How Much Will Libor Suits Cost Banks?

By Roland Li | August 27 2012 11:28 AM

Banks found to have manipulated the London Interbank Offered Rate (Libor), perhaps the world's most important interest rate benchmark, could be liable for billions of dollars in lawsuits from a slew of financial firms and investors affected by the distortions, according to reports.

Reuters

Unlike the civil actions which normally involve slapping a fine on the banks, the criminal fraud cases could send the employees to jail, if found guilty.

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Nacquarie Research said in July that banks would have to pay $176 billion, based on Libor rates that were understated by 0.4 percentage points during 2008 and 2009, the Wall Street Journal reported. Keefe, Bruyette & Woods Inc. estimates $47.5 billion in damages, while Mortgan Stanley predicts $7.8 billion.

Morgan Stanley (NYSE: MS) said the most vulnerable lenders are Barclays Plc (London: BARC), which has been at the center of the controversy, Deutsche Bank AG (DBK), Royal Bank of Scotland Plc (London: RBS), Bank of America Corp. (NYSE: BAC) and JPMorgan Chase & Co. (NYSE:JPM), based on their types of business.

Artificially low rates actually benefited borrowers, who had to pay less interest. But bond holders are thought to have the best case for compensation, because their payments were lessened by lower Libor levels.

Libor also affects commercial paper, corporate bonds, mortgages and student loans, leading to an eclectic range of potential claimants.

New York investors with over $500 billion in securities tied to Libor have filed a class-action lawsuit against banks, led by Linda Zacher, a Pennsylvania woman who holds a $10,000 bond, according to the Journal.

Another suit is based on damages to the futures market. The plaintiffs includes Austrian hedge fund FTC Capital GmbH, a division of German bank Bankhaus Metzler, market maker Atlantic Trading USA LLC, AVP Properties LLC and Spanish polo player Roberto Calle Gracey, according to the Journal.

Mutual fund company Charles Schwab is also seeking billions in fixed-rate investments based on Libor.

Other parties that are considering possible lawsuits include BlackRock Inc. (NYSE: BLK), the world's largest money manager and the California Public Employees' Retirement System (CalPERS), the country's largest pension fund.

Perhaps the only major group that isn't expected to file suits is the banks themselves, despite likely losing money in some of their divisions.