Recently, Barclays, among other major banks have entered into criminal settlements regarding their manipulation of the London Interbank Offered Rate (LIBOR). LIBOR is the average interest rate estimated by lending banks in London that they would be charged on monies lent to them by other banks. LIBOR rates are calculated for 10 different currencies in 15 borrowing periods ranging from overnight to one year, and are published daily at 11:30 a.m. London time. Almost all financial institutions, mortgage lenders, and credit card companies set their own rates relative to LIBOR. At least $350 trillion in derivatives and other financial products are tied to LIBOR.
With the development of the LIBOR scandal, it has become apparent that many of the banks involved in manipulating LIBOR may have intentionally done so to their own financial benefit. Unfortunately, this has been to the detriment of tens of millions — if not billions — of individuals who have short term loans, or are members of pension funds, and the like. In addition, many municipalities have lost massive amounts of money due to these banks’ manipulation of LIBOR. Astoundingly, many of these victimized institutions did not realize the cost to them of LIBOR manipulation. As a result, the banks themselves are left to the task of investigating the matter to determine where they lost money and how much was lost. Many banks and other institutions have neither the time nor the capability to determine how much LIBOR manipulation cost them, their clients, or their constituents, nor do they want to incur the expense of doing so.
In cases involving LIBOR manipulation, a number of law firms usually group together to handle the cases. The consortium of law firms with which our firm, Christopher Ligori and Associates, is affiliated consists of trial lawyers with hundreds of hours of trial experience, class action lawyers, securities lawyers, and lawyers who are very familiar with the handling of major mass tort cases, including cases involving defective drugs, as well as BP oil spill cases.
Banks manipulate LIBOR for several reasons. First, banks are divided into two main sections. One section helps determine LIBOR by putting in a bid to determine the rate for LIBOR. The other section is the investment banking side. The investment banking side of a financial institution may well benefit from a lower or higher LIBOR rate. So, the investment side of the bank — which is generally self-owned – stands to make tens, hundreds, or even billions of dollars if LIBOR fluctuates. If the section of the bank that contributes to determining LIBOR communicates with the banking and lending side of the financial institution – a forbidden practice – the bank could, in effect, control its profits.
Secondly, banks may have artificially manipulated LIBOR during the financial crisis to give the impression to their stock holders, other banks, and bondholders that they were in a more sound financial position than they really were. By artificially manipulating LIBOR to a low rate, banks were able to inflate their stock prices as well as be able to demand a lower rate on lending and bonds. As a result, billions of dollars in interest on bonds, or “coupons” as they are called in the financial investment industry, were not paid out as it should have been. Many private individuals, retirees, pensions funds, and investment firms lost out on hundreds of millions — if not billions — of dollars by the banks’ manipulation of LIBOR.
LIBOR is calculated and published by Thomson Reuters on behalf of the British Bankers Association. It is an index that measures the cost of funds to large global banks operating in London financial markets or with London-based counterparts. LIBOR is determined each day by the British Bankers Association (BBA) who conducts surveys of a panel of 18 major global banks. Each of these banks is asked, “At what rate could you borrow funds, if you were to ask and then accept inter-bank offers in a reasonable market size, just prior to 11 a.m.?” The BBA throws out the four highest responses and the four lowest, and then averages the remaining ten. The average is reported at 11:30 a.m. London time each day, and then LIBOR is posted on the sets of financial indexes.
The LIBOR rate is reported for 15 different maturity dates (i.e., the amount of time to repay debt) for 10 different currencies. The shortest maturity of a LIBOR-based note is overnight and the longest is one year. In the United States, there are many private contracts that reference a 3-month, dollar-based LIBOR, which is an index results from asking the panel what rate they would pay to borrow for 3 months. The various currencies in which LIBOR is posted include the Australian dollar, the Canadian dollar, the Swiss franc, the Danish krone, the Euro, the British pound sterling, the Japanese yen, the New Zealand dollar, the Swedish krona, and the United States dollar.
Structured Products (pre-packaged investment strategies):
- Interest rate-linked notes (Floating Rate Notes)
- Mutual Funds linked to Interest Rates
- Market-linked notes that reflect interest rates
- CDOs and synthetic derivatives
- Interest Rate Swaps
- Structured Rate Notes
- Short term bond funds
- Money Market Funds tied to Interest Rates
- Floating Rate Municipal Bonds (issued)
- Commercial Bonds w/ Interest rate component
- Eurodollar Bonds
- Adjustable/Variable Rate Mortgages (ARMs)
- Farm Loan Products
- Cities/Public Pensions
- University Endowment Funds
- Utility Districts (Sewer Districts often)
- Hospital Districts
How Pension Funds or Investment Groups Can Be Affected by the Manipulation of LIBOR
One of the ways Barclays — and possibly other major financial institutions – manipulated LIBOR was by artificially lowering the LIBOR rate. For example, when Barclays sold bonds to a pension fund or other type of investment firm at LIBOR plus 2%, Barclays would then artificially lower LIBOR to 1.5 % points, when in fact LIBOR should have 2% on the sale of those bonds. The result was that the pension funds and investment firms, who had bought up billions of dollars in bonds were losing .5 percentage points per year from what they should have received. This has a ripple effect throughout financial markets as peoples’ life savings and retirement funds are negatively affected by this artificial manipulation of LIBOR.
Any fund managers, including pension fund managers, who act as fiduciaries in protecting the money and interest of their clients, who are members of pension funds or have investments with certain investment firms, need to determine whether their clients received the correct percentage of interest on the bonds they bought through the fund managers. Bonds are bought mostly for the members of these funds. A loss of even .5% points per year for the last seven years, could amount to tens or hundreds of millions — or even billions of dollars — depending on the size of the funds’ investments. Unfortunately, many funds managers are unaware of the improper return on the funds’ investments, because these managers were unaware that LIBOR was being manipulated. While the funds or pension managers have no liability in the LIBOR scandal itself, they may have liability if they fail to do a thorough job of investigating whether the funds were shortchanged due to the artificially-lowered LIBOR.
How Municipalities Lost Money Due to LIBOR Manipulation
The investment banking industry started selling variable rate notes to state and local finance officials in the United States. These notes can be sold to raise money for a number of infrastructure projects, such as building roads, schools, parking garages, water processing plants, and airports. Instead of using the usual 30-year-fixed-rate bonds, the banks convinced many municipalities to sell variable rate bonds at lower rates, and then buy a “swap” that would fix the total payment to a lower rate than what they had paid in the fixed-rate market. It was designed to be a “win-win” situation: The government agency could borrow money at a slightly lower rate while the investment bank earned millions of dollars in fees. However, if the variable rate for bonds rose above the fixed-rate target, the swap counter party paid off the government agency. If the available-rate bond went down, the swap payments moved in the other direction — away from the taxpayers to the speculators. Either way, the government’s total cost was supposed to be fixed.
However, there was a problem with the formula — one that would cause municipalities to lose billions of dollars. Changes in the variable rate on bonds were always tied to an index of actual municipal bond transactions compiled by the U.S.-based Securities Industry and Financial Markets Association (SIFMA). Yet the swaps were tied to the London Interbank Offer Rate (LIBOR), which is set by the London Banker’s Association. If LIBOR moved lower at a faster pace than SIFMA, the government agencies’ hedge would come up short. Since many of the largest banks were in fact manipulating LIBOR at a rapid rate, the cities came up short and cities like Oakland CA lost tens of millions of dollars. Some deals went so bad that in July of 2012, the City of Oakland demanded the cancellation of a swap, and the company that sold them the swap was banned from doing business with the city. In an attempt to eliminate the risk of rising rates, Goldman Sachs came up with an exceedingly complex structure to fix the problem. The city paid Goldman Sachs a fixed rate that was slightly lower than what was then available on the market. At the same time the city purchased a variable swap that required Goldman to pay off the city’s variable-rate bond plus make payment to the city that was tied to LIBOR. If LIBOR went down, so did the city’s payment.
However, as has been recently discovered, the banks behind the LIBOR manipulation, at times, were reporting lower than actual rates to give the appearance of a more stable financial profile. Government investors and regulators are also investigating allegations that bank insiders manipulated LIBOR rates to benefit their proprietary trading desks. Unfortunately, this manipulation of LIBOR affected virtually every jurisdiction in the United States. It affected hedge funds, money market investors, and institutional investors. The total losses once fully discovered may exceed tens of billions of dollars. The losses that resulted from the misreported LIBOR rates worsened substantially a situation that already had become an incredibly bad deal for public agencies. The majority of swap contracts include large cancellation fees. In an environment where interest rates are going down and where long-term, tax-exempt bond rates have fallen to well below 4 percent, it has become exceedingly expensive for governments to refinance a floating rate debt that had been fixed by the swap contracts at 5 percent or more. If the swap was done in a high-rate environment (which is what we have now), it’s going to be cost prohibitive to get out of the contracts.
Presently, many municipalities, pension funds, hedge funds, and institutional investors are incurring large swap termination costs to exit the risk associated with these contracts. Some estimates place the dollar value of government agency swap contracts that were affected by the LIBOR rate manipulation at more than $200 billion.
The effect from the manipulation of LIBOR on municipalities and the average person is massive. In order to assess the full effect, however, people with knowledge of securities, LIBOR, and a number of other disciplines within the legal field must be employed to make that determination. If you think that you have been affected by the manipulation of LIBOR, please call our office at (877) 444-2929 for a free consultation.
How Municipalities Can Be Harmed by LIBOR Manipulation
For a more detailed explanation of how municipalities can be harmed by LIBOR manipulation, click here. This article outlines in detail how the manipulation of LIBOR affected municipalities in the United States, and different banks took advantage of the municipalities by manipulating LIBOR.
In February of 2012, it was revealed that the U.S. Department of Justice was conducting a criminal investigation into LIBOR manipulation and abuse. Among the abuses being investigated were the possibility that traders were in direct communication with bankers before the rates were set, thus allowing them an advantage in predicting that day’s fixing of LIBOR. Since LIBOR underpins approximately $350 trillion in derivatives, this investigation is highly significant. For example, one trader’s message indicated that “for each basis point (0.01%) that LIBOR was moved, those involved could net about a couple of million dollars.”
In June of 2012, Barclays Bank was fined $200 million dollars by the Commodity Futures Trading Commission,$160 million by the United States Department of Justice, and £59.5 million by the Financial Services Authority for attempted manipulation of the LIBOR and EURIBOR rates. The United States Department of Justice and Barclays officially agreed that “the manipulation of the submissions affected the fixed rates on some occasions.” On July 2, 2012, the chairman of Barclays resigned from the position following the interest rate rigging scandal. Following the resignation of the chairman, the chief executive officer of Barclays, resigned for the same reasons. Then the Chief Operating Officer of Barclays also resigned — another casualty of the scandal. Jerry del Missier, former Chief Operating Officer of Barclays, admitted that he had instructed his subordinates to submit falsified LIBORs to the British Bankers Association.
It has been widely reported that the U.S. Department of Justice and other law enforcement arms around the world were actively investigating the LIBOR manipulation scandal. It has also been widely reported that criminal arrests are imminent regarding this abuse.
How LIBOR Can Affect a Public Entity
The finances of public entities are extremely complicated. Public entities generally issue bonds on a short term basis, which are based on LIBOR or the insurance they take out to secure the bonds is based on LIBOR. If LIBOR is artificially manipulated in any way it could drastically affect the value of the bonds at considerable cost to the public entity. Usually, public entities that have incurred considerable losses choose to opt out of a class action lawsuit because their losses are significant enough to support hiring an attorney, and stand to receive considerably more compensation than they would under a class action lawsuit.
Pension Funds and Other Entities
Pension funds and other entities invest in a wide variety of investment options that are based on LIBOR. The manipulation of LIBOR drastically can affect the return on investment received from a pension plan or investment fund. Unfortunately, many times the investment funds do not realize they have been damaged because of LIBOR manipulation. This is exactly what the banks that manipulated LIBOR counted on. Many of the intuitions never knew they were harmed until it became public knowledge that LIBOR had been manipulated AND, even then, they had to investigate whether they actually had been harmed.
By now, any type of pension fund or public entity should have completed their obligation to investigate as to whether they were harmed by LIBOR manipulation. While these entities have no legal liability if what they bought, sold or invested in was manipulated by LIBOR, failure perform due diligence investigation into whether they were harmed by LIBOR manipulation and to hire legal representation to help recoup these losses, could subject these entities to liability for breach of fiduciary duty.
If you think that you have been affected by the manipulation of LIBOR, please call our office at (877) 444-2929 for a free consultation.