? You have two avenues to pursue on this issue: (1) Play dumb and take advantage of the 1 per cent rate through 2015; or (2) Force the bank to give you an even lower interest rate based on the corruption of the index.
Many loans provide that if the LIBOR ceases being a reliable index, the bank can choose another index. We all know the bank would want to choose an index that best profits them, but is this a legal act by the bank? I would argue that such a provision turns the loans agreement into an illusory contract giving the bank too much power to determine the terms of the loan.
Your loan agreement could be determined to be void based on the illegality of the loan agreement, leaving everyone on the steps of the local courthouse in a Declaratory Relief Action giving a judge the right to determine the rights and responsibilities of the parties. The alternative is to mediate this dispute with your bank to reform the loan agreement to have the payment on a fixed rate such as 2 or 3 per cent rather than using any index, which can be readily manipulated by banks.
Maybe you can agree to the 10 year note rate which is hovering at 1.5 per cent and may go lower upon a QEIII scenario. The point here is that bank agreements that used to be "iron clad," are showing some signs of weakness, given the revelations about Banks and their manipulation of various factors, including the LIBOR. Here, the manipulation of the LIBOR is a really big deal affecting millions of loans in the world, and the amount paid as these loans adjust.
Should be an interesting happenstance if the LIBOR is found to have been manipulated by banks which sold ARM's to consumers without disclosing any material facts regarding their effect on such a loan using the LIBOR. Seems the abks have so corrupted the financial system that it may backfire on many of them in the near future.