Banks’ Defenses to Potential Trillions in Libor Claims Fail

All 3 Libor Defenses Fail

The big banks have been manipulating the world’s central economic indicator – Libor – for decades, harming homeowners, students, credit card holders, small businesses, cities and many others.

The sums involved were huge. As the Economist notes:

The sums involved might have been huge. Barclays was a leading trader of these sorts of derivatives, and even relatively small moves in the final value of LIBOR could have resulted in daily profits or losses worth millions of dollars. In 2007, for instance, the loss (or gain) that Barclays stood to make from normal moves in interest rates over any given day was £20m ($40m at the time). In settlements with the Financial Services Authority (FSA) in Britain and America’s Department of Justice, Barclays accepted that its traders had manipulated rates on hundreds of occasions.

The Independent notes that potential liability from the Libor suits could wipe out Barclays, RBS and other banks … and that the big banks have taken inadequate reserves against litigation risks.

David Kotok – Chairman and Chief Investment Officer of Cumberland Advisors, with $2 billion dollars under management – writes:

This scandal is going to take down many more than just Barclay’s leaders. The claims are likely to be in the trillions.

But the banks say that they are judgment-proof because their manipulation didn’t cause any damage.

Specifically, the banks claim:

(1) Sometimes they nudges rates up and sometimes down …. so it’s a wash;

(2) Some people won and others lost … so it’s a wash; and

(3) It would be impossible for anyone who sued to quantify the amount of damages they suffered due to rate manipulation.

But the first argument is easily debunked. As Yves Smith notes:

The idea that one party’s loss from the manipulation was another’s gain is irrelevant to those on the losing side [quoting the Economist]:

….banks will be sued only by those who have lost, and will be unable to claim back the unjust gains made by some of their other customers. Lawyers acting for corporations or other banks say their clients are also considering whether they can walk away from contracts with banks such as long-term derivatives priced off LIBOR.

The second argument is also easily dispatched. For example, it is clear that for many years up until 2007, every time the banks nudged Libor rates higher, homeowners, students, credit card holders, small businesses and other borrowers were damaged by artificially inflated interest rates.

The case would be especially easy for people who borrowed money and finished paying off their loan during this period. For example, someone who bought a house in 2005 and sold it in 2007 could have a strong case.

Similarly, it is clear that Barclays and other big banks manipulated rates downward after the financial crisis hit in 2007, to make themselves look stronger than they really were. Because of the way their interest rate swaps were structured, local governments got creamed by lower Libor rates.

So governments which bought interest rate swaps during the relevant period based upon the assumption that rates would keep rising – especially if they were misled as to the likely direction of rates by one of the banks that participated in rigging Libor (Citi, Chase,, UBS, RBS, etc.) – could have a solid case.

Finally, I can assure you that derivatives experts, mortgage experts, statisticians, and alot of other people are crunching numbers right now to start quantifying damages.