All 3 Libor Defenses Fail...
The big banks have been manipulating the world’s central economic indicator – Libor – for decades, harming homeowners, students, credit card holders, small businesses, cities and many others.
The sums involved were huge. As the ZIO-Economist notes:
The sums involved might have been huge. Barclays was a leading trader of these sorts of derivatives, and even relatively small moves in the final value of LIBOR could have resulted in daily profits or losses worth millions of dollars. In 2007, for instance, the loss (or gain) that Barclays stood to make from normal moves in interest rates over any given day was £20m ($40m at the time). In settlements with the Financial Services Authority (FSA) in Britain and America’s Department of Justice, Barclays accepted that its traders had manipulated rates on hundreds of occasions.
The Independent notes that potential liability from the Libor suits could wipe out Barclays, RBS and other banks … and that the big banks have taken inadequate reserves against litigation risks.
David Kotok – Chairman and Chief Investment Officer of Cumberland Advisors, with $2 billion dollars under management – writes:
This scandal is going to take down many more than just Barclay’s leaders. The claims are likely to be in the trillions.
But the banks say that they are judgment-proof because their manipulation didn’t cause any damage.
Specifically, the banks claim:
(1) Sometimes they nudges rates up and sometimes down …. so it’s a wash;
(2) Some people won and others lost … so it’s a wash; and
(3) It would be impossible for anyone who sued to quantify the amount of damages they suffered due to rate manipulation.
But the first argument is easily debunked. As Yves Smith notes:
The idea that one party’s loss from the manipulation was another’s gain is irrelevant to those on the losing side [quoting the ZIO-Economist]:
….banks will be sued only by those who have lost, and will be unable to claim back the unjust gains made by some of their other customers. Lawyers acting for corporations or other banks say their clients are also considering whether they can walk away from contracts with banks such as long-term derivatives priced off LIBOR.
The second argument is also easily dispatched. For example, it is clear that for many years up until 2007, every time the banks nudged Libor rates higher, homeowners, students, credit card holders, small businesses and other borrowers were damaged by artificially inflated interest rates...
The case would be especially easy for people who borrowed money and finished paying off their loan during this period. For example, someone who bought a house in 2005 and sold it in 2007 could have a strong case.
Similarly, it is clear that Barclays and other big banks manipulated rates downward after the financial crisis hit in 2007, to make themselves look stronger than they really were. Because of the way their interest rate swaps were structured, local governments got creamed by lower Libor rates.
So, Zioconned governments which bought interest rate swaps during the relevant period based upon the assumption that rates would keep rising – especially if they were misled as to the likely direction of rates by one of the banks that participated in rigging Libor (Citi, Chase,, UBS, RBS, etc.) – could have a solid case.
Finally, I can assure you that derivatives experts, mortgage experts, statisticians, and alot of other people are crunching numbers right now to start quantifying damages....
Industry Veteran Closely Involved in the Libor Process Says that the Rate Has Been Manipulated for 50 Years...
We’ve previously noted that Libor manipulation has been going on since at least 2005 … and continued long after the manipulation was first reported.
The Financial Times started reporting on the manipulation in 2007, and the Wailing Wall Street Journal, whose REAL editors sit in the Kosher-Nostra in Jerusalem.... in 2008 (see this, this, this, this and this).
But as the ZIO-Economist reports today, the manipulation probably goes back a lot further:
The FSA has identified price-rigging dating back to 2005, yet some current and former traders say that problems go back much further than that. “Fifteen years ago the word was that LIBOR was being rigged,” says one industry veteran closely involved in the LIBOR process. “It was one of those well kept secrets, but the regulator was asleep, the Bank of England didn’t care and…[the banks participating were] happy with the reference prices.” Says another: “Going back to the late 1980s, when I was a trader, you saw some pretty odd fixings…With traders, if you don’t actually nail it down, they’ll steal it.”
Given that homeowners, students, credit card holders, and other borrowers pay more when rates are higher, the banks appear to have fleeced consumers for 10 years during the entire bull run leading up to the financial crisis.
We predict that lawyers can prevail in huge class action lawsuits based on that theory alone.
As Yves Smith writes:
I expect the firms involved to face a locust swarm of litigation. Lawyers may accomplish what regulators and politicians refused to do: strip the banks of ill gotten gains and bring their preening CEOs and “producers” down a few notches. A day of reckoning may finally be coming....