As we absorb the Libor banking scandal, one of the things that will drive it is a recognition of who this hurt, at whose expense Barclays and a host of other banks made profits by manipulating the benchmark lending rate. Kevin Drum argues that it’s limited to floating-rate interest note investors, traders on futures exchanges who used Libor, or perhaps investors in Libor-linked CDs. This doesn’t have the kind of victims who are completely sympathetic. You can argue that, since Libor was a benchmark rate, anyone who had any adjustable-rate lending instrument was susceptible to being ripped off. But sometimes banks rigged Libor up and sometimes they rigged it down, frustrating efforts to figure out when they screwed people with those attributes and when they actually helped them. But Barry Ritholtz argues for a much broader view:

Bloomberg’s Darrell Preston explained last year how cities and other local governments got scalped when rates were manipulated downward:

In the U.S., municipal borrowers used swaps to guard against the risk of higher interest costs on variable-rate debt by exchanging payments with another entity and tying how much they pay to an underlying value such as an index. The agreements can backfire if rates move in unexpected directions, resulting in issuers making larger payments.The derivatives were often designed to offset the risks of increases in the short-term rates tied to auction-rate securities, fixing borrowers’ costs by trading their debt- service payments with another party. Instead, rates dropped [...]

Ellen Brown adds:

For more than a decade, banks and insurance companies convinced local governments, hospitals, universities and other non-profits that interest rate swaps would lower interest rates on bonds sold for public projects such as roads, bridges and schools. The swaps were entered into to insure against a rise in interest rates; but instead, interest rates fell to historically low levels. This was not a flood, earthquake, or other insurable risk due to environmental unknowns or “acts of God.” It was a deliberate, manipulated move by the Fed, acting to save the banks from their own folly in precipitating the credit crisis of 2008. The banks got in trouble, and the Federal Reserve and federal government rushed in to bail them out, rewarding them for their misdeeds at the expense of the taxpayers [...]

Banks and borrowers were supposed to be paying equal rates: the fat years would balance out the lean. But the Fed artificially manipulated the rates to the save the banks. After the credit crisis broke out, borrowers had to continue selling adjustable-rate securities at auction under the deals. Auction interest rates soared when bond insurers’ ratings were downgraded because of subprime mortgage losses; but the periodic payments that banks made to borrowers as part of the swaps plunged, because they were linked to benchmarks such as Federal Reserve lending rates, which were slashed to almost zero.

So I think there are plenty sympathetic victims here. Local governments – and that’s basically taxpayer money – were particularly vulnerable.

The fact that what we know of the scandal is a mere head of a pin, and that Bob Diamond and others implicated in the scandal are singing like canaries – “Banks across the world were fixing interest rates,” in his view – suggests that much more will come out about this. After all, Barclays is the one of at least a dozen banks who have COOPERATED in the investigation thus far. Diamond may not be a reliable narrator, but there are plenty that can still come out of the woodwork here.

And everyone is flipping: Conservative Chancellor of the Exchequer George Osborne is interested primarily in implicating Labour officials:

As the pressure on Diamond was renewed yesterday, Chancellor George Osborne ramped up hostilities with Labour over Britain’s banking culture, accusing Ed Balls and other Labour former ministers of being “clearly involved” in intervening over the Libor rate.

The carefully-staged intervention by Osborne, immediately dismissed by Balls’s team as “desperate” and “frenzied”, was designed to intensify the pressure on Labour as Ed Miliband tries to establish a judge-led inquiry into the banking scandal.

Nobody will come out looking particularly good here. And ultimately, as the Economist writes in a cover story which splashes the word “Banksters” (!) on the front page, this is about a culture of greed and venality:

The story will probably now shift to civil courts around the world: that could be a long process. From a public-interest perspective, two tasks lie ahead. The first is to find out exactly what happened and to punish those involved. Where the only motive was greed, the individuals directly involved in fraud should face jail. If the rate was lowered to keep the bank afloat, and regulators were involved, both the bankers and their rule-setters should explain why they took it upon themselves to endanger the City’s reputation in this way. In Britain an independent inquiry makes sense—the speedier the better, which argues for the parliamentary sort the government wants rather than the judicial variety the opposition demands.

The second task is to change the way finance is run—and the culture of banking. This after all is not the first price-fixing scandal: Wall Street has had several. A witch hunt would be disastrous (see Bagehot), but culture flows from structure. The case for splitting retail and investment banks on “moral” grounds is weak, but individual banks could do more: drawing fines from the bonus pool is one example. And some rules must change. LIBOR is set under the aegis not of the regulator but of a trade body, the British Bankers’ Association. That may have worked in the gentlemanly days when “the governor’s eyebrows” were enough to keep bankers in order. These days the City is the world’s biggest centre of international finance.

The Economist talks of a forfeiture of trust in the leading financial institutions. That was forfeited for many of us a long time ago. But if it takes establishment organs a scandal of this magnitude to come along, so be it.