It’s no surprise that more Liborneriness is coming to a bank near you; with Barclays and UBS already pretty much having admitted wide-ranging Libor manipulation and Deutsche Bank seeming to be next up for a roasting. Maybe some people will go to jail, and certainly some more banks will pay fines, but also certainly those fines will be very very very small compared to the potential lawsuits. Because there are eight hundred quazillion dollars of Libor-referencing contracts, and if you screwed them up then in some loose theoretical way you owe money to everyone who got screwed without having any offsetting claims against anyone who benefited.
Now the US legal system being what it is the lawsuits long preceded the evidence of manipulation and there’s a big mishegas of a Libor lawsuit that’s been going on for years in New York. This suit looks a little quaint now, being based on the theory that all the banks got together in a room, smoked cigars, rubbed their hands together, and agreed to lower Libor for some unspecified nefarious purpose. Now we know that they all worked against each other to lower and/or raise Libor for a variety of clearly specified nefarious purposes,* until the crisis hit and they all started working independently to lower Libor for clearly specified and maybe public-spirited purposes. And the banks will tell you that themselves, in their motion in the case filed last week:
Plaintiffs themselves cite as the primary motive for the alleged false reports a desire by Defendants to hide their supposed financial weakness from each other and the public, which would naturally call for circumspection by such banks, not discussion and agreement among them.
See? We would never work together to manipulate Libor – we’re too sneaky for that. We’d prefer to lie to each other, too.
The banks’ response is more generally worth reading, though; it’s about antitrust claims which again look less interesting now – so big investors will be filing their own, more au courant lawsuits – but gives you some sort of philosophical sense of how you might defend your Libor manipulation. If you had to. Which, given the choice, I would not recommend:
There are no buyers or sellers, no market, no profit, and no competition of any kind associated with the mere reporting of rates or setting of USD LIBOR. Defendants do compete for the provision of loans and other financial products, some of which are indexed to USD LIBOR, but Plaintiffs do not allege any reduction in competition in connection with any loans or other financial products. And contrary to Plaintiffs’ suggestions, USD LIBOR is not a “price” of anything; it is an index, a composite derived from the BBA’s survey of the panel banks. Market participants are free to make use of or disregard USD LIBOR as they see fit when negotiating rates for new transactions. …
As an initial matter, there is no objectively verifiable “correct” USD LIBOR, because the panel banks’ USD LIBOR submissions do not reflect actual borrowing rates from completed transactions, but rather hypothetical rates at which the panel banks believe they can borrow on a given day. Moreover, even if “but-for” USD LIBOR rates could be determined, those rates would be insufficient to determine the economic terms on which past transactions referencing USD LIBOR would have been consummated. And even if “but-for” terms could be calculated, numerous purchasers of USD LIBOR-based instruments likely would have benefited from allegedly understated USD LIBOR, and some … may have been indifferent to USD LIBOR movements, depending on the types of instruments they purchased and their net exposures to USD LIBOR.
I confess I do not entirely know what this says. Does it imply that, if you buy a floating-rate bond at L + 100, and Libor fixes at 2.0%, and the issuer pays you 3% interest that quarter, you “are free to … disregard USD LIBOR as [you] see fit” and demand more money? Surely not – after all it says “when negotiating rates for new transactions” – but doesn’t it sound that way? The claim that manipulating Libor doesn’t matter because Libor is just a number and nobody has to use it in their contracts is … well … a thing, but it is sort of unimpressive when people actually do use it in $800 trillion notional amount of contracts.
Or does it imply that, if you bought a floating-rate bond in 2008 at L+200, part of your 200bps spread was to compensate you for the fact that everyone kind of knew that Libor was understated and didn’t reflect actual borrowing costs of banks or anyone else? This is sort of obviously true: if you bought a floating-rate bond from Barclays in 2008 at, whatever, L+100, then part (all?) of your 100bps spread was to compensate you for the fact that Barclays couldn’t actually borrow at Libor. In other words, one possibility is that financial instruments could have discounted the likelihood that banks would lie about Libor, and therefore no one was hurt when they lied about it in the expected ways. I guess? The problem here is that the Libor lying seems to have changed over time, and particularly become more systematic and downward in 2007-2008, meaning that, if you buy this theory, then anyone who bought floating-rate instruments before the crisis got more lying than they bargained for. (And that anyone who, say, took out a floating rate mortgage during the crisis paid too high a premium over Libor – they should sue too. Except, who did that?)
In any case, it certainly does imply what is true, that lots of people would benefit from allegedly understated Libor rates, though I for one cannot understand why that group would include purchasers of Libor-based instruments. That is a good reason to think that blunderbuss class actions against all the banks for a grand Libor conspiracy are not the most efficient way to extract money and pain from the banks. Sadly for them, though, it’s not much of an argument against individual claims from investors who clearly lost from manipulated rates. And those claims are coming.
Rate rigging probe escalates in UK and Germany [Reuters]
Lawsuits against banks loom in Libor scandal [CNN]
Motion to dismiss antitrust claims [pdf via SDNY Blog]
An Analysis of Three-Month LIBOR 2005-2008 [Aleph Blog]
* David Merkel has the state of the blog-o-art on Libor manipulation, reading the numbers to show that “whether formally or informally, you have two groups of banks submitting rates for LIBOR. One group is trying to pull LIBOR up, the other is trying to pull LIBOR down.” This is however evidence only of numbers, not intent – he’s got Barclays in the conspiracy to pull Libor up just because they submitted higher quotes than everyone else, but of course the actual emails show that they were artificially lowering their quotes in 2007-2008: they had the effect of raising Libor (vs. the average), but the intent (and thus effect) of lowering it (vs. their actual cost of borrowing). Similarly, JPMorgan is the biggest outlier in pulling Libor down, which is maybe because they were the scammiest bank on the low side, but also maybe because they could actually borrow more cheaply than other banks in their pre-Whale days.