A scandal over rate-fixing is about to hit the US
By Roland Jones
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The potential avalanche of lawsuits has already started.
Last year the city of Baltimore sued a handful of major banks in federal court in New York, including Bank of America, JPMorgan Chase and Deutsche Bank, claiming those institutions conspired to manipulate LIBOR, which affected the city’s purchase of hundreds of millions of dollars in interest-rate swaps to hedge against changes in interest rates.
The Baltimore suit has since been consolidated with those filed by other municipalities, pension funds and hedge funds.
Darrell Duffie, a professor of finance at Stanford University’s Graduate School of Business, said he expects any lawsuits arising from the LIBOR scandal to cost banks in the region of billions of dollars, or tens of billions of dollars. He cautioned that it’s difficult to say which, given that at this point we do not yet know the ultimate extent of the participation of other banks in the LIBOR distortions.
“Also we do not yet know how difficult it will be to attribute how much of the distortion in LIBOR is due to the actions of each particular bank,” he said, adding that he does expect some lawsuits to be effective in these areas. “But the total damages are very hard to estimate until more of the evidence appears.”
Robert Shapiro, former Under Secretary of Commerce for Economic Affairs in the Clinton administration and now chairman of Sonecon, an economic advisory firm, warned Wednesday that the LIBOR scandal could become the largest financial fraud in history.
Shapiro wrote in a blog Wednesday that “coming on top of the reckless and dishonest behavior that led to the 2008 financial collapse, the LIBOR manipulations should finally dispose of the conservative case for self-regulation by Wall Street.”
Shapiro notes that LIBOR was off by an average of 30 to 40 basis points for several years (one hundred basis points is equal to one percentage point in an interest rate) -- enough to add $50 to $100 to the monthly cost of a $100,000 loan. He also notes that, between 2007 and 2008, Americans held $11.1 trillion in outstanding residential mortgage debt. During the time of the alleged manipulations between 30 percent and 40 percent of that debt carried adjustable rates, Shapiro said.
“If the bankers’ manipulations of the LIBOR was responsible for raising LIBOR rates by just 20 basis points in that period, their shenanigans added between $1.1 billion and $2.2 billion to the yearly interest paid by American homeowners,” he said. “And those mortgages account for less than one percent of all of the financial assets and instruments affected by manipulated LIBOR rates.”
Now only are banks under scrutiny, regulators are also under the microscope over the LIBOR scandal.
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