LIBOR fixing: is there a case for recovering losses?

What a fix!  It seems that banks have been manipulating LIBOR, the suite of global benchmark interest rates, to suit their own purposes.  I know the BBA website says the rates are fixed every day at 11 am, but I didn’t know that was what they meant!  Claims management companies, emboldened from their successes with Payment Protection Insurance, are already on the phones to local authorities, offering to sue banks on a “no win no fee” basis.  Councils could be in for a windfall!  But let’s not get too carried away just yet.

Regulators in all the world’s financial centres having been investigating this issue for a number of years.  Barclays, by all accounts, has cooperated exceptionally well with the authorities and hence is the first to have been fined; unfortunately being the first has attracted a lot of bad publicity and caused the top three men to resign.  I wonder how many executives at other banks are quietly clearing their desks ready for a speedy exit when the time comes.

Barclays has been found guilty of misstating its submissions to the LIBOR panels in two ways.  On certain single dates between 2005 and 2008, artificially high or low figures were contributed to the 3 month US dollar and euro benchmarks at the request of individual derivatives traders in order to increase the profit assigned to those traders and so raise their bonuses.  This looks like good old fashioned fraud to the man in street, and I won’t be surprised if criminal charges are brought against some traders for this.  But this won’t have affected interest rates paid and received by UK local authorities.

The second manipulation was much more systematic, and occurred on the direct instructions of management.  Between 2007 and 2009, Barclays was concerned that its LIBOR submissions were noticeably higher than all the other banks’ figures, and so, possibly egged on by politicians and regulators, it provided deliberately low rates every day for months at a time.  But, as Bob Diamond stressed this week, it’s important to realise that Barclays’ figures were still among the highest and so didn’t affect the published LIBOR rates, which are an average of the middle 8 out of 16 submissions.  So it’s difficult to see how anyone can sue Barclays when their actions had no direct impact on LIBOR.

But the implication is that many of the other banks on the LIBOR panels were at it as well.  And it’s certainly odd how banks like RBS and WestLB that were so weak they were being nationalised were allegedly able to borrow term funds on the market at much lower rates.  And if the banks were conspiring to keep LIBOR deliberately lower than the true cost of interbank lending, then there may be a case to answer.

Local authorities could have lost out in two ways: by receiving less interest on variable rate deposits where the rate is set at a margin above LIBOR; or by paying more interest on variable rate loans such as inverse LOBOs where the rate is set at a figure minus a constant maturity swap rate that is itself linked to LIBOR.  Try explaining that one to the Borough Solicitor!  However, I think it will be difficult to prove culpability, especially if you were dealing with a bank or building society not on the LIBOR panel.  And how can you determine what the rate should have been?  I really don’t see the BBA asking banks to re-estimate their past funding costs in order to restate several year’s worth of LIBOR.

But it might just be worth waiting to see what evidence emerges about other banks in the near future.  If there were all in it together, you can show you’ve suffered a financial loss and you’re not worried about maintaining a good relationship with the bank, I’d have thought you have some chance of pursuing an out of court settlement.  Good luck – you’ll certainly need it.

David Green is Head of Sterling Consultancy Services, a provider of treasury management advice to local authorities and other not for profit organisations.  This is the writer’s personal opinion and does not constitute investment advice.  It should not be relied upon when making investment decisions.