Banks Sued For LIBOR Rate Fraud

September 26, 2013 by Thomas F. Burke, P.C.

USA Today reported that JPMorgan Chase, Barclays, Credit Suisse and 10 other international banks have been sued by a federal credit union regulator on charges they manipulated a financial benchmark used to set rates on trillions of dollars in loans.

The National Credit Union Administration ("NCUA") lawsuits charge that the banks conspired to rig the daily London Interbank Offered Rate ("LIBOR") that's used to set the rates on mortgages, car loans, student loans, credit cards and complex financial derivatives contracts.

LIBOR is set by 16 international member banks and, by some estimates, places rates on a staggering $360 trillion of financial products across the globe. LIBOR rates are calculated for ten currencies and fifteen borrowing periods ranging from overnight to one year and are published daily. Financial institutions, mortgage lenders and credit card agencies set their own rates relative to it. At least $350 trillion in derivatives and other financial products are tied to the LIBOR

By keeping the rate artificially low from at least January 2005 through December 2010, the alleged manipulation resulted in improperly low interest income for five failed corporate credit unions now being liquidated by the regulator according to the 72-page complaint filed Monday in Kansas federal court. Corporate credit unions provide services such as check clearing, electronic payments and investments to retail credit unions, which serve individual consumers.

Simultaneously, the alleged rate-rigging provided a secret and improper boost to the banks' own financial trading positions, "allowing them to earn significant undeserved profits," the complaint charged.

Because the banks' LIBOR quotes were an indicator of their financial health, the alleged manipulation also enabled them "to portray themselves to the marketplace as financially healthier and more liquid than they actually were," the lawsuit charged.

Another prominent trait of LIBOR is that it can dilute the effects of Fed rate cuts. Most investors think it's great when the Fed cuts rates, or at least they welcome the news. If LIBOR rates are high, the Fed cuts look a lot like taking a vacation to Hawaii and getting rain every day. High LIBOR rates restrict people from getting loans, making a lower Fed discount rate a nonevent for the average person.

The new legal actions join more than 40 other lawsuits filed against the banks over the alleged manipulation. Spokesmen for JPMorgan Chase, Barclays and Credit Suisse declined to comment on the lawsuits Tuesday. Other banks sued by the credit union regulator could not immediately be reached.

Separately, investigators in the U.S., United Kingdom, Switzerland, Japan, Canada, the European Union and Singapore are probing the suspected rigging. Authorities have so far netted about $2.5 billion in fines from UBS, Royal Bank of Scotland and Barclays, three of the banks charged in the credit union lawsuit.

Thomas Hayes, a former Citigroup and UBS trader suspected as a key figure in the manipulation, was hit with criminal charges in June by British authorities. Court-filed wiretap excerpts in a U.S. action against Hayes depict traders at several banks using e-mails and instant messages to broker changes in daily LIBOR rates that would boost trading positions for them and their banks.

Separately, the NCUA also announced it had filed lawsuits against Goldman Sachs, Morgan Stanley, Bear Stearns and six other banks for the sale of allegedly faulty mortgage-backed securities to two failed credit unions. Filed in New York federal court, those lawsuits allege that offering documents for the securities contained "untrue statements and omissions" that made them "significantly riskier than represented."