Already there is talk of the government stepping in to oversee a global settlement, just as it did in the mortgage robo-signing scandal. But it took years for regulators to reach a nationwide mortgage settlement. And that settlement involved the cooperation only of states, not countries, which means the banking industry could be mired in legal action for a while.
Dozens of lawsuits have been filed in the wake of a $450 million settlement U.S. and British regulators reached last month with the London-based bank Barclays, which admitted manipulating Libor rates for profit and to hide the bank’s financial distress from 2005 to 2009. Libor, or the London interbank offered rate, is an average of bank interest rates that underpins trillions of dollars’ worth of worldwide financial transactions.
In one of the latest Libor cases, Berkshire Bank is suing all 16 banks involved in setting the rate, claiming loss of income. The New York-based institution, with $881 million in assets, claims in a class-action lawsuit that rate-fixing lowered the interest payments it received from August 2007 to May 2010. “Tens, if not hundreds, of billions of dollars of loans are originated or sold within this state each year with rates tied to Libor,” Berkshire said in a complaint filed Wednesday. Keeping the rate artificially low “on the date on which a loan resets will generally reduce the amount of interest that a lender receives by an equivalent amount.”
Berkshire hopes to represent several hundred banks and credit unions that are based in New York or have a majority of their operations in the state. The case could serve as the model for countless lenders as Libor is the benchmark for the financial products known as derivatives.
“There will be a waterfall of derivative lawsuits,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a Washington research firm. “Each will be different because the alleged harm by plaintiffs is different — different investments, different time periods, different outcomes.”
Given the universe of securities dependant on the rate, financial experts say money managers such as Vanguard Group or BlackRock may enter the legal fray on behalf of their clients.
Investment firm Charles Schwab laid the groundwork last year with a lawsuit against 11 Libor-setting banks that allegedly depressed returns on mutual funds and short-term debt by rigging the rate. Around the same time, municipalities including Baltimore City accused the banks of robbing them of millions in returns on financial instruments used to fund public infrastructure.