FDIC Sues 16 Global Banks For Roles In Manipulating LIBOR

by Trefis Team
Bank of America
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Late last week, the Federal Deposit Insurance Corporation (FDIC) initiated legal action against 16 of the world’s largest banks for their roles in manipulating benchmark LIBOR rates. [1] The FDIC filed the lawsuit on behalf of 38 banks which went bankrupt at the peak of the downturn in 2008, as a considerable part of the losses for these banks were incurred on interest-rate derivative products sold to them by the bigger banks. As the bigger banks were in a position to influence the benchmark rates in a manner suitable to them when the crisis hit, the losses on these products were exaggerated for the failed banks, including Washington Mutual and IndyMac. The lawsuit names U.S.-based banks Bank of America (NYSE:BAC), JPMorgan Chase (NYSE:JPM) and Citigroup (NYSE:C), as well as other globally diversified banking groups as well as the British Bankers’ Association (BBA) which oversaw the LIBOR fixing process at the time.

This is the latest in the string of lawsuits against global banks over the contentious rate-rigging scandal, which has already cost the banking industry billions in fines and settlements. Many of the banks are under investigation by regulators around the globe for their role in the scandal that affects an estimated $300 trillion of securities worldwide, even as institutional and retail investors continue to seek damages from these banks for losses that directly or indirectly resulted from manipulation in LIBOR rates. [2]

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The London Interbank Offered Rate (LIBOR), is arguably the most important benchmark rate used around the globe to fix interest rates for everything ranging from loans and mortgages to complex rate-based derivative contracts. But since the U.S. and U.K. regulatory bodies fined Barclays (NYSE:BCS) $451 million in June 2012 over alleged manipulation of LIBOR by its employees, all other banks involved in the speculation came under scrutiny by financial authorities from several countries. Since then, UBS (NYSE:UBS) and RBS (NYSE:RBS) have also settled with authorities for $1.5 billion and $621 million respectively.

With the manipulation in LIBOR rates affecting a wide spectrum of entities either directly or indirectly, responsible banks face an increasing number of lawsuits for their alleged involvement in the rigging. Last year, Freddie Mac and Fannie Mae filed similar lawsuits against banking giants after the Federal Housing Finance Agency (FHFA) estimated that the two government-sponsored enterprises incurred at least $3 billion in losses from the LIBOR manipulation.

The FDIC had been gathering evidence to support its claims against the banks for well over a year now – something that culminated with the lawsuit filed last week. As the regulator responsible for banks that failed during the downturn, the FDIC’s lawsuit seeks compensation from as well as punitive action against the big banks for pushing their losses to the smaller banks by rigging the LIBOR. While the lawsuit does not mention the damages sought, the figure is expected to be around $1 billion. [3]

Like the many other lawsuits against the banks, the one by the FDIC poses a very real legal liability which will result in higher litigation charges over coming months as well as millions of dollars in possible settlements. Also, this lawsuit could in itself spawn a series of additional lawsuits against the banks as apex organizations that govern individual sectors affected by LIBOR rigging will be emboldened by the FDIC’s move and could pursue a legal recourse of their own – compounding the legal liability for banks.

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  1. FDIC Sues Banks Over Libor, The Wall Street Journal, Mar 14 2014 []
  2. BofA, Citigroup, Credit Suisse Sued by FDIC Over Libor Rigging, Bloomberg Businessweek, Mar 14 2014 []
  3. FDIC sues banks over Libor manipulation, The Financial Times, Mar 14 2014 []
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