The London Interbank Offered Rate (LIBOR) is an average of estimated interest rates submitted daily by leading banks in London. It reflects the cost of interbank lending and is used as the basis for pricing short-term global financial instruments such as futures, credit default swaps, mortgages and other loans. Because it is such an important benchmark, any changes to the LIBOR rate can have far-reaching consequences.

In 2012, revelations came to light that several banks had been colluding to artificially manipulate the LIBOR since 2005. Former Barclays executive, David Cresser, and other employees were found to have colluded with traders from JP Morgan, UBS, Royal Bank of Scotland and Citigroup to improperly manipulate the LIBOR. The scandal involved traders requesting that other banks submit false interbank lending rates, in order to reap short-term profits on financial products linked to these rates.

The implications of the LIBOR scandal have been far-reaching, both financially and legally. The financial consequences occur as a result of the mispricing of financial contracts and derivatives, due to the unnatural benchmarks affecting the prices of the contracts. In addition to this, the scandal has led to a complete breakdown of trust in the international banking system, which had a ripple effect throughout the global economy.

On the legal front, several banks have been fined for their involvement in the scandal, and many bank executives have been criminally charged or fired. Also, extensive legal battles have been launched by victims of the manipulation, who have sought to seek damages from the banks involved. This is made difficult by the complexity of the transactions, and the difficulty in proving any losses incurred.

The response to the scandal has been extensive, with extensive reform measures being implemented worldwide. Most notably the US implemented its Dodd-Frank Act, aimed at minimizing fraud and conflicts of interests in the financial markets, as well as providing greater oversight to the procedures which create and set the LIBOR rate.

Overall, the LIBOR scandal provides a stark example of the risk associated with financial products and benchmarks which lack oversight, particularly when transacted in opaque networks. The scandal has caused a re-examination of global financial mechanisms, and established stricter information reporting obligations and hedge fund transparency regulations. It has also shaken public trust in the banking system, leaving a burden on governments, regulators and banks to bring banking confidence back to the public.