No longer headline news, you may be wondering… “What happened to the Libor scandal?” Answer: It is not gone, and the residual effects remain unresolved. To date, at least a dozen international banking institutions still face investigations and probes by U.S. and European regulators. And, lawsuits brought by or on behalf of investors are proving more difficult than previously thought as banks obfuscate the facts to shield themselves. Thus many believe that major changes in the banking industry still need to be made.
The London Inter-Bank Lending Rate.
In finance, the Libor, or London inter-bank lending rate, is generally considered one of the most important interest rates. In fact, Libor buttresses trillions of dollars worth of loans and financial contracts internationally. However, in June 2012, Barclays was fined £59.5 million ($76.8 million) by the UK’s Financial Services Authority after some of its derivatives traders were found to have tried to rig Libor rates. This fine, following the 2007-2008 Financial Crisis, weakened an already skeptical public’s confidence in the banking industry and further tarnished public opinion of the financial services sector. Eventually, the scandal led to the resignation of both Barclays’s chief executive Bob Diamond and chairman Marcus Agius, helping to spur government investigations and litigation across the globe.
Essentially, traders at banks such as Barclays manipulated dollar Libor and Euribor (the Eurozone's equivalent of Libor) rates upon the request of derivatives traders. The misconduct spread to global financial centers beyond London, such as New York and Tokyo. In fact, the New York Federal Reserve has subsequently reported that as early as August 2007 it received mass-distribution emails implying that Libor submissions were being set unrealistically low by the banking industry. Upon discovery of the fraudulent rates, U.S. and UK government officials met with banking industry leaders in 2008 to address Libor’s creditability problem amidst the backdrop of a deepening, worsening global financial crisis.
As the banking industry worked to address issues such as the perverse incentives to misreport Libor rates, the public became increasingly aware of yet another banking scandal. As attention gathered, banks took steps to disassociate from individuals involved in the Libor scandal. For example, the Royal Bank of Scotland fired four individuals in 2011 that had played roles in Libor rate fixing.
The scandal came to a head in June 2012, garnering international attention, when Barclays admitted to Libor-related misconduct. In addition to the UK Financial Services Authority penalty, the U.S. Department of Justice and the Commodity Futures Trading Commission (CFTC) imposed fines of approximately $451.4 million. As a result, Moody’s downgraded Barclays’s outlook rating. Subsequently the Swiss bank UBS, German bank Deutsche Bank, as well as others warned investors of their involvement in the Libor scandal. Many such entities have subsequently been fined and/or sued.
Lawsuits More Difficult Than Expected.
As of this summer, 2013, Barclays, UBS, and the Royal Bank of Scotland Group have agreed to pay a combined $2.6 billion to resolve U.S. and European regulators’ allegations and claims that their traders gamed the financial system. At least a dozen other banking institutions still face investigations and probes by U.S. and European regulators. And yet, these banks have generally avoided and evaded disclosing any estimates of their exposure for their involvement in the Libor scandal—despite the fact that they face government sanctions and lawsuits on both sides of the Atlantic. Some estimates by Morgan Stanley predict legal costs for individual banks may range from $59 million to more than $1 billion.
Among the current and future plaintiffs are investors in savings rates or bonds linked to Libor rates, those buying derivatives priced off of Libor, and those who dealt directly with banks involved in fixing Libor rates. With that being said, although the number of investors harmed by the Libor scandal is significant, not every investment was necessarily harmed by Libor manipulation. Therefore, suits brought by or on behalf of investors will be more difficult than previously thought. Particularly since banks will dispute financial models estimating damages based upon derivative trading agreements. In other words, the banks will use obfuscation to shield themselves from lawsuits by investors and shareholders.
This past spring, Judge Buchwald in the Southern District of New York dismissed most of the claims in In re LIBOR-Based Financial Instruments Antitrust Litigation, a case consolidating a number of U.S. Libor related actions. Most of the dismissed allegations were those involving antitrust and Racketeer Influenced and Corrupt Organizations (RICO) counts, which would have brought about triple damages and attorneys’ fees for any violation. Critics of this decision note that the banking industry is getting away with gross financial manipulation. Others, however, view this decision more favorably; pointing out that there was little evidence of actionable antitrust violations.
What is clear is that major changes in the banking industry still need to be made. Among these changes are basing Libor and other rates on actual lending data, continuing to incentivize and promote truth-telling to reduce the possibilities for coordinated rate quotes, and increasing transparency. Regulators in North America, Europe, Asia, and beyond are working to address the issues raised by Libor rate fixing. Thus, the Libor scandal, today, serves as a reminder that the financial services sector requires additional accountability.