(The Root) — For all Baltimore's average citizens knew prior to late June, Libor was a faraway planet or some kind of a cleaning compound (as in: "For maximum results, add a dash of Libor to your borax when laundering horse blankets").
Then the news broke that British bank Barclays had admitted to gaming a key financial benchmark, the "London Interbank Offered Rate," so that its derivatives traders could extract illegal profits for the bank. Barclays is paying at least $450 million in penalties for the scheme, which may have affected mortgages, car financing and student loans.
Libor, like the much more widely known prime rate, Baltimoreans learned, is an interest rate to which not just adjustable rate loans but also pension funds and municipal bonds are pegged.
Libor-rate manipulations have by now grown far beyond a scandal du jour, prompting multiple investigations involving some two-dozen banks on three continents with potential damages in the billions of dollars.
And the banks that set the rate are now the subject of a class-action suit by multiple plaintiffs, led by the city of Baltimore, an urban center that has been struggling to make ends meet. For the past three fiscal cycles -- including the one that began on July 1 -- the city has grappled with multimillion-dollar deficits.
The city's fiscal managers have been forced to take extreme measures, from forcing city employees to take unpaid furloughs to making drastic changes in the city's public-employee pension system to cutting off funds for the historic Poe House, the family home of Edgar Allan Poe.
In the face of budgetary strife, Mayor Stephanie Rawlings-Blake has taken a fighting stance. "We cannot stand by when we feel that we are being cheated," she told CBS-TV. "You're talking about $1 or $2 million. You know, that's a fire company, that's recreation centers. That's services that our city needs, and we're going to fight for that."
Baltimore invested hundreds of millions in "interest-rate swaps," which were devalued by rate-setting banks, which, between 2006 and 2009, allegedly kept Libor artificially low. The scheme was ordered by bank managers to suggest that their banks were, during a time of economic troubles, more liquid than they actually were, say attorneys for the plaintiffs.
The result was that Baltimore and a large class of cities, states, pension funds and mutual funds received less than they should have in interest payments from banks. According to one estimate, about three out of four major American cities hold bonds linked to the Libor rate.
Read the full story at theroot.com.
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(Photo: Leigh Vogel/Getty Images for AOL)