Complexity and cost the barriers to Libor loss recovery

A consumer banking website has been looking into whether councils should be trying to recoup potential losses from the Libor-fixing scandal.

The website Move Your Money, which usually challenges the public to switch away from the big four banks, recently put together a local authorities’ toolkit to encourage councils to invest in social value, but in the process found that authorities “didn’t really have a handle on how Libor fixing had affected their investments,” according to a spokesman.

The European Union this week passed a law allowing fines of 15% of turnover to be levied on firms found guilty of Libor fixing and a second part of the law, to make financial crimes punishable by jail sentences, is expected in the coming weeks. But while councils in the US, including the municipality of Baltimore, bought swaps affected by rigged Libor rates, UK local government has largely steered clear of derivatives since the late 80s.

FOI requests submitted by Move Your Money to a number of councils found that authorities did not think they had been exposed to losses. Moray Council said that it had no Libor-linked investments and pointed out: “If Libor was successfully manipulated to be lower than it would otherwise have been, then the council may have received less income than it would have done otherwise, but…will also have paid less interest on its Lobo (loan) which at £33.4m in total, outweighs the amount the council had invested at any stage during the period in question.”

Westminster responded succinctly: “There has been no impact of Libor manipulation upon council managed investments, savings, pension funds, interest rate swaps, derivatives and other interest hedging products pegged to the Libor rate.”

Lancashire’s head of public market investments Trevor Castledine told Room 151 that any exercise to look into potential losses would be expensive. “Most of the stuff we’ve invested in would have been fixed rate,” he said. “Historically the pension fund had low exposure to floating rate; we’d have been in gilts or investment grade credit. As people set Libor it could make a change to the valuation at the margin but the process of calculating that would be so arduous for so little back that it wouldn’t be worth it.

“It is very complex,” Castledine continued. “So if you were looking at litigation you’d have to take a view on the risk/reward of looking into it. Just the cost of staffing an initial investigation would be more than a lot of councils could take on.”

The treasury consultants agree with Castledine’s view. Arlingclose director David Green reckons that councils don’t see it as a big issue. Councils don’t tend to make Libor-linked investments or loans, and figuring out who to go after for redress (“the investment counterparty, the Libor panel banks, the BBA which owns Libor, Thompson Reuters who compile Libor”) is complicated. Sector director Cecilie Booth said that she wasn’t aware of any councils who think they had incurred a loss.

A class-action lawsuit in the US against 16 banks accused of Libor-rigging saw a large part of the claim dismissed in March when a judge ruled that the banks had not acted anti-competitively, manipulated commodities or breached racketeering and state law rules.