One way to gauge the global impact of the unlawful manipulation of the Libor rate by banks around the world is to tabulate the diverse array of victims involved. They range from pension funds to national, state and local governments, to businesses of every type to thousands of individual investors.
Now, the US Federal Deposit Insurance Corporation (FDIC) has added a new group of victims to that list. In a civil suit filed in a Manhattan federal courtroom on March 14, the FDIC alleges Libor rate-rigging by some of the world’s largest financial institutions harmed dozens of small regional banks that collapsed in the wake of the 2008 financial crisis.
The FDIC is responsible for insuring deposits of account holders up to certain amounts at insured US banks. The agency also winds down failed banks. When banks collapse, the FDIC steps into the role of “receiver” and oversees bankruptcy proceedings, sometimes doling out millions to repay the depositors of defunct institutions.
The FDIC’s case against 16 global banks, including major US institutions like JPMorgan Chase, Bank of America and Citigroup, is not an entirely new tactic for the agency. In cases where fraud or other financial misdeeds played a role in a bank’s failure, the FDIC will occasionally seek to recover losses through civil suits.
However, the Libor suit is significantly more complex and high-profile than the agency’s usual cases, and signals a more aggressive role for a regulator that until now has largely stayed away from Libor rate-rigging enforcement. The FDIC’s complaint runs an exhaustive 113 pages, and includes 26 counts alleging that defendant banks engaged in fraud, civil conspiracy, breach of contract, and violations of US anti-trust laws, among other misdeeds.
Case may presage new wave of civil litigation
Rumblings of Libor rate manipulation first surfaced publicly over two years ago, and nine banking giants – Barclays, JPMorgan Chase, Citigroup, Deutsche Bank, Societe General, UBS, RBS, Rabobank and ICAP – have already paid over $6 billion in combined penalties.
Even so, the FDIC suit is a clear indicator that Libor-related litigation and enforcement is far from over. Instead, non-prosecution and other settlement agreements reached in criminal cases have unearthed a trove of evidence and admissions that both government regulators and private litigants can deploy in civil suits.
“In terms of government cases, we’re maybe one-third of the way through,” says Eric Fastiff, a partner at Lieff Cabraser Heimann & Bernstein who is representing investment firm Charles Schwab in a private Libor suit. Some large-scale enforcement actions have already been settled, he says, noting that there “likely will be more civil and criminal cases from government agencies, including state attorneys general.”
“When it comes to private suits, though, we’re still really just starting out,” he says.
Complaint takes aim at British Bankers Association
Along with the financial institutions responsible for setting the Libor rate, the FDIC complaint also names the British Bankers Association (BBA) as a co-defendant. The BBA oversaw the administration of the Libor for years, actively promoted its use, and received revenue from products tied to the Libor. Blinded by this revenue stream, the BBA neglected to exercise oversight on Libor submissions and willfully misrepresented the Libor as a “honest and consistent” benchmark, the FDIC says.
The FDIC brought its suit on behalf of 38 failed US institutions. The long list of plaintiffs includes two notable major institutions that folded during the financial crisis, Washington Mutual and IndyMac, but most others are small community banks.
The allegation that even tiny local banks could suffer harm from the manipulation of the Libor attests to the wide-ranging importance of the interest rate benchmark to the global financial system.
The “London Interbank Offered Rate,” or Libor, was intended to be a daily snapshot of the interest rates at which banks would lend money to each other. The rate is tied to an estimated $300 trillion in securities and financial products worldwide.
Banks fixed rate to reap profits, hide their own weaknesses, FDIC says
It was set each day by a poll of the world’s 16 largest banks, administered by the British Banker’s Association. Rate-setters at each institution were supposed to provide a neutral, independent assessment based only on market forces. Instead, the FDIC alleges the 16 financial giants who set the engaged in “fraudulent and collusive conduct” to fix the Libor to their own advantage for a period of about four years between 2007 to 2011.
According to the FDIC’s complaint, this rate-rigging took one of two forms. In some instances, traders at banks on the rate-setting panel would communicate directly with employees responsible for submitting Libor rates, requesting a higher or lower rate submission depending on the deals the traders had pending that day. By nudging the rate higher or lower, traders could profit off deals involving derivatives tied to the Libor, such as interest rate swaps.
Even more pernicious and widespread, the complaint alleges, was a plot among rate-setting banks to artificially suppress the Libor rate during the financial crisis. By working together to keep the rate low, banks could make it appear they had no worries about lending to each other, helping to allay concerns about their stability and fiscal soundness.
Despite stacks of evidence to show rigging, FDIC may struggle to show harm
The FDIC currently has plenty of ammunition to establish this sort of routine rate-rigging actually happened, most of it gleaned from enforcement actions by regulators in the US and other nations. The complaint cites public admissions and other documents taken from settlements with Barclays, UBS, RBS and Rabobank, and is peppered with emails from a variety of banks that openly discuss rate manipulation.
In one such message, a Barclays employee calls the bank’s own Libor submissions “utter rubbish.” In another from 2008, a UBS banker notes that “Libors currently are even more fictitious than usual.”
The real challenge confronting the FDIC will be similar to that faced by many other Libor litigants – demonstrating that rate manipulation caused harm to the plaintiffs, which are dozens of now-defunct banks in this case.
Showing that rate-rigging harmed failed banks is difficult in part because much of the alleged collusion focused on suppressing the Libor. One approach the FDIC takes is to argue that the closed banks held deposits, loans or interest rate swaps that would have garnered higher interest payments if the rate-setting panel had not conspired to keep the Libor low.
The complaint does not specify how much the FDIC has paid to wind down the 38 banks it is representing, or how much the agency is seeking from the alleged rate-riggers, saying only that “the closed banks… have suffered damages in an amount presently undetermined.” If the FDIC is successful in bringing its anti-trust claims, whatever damages the courts award will be tripled.
With 26 causes of action, FDIC alleges wide range of harm done to failed banks
Getting those triple damages is likely to be an uphill battle for the FDIC. So far, a number of private civil suits alleging Libor manipulation have already been dismissed, whether they were brought on claims of fraud, breach of contract, or violations of the Sherman Act, the main US anti-trust law.
By including all of these causes of action in its complaint, the FDIC appears to be taking an “all the above” approach to its own case.