The LIBOR “scandal” could have far-reaching implications for financial institutions in the United States and global markets. It is hard to know exactly how the issue will play out. The Department of Justice is definitely gearing up to lead or play a significant role in a wide-ranging criminal and civil investigation.
The investigation focuses on traditional antitrust and fraud violations. The implications for follow-on civil litigation are mind-boggling, especially when you consider potential treble damage suits for antitrust violations.
The London Interbank Offered Rate, or LIBOR, is a benchmark rate which is the average of rates submitted by individual participating banks, and is used among the banks for inter-bank loans. The LIBOR rate is calculated and published under the auspices of Thomson Reuters. It is used by banks and other financial entities around the world for setting interest rates, including credit cards, savings accounts, variable mortgage rate mortgages, student loans, car loans, and other loan products. On the flip side, the LIBOR is used to set rates of return for institutional investments such as municipal bonds, pension funds and short-term government investments.
The allegations center on agreements among member banks to submit lower rates as part of the LIBOR process to reassure customers during the financial crisis. The motive for such low-ball reporting may be two-fold – to show that the banks are not raising interest rates in response to lower revenues during the financial crisis, and to reduce pay-outs to institutional investors.
Prosecutors will have to unravel these two motives.
The first motive, while false and joint conduct, may trigger fraud concerns, meaning that the member banks were knowingly supplying inaccurate information to the LIBOR calculation process. Banks may have wanted to report lower inter-bank borrowing rates to demonstrate that they were not suffering from the financial crisis.
The second motive may be a traditional antitrust concern, an agreement among the member banks to reduce payouts to institutional investors. In the absence of a pro-competitive explanation for such conduct, prosecutors may focus on this motive as a urun-of-the-mill price fixing conspiracy.
Barclays settled a civil case with the Commodities and Futures Trading Commission and agreed to pay $200 million. A copy of the CFTC settlement order is attached here. The Justice Department agreed not to prosecute Barclays or any of its executives. The UK’s Financial Services Authority settled with Barclays.
The Justice Department has confirmed that it has an ongoing criminal investigation into the LIBOR issue. That raises the possibility of serious criminal prosecutions, combined with large criminal and/or civil settlements.
Subjects of the LIBOR investigation should seek settlements and the press is already reporting ongoing settlement discussions with other major banks. Five major banks settled their cases with the Justice Department involving alleged mortgage servicing abuses. A similar approach should be evaluated.
While the alleged conduct is significant, there are also real implications for the economy. Criminal and/or civil settlements will lead to private civil litigation which will continue for years. Class action lawyers are licking their chops, and ready to pounce on financial institutions. The implications of the LIBOR scandal will resound in our economy.