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Jealous Non-Libor-Panel Banks Want Libor Lawsuits Too

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Apparently a lot of law school graduates are unemployed and starving so as a public service I figured I'd clue them in to an easy and lucrative line of business open to any self-starter with a law degree:
(1) Find a description of how banks manipulated Libor and it was bad - this complaint will do, or this one, or just open a newspaper,
(2) Find someone who was receiving floating-rate payments based on Libor in 2005-2008,
(3) Put the name of the person you found in step (2) on top of the description you found in step (1),
(4) Sue like your life depends on it.

Works every time! Well, many times. It feels like it won't work for Berkshire Bank and their lawyers, though?

In the latest sign of the potential legal vulnerability facing banks ensnared in the world-wide probe of interest-rate manipulation, a New York lender alleges in a lawsuit that it was cheated out of interest income because rates on loans tied to Libor were "artificially" depressed.

The lawsuit effectively argues that the alleged manipulation short-changed lenders by helping borrowers pay less for mortgages and other loans.

Berkshire Bank, with 11 branches in New York and New Jersey and about $881 million in assets, claims in a proposed class-action lawsuit in U.S. District Court in New York that "tens, if not hundreds, of billions of dollars" of loans made or sold in the state were affected by rigging the London interbank offered rate.

The Journal has the complaint and it mostly hits the same high notes as everything else - Libor submissions and bank CDS diverged, Barclays admitted to manipulating Libor, all the banks were doing it, etc. - but goes a little light on what any of this has to do with Berkshire Bank. Berkshire Bank, you see, seems never to have met anyone at a Libor panel bank, but it's all one interconnected global financial system so they feel aggrieved and aresuing for common law fraud.

I am not a lawyer, but Wikipedia is,* and Wikipedia is pretty sure that common law fraud requires not just a lie but also "the speaker's intent that it shall be acted upon by the plaintiff." Ask yourself: when Barclays was lying about Libor, did it intend for Berkshire Bank to adjust its loans based on those lies? The fact that Barclays and Berkshire seem never to have met probably cuts against that theory, no? The complaint says:

Defendants intended to induce reliance upon their misrepresentations. Indeed, the only reason that Defendants submitted USD LIBOR quotes to the BBA was for inclusion of those quotes in the calculation of the BBA's daily USD LIBOR fix and dissemination of their individual quotes and the aggregated fix to the financial markets.

But that has nothing to do with wee Berkshire Bank. Berkshire wasn't, for instance, in a swap with a Libor panel bank that was manipulating Libor to screw Berkshire out of its swaps profit. It was just doing its own loans to its own customers and free-riding on the Libor banks' work in putting together a floating-rate index. Berkshire Bank could have just made loans that floated based on, for instance, Berkshire Bank's own cost of financing, or on fed funds or the 11th District whatsit. It used Libor instead because presumably that got it customers and made it more money: using a (supposedly) objective index based on big banks' (supposed) cost of borrowing is more attractive to clients than just making up the number yourself. "Ooh, you have them newfangled Libor loans," said the small businessman in Goshen, NY. "I'll take three of them."

Now, of course, Berkshire has learned that it didn't make as much profit on Libor loans as it could have, and so it's suing because someone it never met did something it never paid for less diligently than it would have liked. One question you could ask is: would it have been done better if Berkshire had paid for it? That is kind of the thesis of this paper** arguing that Libor should have been sold as a subscription product to anyone who wanted to use it:

Able to see the explicit value of the BBA Libor index, BBA and the panel banks might treat the index like a product. They would have adequate incentives to prevent indexing risks, investing in governance and systems to prevent employee manipulation. If the disturbances were reputational, the banks would have to weigh reputational effects against the damage to a valuable revenue stream. Even in the turmoil of a crisis, such revenue would not be risked lightly. Moreover, the licensing fees would be sufficiently attractive to encourage competitors drawing more participants into the field.

Meh! The theory is that Libor would be better if the panel banks charged people for using it, which, I dunno, maybe.*** But they didn't, and it was bad, and everyone is piling on to complain about it. And everyone gets to complain. It's just, not everyone gets to get paid.

But some people probably do. If I were an unemployed lawyer looking to make some money off of Liborgate, and if for some reason (love of a challenge maybe) I was committed to the idea of suing banks on behalf of other banks, I'd be looking for banks who actually have some direct cause for complaint against the Libor panel banks.

Here's one idea, which anyone is free to use in return for a nominal**** share of the recovery: syndicate banks. When Barclays, say*****, was syndication manager for a corporation's floating-rate credit agreement, it got lots of fees and ancillary business and whatnot, and passed off much of the credit and Libor manipulation risk to other banks who signed up for part of the loan on terms more or less dictated by the syndication manager. When Barclays then manipulated Libor downwards, it not only preserved its reputation as a bank that was able to borrow in interbank markets at non-ruinous rates: it also made its client happy by reducing its borrowing costs. But while Barclays got most of the benefit of that, the syndicate banks paid much of the cost, because their interest payments were reduced by Libor manipulation. I suspect Berkshire Bank wasn't doing too many syndicated loans, and they don't claim they were in their complaint. If I wanted a Libor-lawyer payday, I'd be looking for someone who was.

New York Lender Files Libor Lawsuit [WSJ]
Index Theory: The Law, Promise and Failure of Financial Indices [SSRN]

* Important: it is also possible that I am a lawyer and Wikipedia is not.

** Via The Conglomerate.

*** There are a lot of things in the financial world where you might think "obviously banks will do this honestly because otherwise customers wouldn't use it, and when done honestly it is a nice revenue stream," but actually it's an even nicer revenue stream when done dishonestly and customers aren't smart enough to stop using it just because it happens to be dishonest. For instance: if you knew Libor was being manipulated, and you did, why would you do an interest rate swap with a Libor panel bank? Just for instance. So the argument "make it a revenue stream and then it will be done honestly" is probably wrong.

**** 10%

***** Not to pick on them; just saves some "allegedly"s to talk about the bank that's admitted to manipulating Libor.