This issue of the Credit Crunch Digest focuses on developments in antitrust-based Libor claims against major banks; the status of European Union investigations into Libor manipulation; developments in IndyMac-related litigation; a dispute between the New York Attorney General and Madoff bankruptcy trustee Irving Picard; the implementation of Dodd-Frank swap clearing regulations; and the results of a recent stress test on major banks conducted by the Federal Reserve.

Libor Scandal

Litigation and Regulatory Investigations

Fraud and Ponzi Schemes


Government and Regulatory Intervention

Libor Scandal

Banks Request Court to Dismiss Antitrust-Based Libor Lawsuits

Earlier this month, lawyers for the bank defendants named in the consolidated Libor manipulation lawsuits in the U.S. District Court for the Southern District of New York requested that the presiding judge dismiss several lawsuits alleging the banks manipulated the Libor interest rate, causing billions of dollars in investment losses.  The defendants argued that the claims are invalid because they are premised on violations of antitrust laws, which the banks argue do not apply to Libor.

Because Libor is merely a benchmark of the average rate, and not a commodity that is bought, sold or traded, the banks claim that antitrust laws cannot apply.  However, plaintiffs argue that their antitrust claims are valid and should proceed.

U.S. District Judge Naomi Reice Buchwald has yet to make her ruling, but did criticize the plaintiffs for lingering instead of immediately filing lawsuits in the spring of 2008, when potential Libor manipulation first gained media attention. The plaintiffs asserted that they delayed bringing their lawsuits because the banks denied manipulating the interest rate when such allegations first emerged.  In response, Judge Buchwald told the plaintiffs that whether they sue should not be premised on whether the banks confessed to the alleged wrongdoing. (“Banks Seek Dismissals of Lawsuits Over Libor,” The Wall Street Journal, March 5, 2013)

EU Antitrust Official: Libor Investigations Progress to “Advanced Stage”

A senior European Union (EU) antitrust official has confirmed that investigations into the alleged fixing of benchmark Libor and Euribor interest rates have matured to an “advanced stage.”  Previously, officials had characterized the investigation of the rate manipulation, which has been continuing for the last 18 months, as in its infancy and cautioned that it could be some time before charges were brought.

Sources indicate that EU antitrust officials seek to issue decisions by year end, with banks potentially facing fines of up to 10 percent of their worldwide revenue. Thus far, U.S. and U.K. regulators have levied fines totaling $2.6 billion against three banks, RBS, Barclays and UBS for allowing manipulation of the Libor interbank rate. Others, including HSBC and SocGen, are reportedly cooperating with EU regulators.

Regulators in other countries, including Japan, Canada, Italy, Germany and the Netherlands, are also reviewing the issue.  (“Libor bank probes at advanced stage: EU antitrust official,” Reuters, March 7, 2013)

Litigation and Regulatory Investigations

MBIA Can’t Access FDIC Funds for Its IndyMac Liability

A Washington, D.C. U.S. Court of Appeals has rejected an appeal by MBIA Inc., seeking to recover upwards of $244 million from the Federal Deposit Insurance Corp. (FDIC) for the insurer’s losses related to securitized mortgage-backed securities issued in 2006 and 2007 by failed bank IndyMac Bancorp Inc.  MBIA sought indemnification for the losses as a result of IndyMac’s alleged misstatements and conduct, which led to the issuance of the policies. MBIA had argued, as a priority creditor, that it should be granted access to the funds that the FDIC collected following its $654 million sale of IndyMac after its collapse.  In upholding the lower court’s decision, the Court of Appeals found that MBIA’s interpretation of the indemnification provisions of the contracts were overly broad.  (“MBIA Loses Bid to Get FDIC Funds to Cover IndyMac Liability,” Bloomberg, March 8, 2013)

Fraud and Ponzi Schemes

Showdown Between NY Attorney General and Madoff Bankruptcy Trustee Developing

New York Attorney General Eric Schneiderman has asked a federal court for permission to finalize a settlement with hedge fund manager J. Ezra Merkin for purposes of compensating investors in the Madoff investment scheme.  The $410 million settlement would dispose of Schneiderman’s lawsuit against Merkin alleging that he recklessly funneled his clients’ funds into Madoff’s firm.  The settlement will also reimburse the Attorney General’s Office the $5 million spent in pursuing litigation against Merkin over the past three years.    

However, the settlement has garnered the attention of Irving Picard, the Madoff bankruptcy trustee.  Picard is challenging the settlement based upon his contention that the settlement unfairly compensates only a portion of Madoff’s investors, while leaving other investors out.  Furthermore, Picard contends that only he can sue fund managers that invested in Madoff securities for purposes of reimbursing investors with approved claims.  Picard initially threatened legal action against the Attorney General’s Office in an effort to forestall the settlement with Merkin, but when Schneiderman refused to table settlement negotiations, Picard filed an action in the U.S. District Court for the Southern District of New York.  

Schneiderman alleges that Picard does not have standing to challenge the settlement, nor the authority to stop the state from enforcing the people’s rights.  Furthermore, Schneiderman contends that he sued Merkin on behalf of investors that otherwise wouldn’t be entitled to funds recovered by Picard because they were not direct investors in Madoff securities.  The parties were set to appear before the court on March 11. However, due to a scheduling conflict, the matter was continued.  (“New York to Seek Approval to Complete Merkin Deal,” Bloomberg, March 12, 2013)

Government and Regulatory Intervention

Swap Dealers Begin Dodd-Frank’s Mandatory Clearing Process

On March 11, 2013, major swap dealer participants began participating in the mandatory clearing process under Dodd-Frank rules.  This reporting process, applicable to the $639 trillion over-the-counter derivatives market, requires an approved clearinghouse to consent to the swap trade before the trade is made.  Additionally, due to the fear of another financial collapse, dealers must post upfront collateral to hedge losses, which will total approximately $6.7 trillion.

While some believe the swap trade approval process may cut pretax margins at banks by a third, most people in the industry are concerned that the clearinghouses are not prepared for the surge in trades they must approve.  Moreover, the new regulations could cost some major banks an estimated $1 billion to $2 billion in revenue, which they may seek to recoup through the imposition of additional fees on customers.

As of March 11, there were 71 entities registered as swap dealers.  If the clearinghouse system is not already stressed, it will certainly face more difficulties this June when a larger number of firms, including smaller banks, hedge funds and insurance companies, must also register their swap trades.  Pensions and accounts managed by other asset managers will be added by September 9.  This year, the Commodity Futures Trading Commission is also considering whether to impose these clearing mandates on commodity and energy swap trades.  (“Swaps-Clearing D-Day Set to Trim Dealer Profits:  Credit Markets,”  Bloomberg, March 11, 2013)

Feds Say Large Banks Prepared to Withstand Any Future Market Crashes

Recent results of stress tests imposed by the federal government indicate that the major U.S. lending institutions are better prepared to endure any future crashes in the lending markets.  The tests measured 18 major banks’ capital levels during adverse market conditions comparable to the Great Recession and found that these institutions are resilient enough to be able to continue lending to customers even in dire economic times. 

The stress tests estimated that, should another deep recession occur, the 18 major banks would incur combined losses of $462 billion, while the unemployment rate would soar to higher than 12 percent.  Additionally, such a recession would cause the stock market to lose half its value, and the real estate market to see a downturn of more than  20 percent. 

According to the results, the only bank tested that is at risk of failure in the event of another deep downturn in the markets is Ally Financial, Inc. from Detroit, a bank in which the federal government is still a majority shareholder.  The results of the stress test demonstrated that, should another severe recession occur, Ally Financial’s capital to risk-weighted asset ratio would drop to 1.5 percent.  The minimum ratio allowed for banks is 5 percent.  Ally has contested the results as flawed in that they included certain loss projections that were implausible. 

Further testing of banks is expected to be conducted in the near future, which will result in pass/fail grades based upon additional information.  Obtaining a pass grade during future tests is necessary for the banks to get approval for their plans to pay dividends to investors and buy back stock.  If a positive grade is not received, the federal government would require the banks to raise more capital before carrying out any such plans.  Last year, four of the 18 major U.S. lending institutions failed the stress test – those being Ally, Citigroup Inc., SunTrust Banks Inc. and MetLife Inc.  As a result, those banks were required to amend their planned dividend and stock buyback plans in order to gain approval from the federal government. (“Stress tests show banks improving,Los Angeles Times, March 7, 2013)

Topics:  Attorney Generals, Bernie Madoff, Dodd-Frank, EU, FDIC, Federal Reserve, IndyMac, Libor, Mandatory Clearing Requirements, Stress Tests

Published In: Antitrust & Trade Regulation Updates, Finance & Banking Updates, Government Contracting Updates, International Trade Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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