Do you have a floating rate mortgage loan linked to LIBOR? If so, you may have paid a few basis points too much over the years.

Since 2002, more than 12 million A.R.M.'s, worth $3.5 trillion, have been indexed to LIBOR. Here's what LIBORgate means for you, first, and what it means for a few "Wall Street" bankers, second.

If you have a $100,000 mortgage, and you paid 10 basis points more than you had to, then each year you paid $100 more in interest payments than you should have paid. Now, the odds are LIBOR was manipulated less than that, and so it could have cost you between $30 and $100 per year per $100,000 borrowed. Not surprisingly, attorneys are clamoring to start up class action lawsuits against the various banks who may have colluded to keep LIBOR rates high.

The LIBOR scandal is causing lots of lawsuits and a lot of unhappy folks.  As I've discussed before, and recently, the incentives to cheat are huge!

A recent editorial by a Wesleyan professor has an interesting idea: eliminate the LIBOR numbers racket. 

In the first half of the century, mobsters controlled the results of government lotteries-numbers  games. You pick a number between 1 and 999 and, naturally, the mob cheated so that you lost and a mobster won. Once they changed the numbers to something that couldn't be fixed and was widely available, like the last 3 digits of the US Treasury balance, published in the paper, the numbers racket went away.

So, the Professor recommends that instead of asking LIBOR bankers for their best or worst estimates, LIBOR ought to be based on a market-determined figure. He proposes something called GCF Repo index, published by the Depository Trust & Clearing Corp.

"The benefit of such an index is that it is determined by a large number of actual trades. Fully 2,600 GCF Repo index contracts were transacted on its first trading day...  In order to restore the world's benchmark interest rate, the financial system ought to take a lesson from the mob."   Read Full Article