Chinese investment institutions remain silent over Libor lawsuits

Investment institutions worry about exposing their dealings if they join rate-setting suits

PUBLISHED : Monday, 17 September, 2012, 12:00am
UPDATED : Monday, 17 September, 2012, 5:03am

As lawsuits mount from aggrieved parties in the Libor scandal, one party is keeping tight-lipped: Chinese investment institutions that are wary of revealing too much about their dealings.

A flurry of suits have been filed from parties ranging from individual investors to fund managers to banks, all claiming to have been hurt financially by a group of banks that manipulated the London interbank offered rate (Libor). The setting of the key interest rate - on which everything from derivative contracts to home mortgages is based - is overseen by the British Bankers' Association, a trade group.

In June, Barclays agreed to pay about US$450 million in fines to US and British regulators after admitting its traders tried to toy with the Libor setting. Regulators contended that Barclays submitted artificially low rates to make it look sounder.

China has been aggressively investing overseas since 2007. And powerful Chinese institutions, including the sovereign wealth fund and major banks, are believed to have large exposures to assets related to Libor.

A person close to China Investment Corp, the US$482 billion sovereign wealth fund, said Beijing would take a wait-and-see attitude before deciding whether to do anything such as participating in a class-action suit, where one party sues on behalf of a group sharing the same grievance. He added that the lukewarm response by mainland institutions to the Libor lawsuits reflected the officials' concern that the cases might hurt relationships with some of the world's largest banks and turn an unwelcome spotlight on Chinese investment portfolios.

The investment strategies of CIC and the State Administration of Foreign Exchange, which oversees certain foreign assets, seem "secretive" to the international investment community and lack transparency, say investment bankers and others.

For example, in October 2008, the US$5.4 billion investment by CIC - which was viewed more as an equities investor - in a US money-market fund only became public knowledge after the fund went into liquidation because of losses from its investment in Lehman Brothers, which went bankrupt.

But David Kovel, the first lawyer to file a class-action Libor- related lawsuit on behalf of investors, said mainland institutions should put aside worries about exposing their investment strategies and prepare to claim compensation by first figuring out whether they, too, had suffered financially. If Libor was set artificially low, it would mean that, among other implications, investors received less investment income than they otherwise would have.

Opening their portfolios for review "shouldn't be a huge concern" for Chinese institutions, said Kovel, who works for US law firm Kirby McInerney. "In the US courts, there are ways of protecting investment secrets."

Based in New York, Kovel visited Shanghai on business earlier this month but declined to say whether he had approached any Chinese investor regarding participating in a Libor-related case.

Just how many cases have been filed so far and the size of those claims are not clear. But according to research by Macquarie, in July, the Libor scandal could force the world's biggest banks such as Citigroup to face potential legal liability of about US$176 billion.

Claimants who do not participate directly in a class-action suit can benefit from any settlement. But Kovel said Chinese institutions must clarify the damage they sustained before they could apply to receive a portion of the settlement.