The cost of rigging

Banks face massive claims as multiple states in the US join forces in an investigation of alleged manipulation of interest rates

PUBLISHED : Friday, 08 February, 2013, 12:00am
UPDATED : Friday, 08 February, 2013, 3:53am

A multistate probe of alleged manipulation of interest rates threatens to leave banks liable for billions of dollars in estimated state and local losses from the scandal, even as they settle with national regulators.

New York Attorney General Eric Schneiderman is helping lead a probe into claims that banks rigged global benchmarks for borrowing, adding to investigations by other authorities, including the US Justice Department.

Royal Bank of Scotland agreed on Wednesday to pay about US$612 million to US and British regulators to resolve their claims.

"The damage to public entities is a matter of great concern to state and local governments," Schneiderman said. "These were allegations of really despicable conduct."

More than 12 states are participating in the probe, according to a person familiar with the matter, who requested anonymity because he is not authorised to speak publicly.

States have joined forces as banks reach settlements to resolve liability tied to the London interbank offered rate.

Barclays in June agreed to pay £290 million (HK$3.52 billion), and in December, UBS agreed to pay 1.4 billion Swiss francs (HK$11.93 billion).

By acting together, state attorneys general could amass potentially large claims against banks and gain leverage in any settlement negotiations, said Stephen Houck, a lawyer at Menaker & Herrmann and a former chief of the New York attorney general's antitrust bureau.

Antitrust law allows states to seek triple damages.

"It certainly gives them more clout," Houck said about states working with one another. "If they can bring all their claims together, they're representing a very large group of plaintiffs."

Global authorities have been investigating claims that more than a dozen banks altered submissions used to set benchmarks such as Libor to profit from bets on interest-rate derivatives or make the lenders' finances appear healthier.

Libor, a benchmark for financial products worldwide, is created from a survey of banks conducted each day on behalf of the British Bankers Association in London. Lenders are asked how much it would cost them to borrow from one another for different periods in various currencies.

Libor manipulation that kept the benchmark artificially low cost states and local governments about US$6 billion on interest-rate swaps, according to an estimate by Peter Shapiro, a managing a director at Swap Financial.

Those swaps are used to hedge interest-rate risk, with governments paying a fixed rate in exchange for variable payments based on Libor.

Any investments in floating-rate securities tied to Libor also would have paid less in interest if the rate was suppressed. Shapiro said he did not have an estimate for those damages.

"One of the challenges going forward is not necessarily whether the index was manipulated but to determine the degree," said Nat Singer, a Swap Financial managing director. "Municipalities know they were short-changed, but they don't know by how much."

Last year, 49 states and federal agencies reached a US$25 billion settlement with five US banks after attorneys general began an investigation into claims of fraudulent foreclosure practices by mortgage servicers.

Besides New York, 10 states confirmed their involvement in the Libor multistate investigation, including California, Florida, Colorado, Connecticut and Massachusetts.

Subpoenas had been issued to more than a dozen banks in the probe, including Deutsche Bank, JP Morgan Chase, HSBC and Societe General, a person familiar with the probe said last year.

Ed Canaday, a spokesman for RBS, and Michael O'Looney, a spokesman for Barclays, declined to comment about the state investigation. Karina Byrne, a UBS spokeswoman, said in an e-mail that the bank had disclosed that states were investigating.

Jaclyn Falkowski, a spokeswoman for Connecticut Attorney General George Jepsen, said in October that attorneys general throughout the United States had organised "a large, well-coordinated multistate investigation" in whether state and municipal issuers had been harmed.

Banks have already been sued by municipal governments, including the city of Baltimore and San Diego county.

Banks would want to settle with a "critical mass" of states so they could avoid the potential cost of litigating in many states, said Peter Henning, a professor at Wayne State University Law School in Detroit and a former federal prosecutor.