Libor manipulation lawsuits could cost banks “tens of billions”

Evidence that Barclays attempted to manipulate the fixing price of the benchmark Libor and Euribor interbank lending rates could result in tens of billions of dollars in fines and penalties across the dealer community.

The evidence and the bank’s settlement with regulators in the UK and US have given a boost to a series of civil lawsuits.

“Things have changed dramatically in the past two hours,” said the co-lead counsel for one of those lawsuits, speaking shortly after the settlement had been announced.

Yesterday, the Commodity Futures Trading Commission (CFTC), the Department of Justice (DOJ) and the UK Financial Services Authority (FSA) ordered Barclays to pay a total of around $450 million in fines and penalties in order to settle enforcement action that had uncovered repeated – and sometimes daily – attempts to make “false, misleading or knowingly inaccurate submissions concerning” Libor and Euribor. The Libor benchmark is used as the reference rate for an estimated $350 trillion in financial products, from over-the-counter derivatives, to mortgages and bonds.

The CFTC’s order states that Barclays sought to manipulate the benchmarks for two reasons: to boost profits or minimise losses on big swaps positions, which prompted traders to request both high and low quotes from the bank’s Libor submitters; and to avoid standing out from other Libor panel banks during the financial crisis, when high quotes could have been seen as evidence that an institution was experiencing liquidity problems. The manipulation attempts spanned a period from at least 2005 to at least 2009, the CFTC order says.

“I think it is possible we could see the total industry-wide cost of the Libor manipulation issue reaching into the tens of billions of dollars. It’s early in our class-action process and we have not computed the damages yet, but obviously they are going to be very sizeable,” says William Butterfield, a partner at law firm Hausfeld in Washington, DC, and co-lead counsel in one of a number of class-action lawsuits filed on behalf of plaintiffs that held financial assets linked to Libor.

Hausfeld is representing firms that traded OTC derivatives with banks on the US dollar Libor-setting panel, but there are at least three other classes of plaintiffs that have either organised suits or are in the process of doing so. They include eurodollar futures traders, investors that bought bonds referencing the Libor rate, and banks that lent money at the Libor rate, says the co-lead counsel for one of the other lawsuits.

“The CFTC’s order is consistent with what we have alleged, and it underscores the severity of Libor manipulation that took place during the past decade. And this isn’t the last shoe to drop – there are many governmental investigations into Libor still on-going,” says Bill Carmody, a partner at law firm Susman Godfrey in New York and co-lead counsel for the OTC class of plaintiffs.

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