Some of the world's largest financial firms are suspected to have manipulated the benchmark Libor interest rate, prompting a probe by the Department of Justice:
The US authorities are considering invoking anti-cartel laws against some of the world's biggest banks, in an investigation into whether they colluded to manipulate interest rates during the credit crisis.
An investigation by the US Justice department and the Securities and Exchange Commission, the Wall Street regulator, is examining if banks published misleading data to play down the effects of the escalating crisis between 2006 and 2008.
The inquiry is focused on the calculation of the London Interbank Offered Rate, known as Libor, which is central to the operation of financial markets. The price of trillions of dollars of loans and derivatives are set with reference to Libor, and it became one of the most closely watched measure of stress in the financial markets during the crisis.
The investigation has focused on whether Citigroup, Bank of America, and UBS formed a global cartel to understate borrowing costs, hide losses, and manipulate the outcome of derivatives tied to Libor.
Roughly $10 trillion in loans and $350 trillion in derivatives are tied to Libor, which affects costs for everything from corporate bonds to car loans. If the rate was kept artificially low, borrowers likely weren't harmed, though lenders could complain that the rates they charged for loans were too low. Derivatives contracts could be mispriced because of any manipulation of Libor.
According to people familiar with the yearlong probe, U.S. regulators are focusing on major institutions Bank of America Corp., Citigroup Inc. and UBS, among others, and have sent subpoenas to those banks. The three banks declined to comment.
Inside the Justice Department, the case is being pursued by antitrust and antifraud prosecutors, said people familiar with the situation. Criminal antitrust investigations typically focus on collusive behavior such as price-fixing and bid-rigging.
Fund managers have already filed suit against the banks:
A European asset manager has sued one dozen U.S., European and Japanese banks, accusing them of conspiring to manipulate Libor, a benchmark used to set interest rates on hundreds of trillions of dollars of securities.
Vienna-based FTC Capital GmbH and two funds it operates in Luxembourg and Gibraltar accused the banks of conspiring to artificially depress Libor, and limit trade in Libor-based derivatives from 2006 to 2009.
The defendant banks include Bank of America Corp, Barclays Plc, Citigroup Inc, Credit Suisse Group AG, Deutsche Bank AG, HSBC Holdings Plc, JPMorgan Chase & Co, Lloyds Banking Group Plc, Norinchukin Bank, Royal Bank of Scotland Group Plc, UBS AG and WestLB AG.
Firms like J.P. Morgan used derivatives tied to Libor to swindle municipalities, sending places such as Jefferson County towards bankruptcy. Last year, JPM, UBS, and BofA were named in a massive municipal bond bid-rigging conspiracy.
As reported by Fitch, the top five holders of derivatives are:
(Total Notional Derivatives: Assets & Liabilities, $ in Trillions)
- JP Morgan:$81.7;
- Bank of America:$80.0;
- Goldman Sachs: $47.8;
- Morgan Stanley:$39.3;
- Citigroup:$31.5;
The lowdown on Libor:
LIBOR, or the London Interbank Offered Rate, is arguably the most important interest rate in the world. It is used to calculate the interest rates on hundreds of billions of dollars of corporate debt, mortgages and innumerable other loan products – including hundreds of trillions of dollars of derivatives...
LIBOR was created to make sure that banks that offer loans with “floating” – or adjustable – interest rates know just what their constantly changing cost-to-borrow actually is.
Lenders offering floating or adjustable rate loans typically charge borrowers a “spread” above LIBOR. When you hear: “Your cost on this loan is three-month LIBOR plus 5,” it means the lender is charging you the three-month LIBOR rate – plus an additional five percentage points. If three-month LIBOR is 4%, your actual rate is 9% (4% + 5% = 9%). If your loan re-sets in the future, it will do so based on the LIBOR rate that day – plus an additional five percentage points.
Each morning, “panels” of banks submit loan data to Thomson Reuters PLC in London, usually by 11:10 a.m. London time, and Reuters (a news, information, data and market quoting service corporation) calculates LIBOR, which is subsequently published each day by the British Bankers’ Association.