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Rigged Libor shows flaw of self-regulation

PUBLISHED : Thursday, 13 December, 2012, 11:55am
UPDATED : Thursday, 28 March, 2013, 2:21pm

Every morning, from his desk by the bathroom at the far end of Royal Bank of Scotland’s trading floor overlooking London’s Liverpool Street station, Paul White punched a series of numbers into his computer.

White, who joined RBS in 1984, was one of the employees responsible for the firm’s submissions to the London interbank offered rate, or Libor, the global benchmark for more than US$300 trillion of contracts, from mortgages and student loans to interest-rate swaps.

Behind him sat Neil Danziger, a derivatives trader at the bank since 2002. On the morning of March 27, 2008, Tan Chi Min, Danziger’s boss in Tokyo, told him to make sure the next day’s submission in yen would increase.

“We need to bump it way up high, highest among all if possible,” Tan, known by colleagues as “Jimmy,” wrote in an instant message to Danziger, according to a transcript made public by a Singapore court and reviewed by Bloomberg before being sealed by a judge at RBS’s request.

The trader typically would have swiveled in his chair, tapped White on the shoulder and relayed the request, people who worked on the trading floor said. Instead, as White was away that day, Danziger input the rate himself.

The next morning RBS said it paid 0.97 per cent to borrow in yen for three months, up from 0.94 per cent the previous day.

The Edinburgh-based bank was the only one of 16 surveyed to raise its rate. If it had lowered its submission in line with others, the cost of borrowing in yen would have fallen one-fifth of a basis point, or 0.002 per cent, according to data compiled by Bloomberg. Even that small a move could mean a gain of US$250,000 on a position of US$50 billion.

 

Events like those that took place on RBS’s trading floor, across the road from Bishopsgate police station and Dirty Dicks, a 267-year-old public house, are at the heart of the biggest and longest-running scandal in banking history.

For years, traders at RBS, Barclays, UBS, Deutsche Bank, Rabobank and other firms that stood to profit worked with employees responsible for setting the benchmark to rig the price of money, according to documents obtained by Bloomberg and interviews with two dozen current and former traders, lawyers and regulators. Those interviews reveal how the manipulation flourished for years, even after bank supervisors were made aware of the system’s flaws.

The conspiracy wasn’t confined to low-level employees. Senior managers at RBS knew banks were systematically rigging Libor as early as August 2007, transcripts of phone conversations obtained by Bloomberg show. Some traders colluded with counterparts at other banks to boost profits from interest- rate futures by aligning their submissions.

Members of the close-knit group knew each other from working at the same firms or going on trips organised by interdealer brokers such as ICAP to Chamonix, a French ski resort, or the Monaco Grand Prix.

“We will never know the amounts of money involved, but it has to be the biggest financial fraud of all time,” said Adrian Blundell-Wignall, a special adviser to the secretary general of the Organization for Economic Cooperation and Development in Paris. “Libor is the basis for calculating practically every derivative known to man.”

Now, more than five years after alarms first sounded, regulators and prosecutors are closing in. Three people, including a former trader at UBS and Citigroup, were arrested in London this week in connection with the probe into rate manipulation, the first apprehensions in an investigation involving more than half a dozen agencies on three continents.

 It has to be the biggest financial fraud of all time. Libor is the basis for calculating practically every derivative known to man
Adrian Blundell-Wignall, special adviser to the secretary general of the Organization for Economic Cooperation and Development 

Barclays paid a record 290 million-pound (US$468 million) fine in June to settle with regulators, and the London-based lender’s three top executives, including chief executive Robert Diamond, departed after criticism by bank supervisors and politicians. Other firms, including RBS and UBS, are negotiating settlements, according to people with knowledge of the discussions. UBS faces a fine within days that may surpass the one levied on Barclays, one of the people said.

Barclays, RBS and UBS declined to comment.

The industry faces regulatory penalties of at least US$8.7 billion, according to Morgan Stanley. The European Union is leading a probe that could see banks fined as much as 10 per cent of their annual revenue. Dozens of lawsuits have been filed in the US and U.K. claiming losses on products pegged to Libor.

The scandal demonstrates the failure of London’s two-decade experiment with light-touch supervision, which helped make the British capital the biggest trading hub in the world. In his 10 years as Chancellor of the Exchequer, Gordon Brown championed this approach, hailing a “golden age” for the City of London in a June 2007 speech. Even after the FSA pledged to toughen its rules following the 2008 financial crisis, supervisors failed to act on warnings that the benchmark was being manipulated.

Regulators have known since at least August 2007 that banks were using artificially low Libor submissions to appear healthier than they were. That month, a Barclays employee in London e-mailed the Federal Reserve Bank of New York, questioning the numbers that other banks were inputting, according to transcripts published by the New York Fed.

Nine months later, Tim Bond, then head of asset allocation at Barclays’s investment bank, publicly described the Libor figures as “divorced from reality,” saying in a Bloomberg Television interview that firms were routinely misstating their borrowing costs to avoid the perception they were facing stress.

When a bank can benefit financially from doing the wrong thing, it generally will. The extent of the Libor manipulation was eye-popping
Sheila Bair, a former acting chairman of the US Commodity Futures Trading Commission and former chairman of the Federal Deposit Insurance Corp 

The New York Fed and the Bank of England say they didn’t act because they had no responsibility for oversight of Libor. That fell to the British Bankers’ Association, the industry lobbying group that created the rate and largely ignored recommendations from central bankers after 2008 to change the way the benchmark is computed.

Regulators also were preoccupied with the biggest financial crisis since the Great Depression, and forcing banks to be honest about their Libor submissions might have revealed they were paying penalty rates to borrow.

Libor is calculated daily through a survey of banks asking how much it costs them to borrow in different currencies for various durations.

Because it’s based on estimates rather than actual trade data, the process relies on the honesty of participants. Instead, derivatives traders at banks around the world sought to influence their firms’ Libor submissions and managers sometimes condoned the practice, according to documents and transcripts of instant messages obtained by Bloomberg.

Some former regulators say they were surprised to learn about the scale of the cheating.

“Through all of my experience, what I never contemplated was that there were bankers who would purposely misrepresent facts to banking authorities,” Alan Greenspan, chairman of the US Federal Reserve from 1987 to 2006, said in a phone interview. “You were honour-bound to report accurately, and it never entered my mind that, aside from a fringe element, it would be otherwise. I was wrong.”

Sheila Bair, a former acting chairman of the US Commodity Futures Trading Commission and chairman of the Federal Deposit Insurance Corporation from 2006 to 2011, said the scope of the scandal points to the flaws of light-touch regulation.

“When a bank can benefit financially from doing the wrong thing, it generally will,” Bair said in an interview. “The extent of the Libor manipulation was eye-popping.”

Libor debuted in 1986, the year British Prime Minister Margaret Thatcher’s so-called “Big Bang” program of financial deregulation fueled a boom in London’s bond and syndicated-loan markets. It was intended to be a simple benchmark that borrowers and lenders could use to price loans.

In 1997, the Chicago Mercantile Exchange switched the rate used in pricing Eurodollar futures contracts to Libor, solidifying its position as the principal benchmark for the swaps market, which by June 2012 had a notional value of US$639 trillion, according to the Bank for International Settlements.

That decision created a temptation for swaps traders to game Libor, particularly in the days before International Money Market or IMM dates, when three-month Eurodollar futures settle. The value of traders’ positions, often billions of dollars, was affected by where the dollar Libor rate was set on the third Wednesdays of March, June, September and December.

The manipulation of Libor was discussed openly at banks.

 Through all of my experience, what I never contemplated was that there were bankers who would purposely misrepresent facts to banking authorities
 Alan Greenspan, former US Federal Reserve chairman 

“We have an unbelievably large set on Monday,” one Barclays swaps trader in New York e-mailed the firm’s rate- setter in London on March 10, 2006. “We need a really low three-month fix, it could potentially cost a fortune.”

The rate-setter complied with the request, according to Britain’s Financial Services Authority, which published the e-mail following its investigation of the bank’s role.

The 2007 credit crunch increased the opportunity to cheat. With banks hoarding cash and not lending to one other, there was little trading in money markets, making it impossible for rate- setters to assess borrowing costs accurately. Instead, traders said they resorted to seeking input from interdealer brokers, colleagues and acquaintances at other firms, many of whom stood to benefit from where the rate was set. They described it as legitimate information-sharing in the absence of trading.

On August 20, 2007, days after BNP Paribas halted withdrawals from three funds, forcing the European Central Bank to offer lenders unlimited cash and marking the start of the credit crisis, Paul Walker, RBS’s head of money-markets trading and the person responsible for US dollar Libor submissions, discussed with Scott Nygaard, then Tokyo-based head of short- term markets for Asia, how banks were using Libor to benefit their trading positions.

“People are setting to where it suits their book,” Walker said in a phone call with Nygaard, a transcript of which was obtained by Bloomberg. “Libor is what you say it is.”

“Yeah, yeah,” replied Nygaard, an American who joined RBS in 2006 after six years at Deutsche Bank in Japan.
Walker and Nygaard, now global head of treasury markets based in London and a member of the Bank of England’s money- markets liaison group, both declined to comment.

Each day, the BBA asks banks to estimate how much it would cost them to borrow in 10 currencies for periods ranging from overnight to one year. The top and bottom quartiles of quotes are excluded, and those left are averaged and made public before noon in London. Submissions from contributing banks also are published. The dollar Libor panel consists of 18 banks, while the one for sterling has 16, and 13 firms set the yen rate.

It didn’t take a conspiracy involving large numbers of traders at different firms to move the rate. By nudging their submissions, traders at a single bank could influence where Libor was fixed.

Even inputting a rate too high to be included could push up the final figure by sending a previously excluded entry back into the pack. A move in Libor of less than 1 basis point, or one-hundredth of a per centage point, could be valuable for traders managing billions of dollars in swaps.

“If you have a system like Libor, where highly subjective quotes are built into the process, you have a lot of opportunity for manipulation,” said Andrew Verstein, a lecturer at Yale Law School in New Haven, Connecticut, and co-author of a paper on Libor rigging to be published in the Winter 2013 issue of the Yale Journal on Regulation.

“You don’t need a cartel to make Libor manipulation work for you. It certainly wouldn’t hurt, but it didn’t have to happen.”

At UBS, Deutsche Bank, Barclays, Rabobank, RBS and JPMorgan Chase, rate-setters were given no training or guidelines for making submissions, according to former employees who asked not to be identified because investigations are continuing.

At RBS and Deutsche Bank, derivatives traders on occasion made their firm’s submissions, they said. Spokesmen for all the banks declined to comment.

As the credit crisis intensified in the fourth quarter of 2007, Libor was a closely scrutinized gauge of the health of financial firms.

After years of relative stability, the benchmark became more volatile. The average spread between the highest and lowest submissions to the three-month dollar rate widened to about 8 basis points in the three months ended Oct. 30, 2007, from about 1 basis point in the previous three months, data compiled by Bloomberg show.

The volatility drew the attention of investors and regulators.

As Japan endured its most intense heat wave in 100 years on August 20, 2007, a sales manager at RBS in Tokyo received a call from a trader at hedge fund Brevan Howard in Hong Kong, according to two people with knowledge of the matter.

 If you have a system like Libor, where highly subjective quotes are built into the process, you have a lot of opportunity for manipulation
Andrew Verstein, lecturer at Yale Law School 

RBS’s rate-setter in London had increased the bank’s submission for three-month yen Libor by 9 basis points from the end of the previous week, helping to push the benchmark to its highest level since 1995.

Brevan Howard wanted to know why the rate jumped, even after the Fed had announced unprecedented steps to boost liquidity at the end of the week, something that should have lowered the measure, the people said.

RBS employees in London and Tokyo discussed the hedge fund’s call in instant messages. Nygaard phoned Walker in London to say RBS should be “careful how we speak with them about what we, how the rate is set,” according to a transcript of an instant-message conversation obtained by Bloomberg.

On a conference call later that day that included Walker and Darin Spilman, an RBS sales manager, Danziger told the Brevan Howard trader how the bank calculated its submissions in the absence of any cash trading and gave his views on what he expected to happen to the Tokyo interbank offered rate, or Tibor. Danziger, Spilman, Walker, Nygaard and Tan declined to comment, as did Anthony Payne, a spokesman for Brevan Howard in London.

About a week later, on August 28, 2007, Fabiola Ravazzolo, an economist on the financial-stability team at the New York Fed, received an e-mail from a member of Barclays’s money-markets desk in London, accusing the firm’s competitors of making artificially low Libor submissions, according to transcripts published by the regulator that didn’t identify the sender.

Barclays that day had submitted the highest rate to three- month dollar Libor, while the lowest was posted by Lloyds Banking Group, suggesting Barclays was having more difficulty obtaining funding than Lloyds, a bank later bailed out by the UK government.

“Today’s US dollar Libors have come out and they look too low to me,” the e-mail said. “Draw your own conclusions about why people are going for unrealistically low Libors.”

Lloyds, in an e-mailed statement, declined to comment on what it called “speculation by traders at other banks.”

It wasn’t until the following year, prompted by a March 2008 report by the Bank for International Settlements and an April article in the Wall Street Journal suggesting banks were lowballing their submissions, that the New York Fed and the Bank of England asked the BBA to review the rate-setting process.

In June 2008, New York Fed President Timothy Geithner sent a memo to Bank of England Governor Mervyn King and his deputy, Paul Tucker, putting forward a list of recommendations for fixing Libor, including increasing the number of contributing banks, basing the rate on an average of randomly selected submissions and cutting maturities in which little or no trading took place.

“These are pretty modest reforms, they probably wouldn’t have invalidated contracts and they might have reduced some of the abuses,” Yale’s Verstein said. “On the other hand, it would likely have caused Libor to go up, which could have affected a great many people.”

Aside from creating a committee to review questionable submissions and promising to increase the number of contributors to dollar Libor, the BBA chose not to implement Geithner’s suggestions. Angela Knight, then the group’s chief executive, said in a December 2008 statement that Libor could be trusted as “a reliable benchmark.”

Privately, regulators were sceptical. As the BBA was drafting its proposals, King wrote to colleagues including Tucker on May 31, 2008, describing the group’s response as “wholly inadequate,” according to documents released by the Bank of England in July. Rather than press the BBA to change the way Libor was set, the Bank of England, the FSA and the New York Fed demanded that any references to them be removed from the BBA review, the e-mails show.

A spokesman for the Bank of England said Britain’s central bank “had no supervisory responsibilities” for Libor at the time. The New York Fed also “lacked direct authority over Libor” and didn’t want to be seen endorsing a private association’s plan, according to Jack Gutt, a spokesman. The New York Fed continued to press for reform through 2008, he said.

Liam Parker, an FSA spokesman, referred to earlier comments FSA Chairman Adair Turner made to British lawmakers in July that the regulator was in contact with the CFTC at a “very early stage” in the US commission’s investigation. It’s in the nature of such probes that one regulator takes the lead and others assist and decide at a later date whether to get “directly and formally involved,” Turner said.

The BBA said in an e-mail that it’s working with the regulators “to ensure the provision of a reliable benchmark which has the confidence and support of all users.”

By failing to act, regulators allowed rate-rigging to continue over the next two years.

At RBS, the abuse was most pronounced from 2008 until late 2010, according to people close to the bank’s internal probe. At Barclays, manipulation continued until the second half of 2009. Japan’s financial services agency banned Citigroup from trading derivatives linked to Libor and Tibor for two weeks in January in punishment for wrongdoing that started in December 2009.

Barclays former chief operating officer, Jerry Del Missier, went further, saying that the Bank of England encouraged the lender to suppress Libor submissions. In October 2008, days before RBS and Lloyds sought bailouts, the central bank asked Barclays to lower its quotes because they were stoking concern about the bank’s stability, Del Missier told a panel of British lawmakers July 16. Tucker, the Bank of England deputy director, has said he never gave such instructions.

“It’s not adequate for the authorities to say, ‘We didn’t have responsibility,’” said Paul Myners, a Labour Party member in Parliament’s House of Lords and the U.K. government’s financial-services minister from 2008 to 2010. “It was a huge oversight by the regulators not to realize that Libor and other benchmarks were of such critical importance that they should fall within the regulatory ambit.”

In the end, it was a US regulator without any banking oversight that brought Libor rigging to a halt. Vincent McGonagle, a top enforcement official at the Commodity Futures Trading Commission in Washington, initiated a probe into Libor after reading the April 2008 Wall Street Journal story.

The CFTC sent letters to several banks that fall requesting information, according to a person with knowledge of the investigation. The commission decided it had the authority to act because Libor affects the price of commodities, including futures contracts that trade on the Chicago Mercantile Exchange.

It’s not adequate for the authorities to say, ‘We didn’t have responsibility.’ It was a huge oversight by the regulators not to realize that Libor and other benchmarks were of such critical importance
Paul Myners, a Labour Party member in Parliament’s House of Lords and former financial-services minister

A decade earlier, the CFTC had lost out in an attempt to regulate the market for over-the-counter derivatives, including those pegged to Libor, following the 1998 collapse of hedge fund Long-Term Capital Management. The bid was opposed by then-Fed Chairman Greenspan and Treasury Secretary Robert Rubin.

In 2000, Congress passed the Commodity Futures Modernization Act, leaving the OTC markets unregulated.

“That’s reflective of the hands-off, light-touch, markets- can-regulate-themselves approach to regulation that has been shown to be so flawed,” Bair said.

Banks opened their own investigations after the CFTC inquiries. Barclays initially looked into allegations it had lowballed dollar Libor. It appointed Rich Ricci, then co-head of its investment bank, to oversee the inquiry. As the team sifted through thousands of pages of e-mail correspondence and transcripts of instant messages and phone conversations, it uncovered evidence that traders were manipulating the rate both up and down for profit, according to two people with knowledge of the probe.

The CFTC came to the same conclusion in late 2009 or early 2010, according to the person with knowledge of the commission’s inquiry. It happened when Gary Gensler, who had been chairman for less than a year, stood in the foyer of his ninth-floor Washington office as Stephen Obie, acting head of enforcement at the time, played a Barclays tape of a conversation between traders and rate-setters, the person said.

“We had to vigorously pursue this,” Gensler said in a Dec. 9 interview. “Sometimes practice in a market gets confused and over the line, but nonetheless it may still be illegal.”

The Barclays internal probe retained two law firms working outside the bank’s Canary Wharf office and cost 100 million pounds, according to people briefed on the matter. Diamond, who was interviewed during the in-house inquiry, wasn’t made aware of the full extent of the findings until less than a week before the bank announced its settlement in June because of his status as a witness in the probe, the people said.

The settlement revealed how widespread the manipulation was. The bank’s derivatives traders made 257 requests for US dollar Libor, yen Libor and Euribor submissions between January 2005 and June 2009, according to the settlement. The requests for US dollar Libor were granted about 70 per cent of the time.

Former Barclays trader Philippe Moryoussef is under investigation by the CFTC, FSA and US Department of Justice for colluding with counterparts at Deutsche Bank, Credit Agricole  and HSBC Holdings to influence Euribor, according to a person with knowledge of the matter who asked not to be identified because the probes are continuing. The Deutsche Bank trader was Christian Bittar, head of money-markets derivatives trading, one of the people said.

Thomas Hayes, among those arrested in London on December 11, also is being probed by Canada’s Competition Bureau for rate manipulation along with counterparts at five banks including HSBC, RBS and JPMorgan, according to a person briefed on the investigation. The 33-year-old trader worked with two of the others during his time at RBS in London between 2001 and 2003, two people with knowledge of the matter said.
The extent of the rate-rigging surprised Martin Taylor, Barclays’s chief executive from 1994 to 1998.

“Pretty much anything you could do to increase the revenue of your organization appeared legitimate,” Taylor said in an interview. “Here was the market doing something blatantly dishonest. I never imagined that people in the financial markets were saints, but you expect some moral standards.”

Michael Golden, a Deutsche Bank spokesman, said that the conduct of a “limited number” of employees, acting on their own initiative, fell short of the bank’s standards, and that the firm is cooperating with regulators. Spokesmen for Barclays, HSBC and Credit Agricole declined to comment, as did Bittar. Hayes and Moryoussef couldn’t be located through directory and web searches or by contacting former employers.

At RBS, managers condoned and sometimes encouraged rate- rigging by employees, according to Tan, who sued the bank for wrongful dismissal in Singapore in December 2011. Tan says executives including Nygaard and Kevin Liddy, global head of short-term interest-rate trading, were aware of the behavior.

Other RBS managers sought to manipulate the benchmark themselves. In an instant-message conversation on December 3, 2007, Jezri Mohideen, then RBS’s head of yen products in Tokyo, instructed colleagues in the UK to lower the bank’s six-month Libor submission that day, according to a transcript of the discussion seen by Bloomberg.

“We want lower Libors,” Mohideen said in the chat. “Let the money markets guys know.”

“Sure, I’m setting,” said Will Hall, a trader in London who set the rate that day in the absence of the rate-setter.

“Great, set it nice and low,” Mohideen said.

Hall agreed to set the rate at 1.01 per cent and followed through with the request, data compiled by Bloomberg show. No reason was given in the message as to why he wanted a lower bid.

RBS put Mohideen on leave October 12, two weeks after Bloomberg reported the conversation, according to two people with knowledge of the move. White, Danziger and Tan were dismissed in 2011 following the bank’s internal probe into yen Libor known as Project Zen. Andy Hamilton, who traded derivatives tied to the Swiss franc, also was fired in 2011 for trying to influence Libor.

The client will argue, ‘Had you told me the truth -- that you were fraudulently manipulating this rate -- I would never have entered the contract with you.’ We are calling this the nuclear option
Stephen Rosen, who runs Collyer Bristow, a 252-year-old law firm

White is now the commercial manager for Welling United football club and writes match-day programs for the Wings, as the non-league soccer team in southeast London is known. On his LinkedIn profile, he describes himself as: “Former trader: looking for employment or a fresh challenge.” He declined to comment, as did Tan, Danziger, Hamilton and Liddy. Mohideen said in a statement issued by his lawyer that he never sought “to exert pressure on anyone to submit inaccurate rates.”

The manipulation of Libor was a common practice in an unregulated market small enough for most participants to know one another personally, investigators found. Traders who worked 12-hour days without a lunch break were entertained by interdealer brokers soliciting business, according to three people familiar with the outings.

In March 2007, five months before the onset of the credit crisis, a dozen traders from firms including Deutsche Bank, JPMorgan and Lehman Brothers traveled to Chamonix, according to people with knowledge of the outing. The group, traders of yen-based derivatives, spent a day skiing before gathering over mulled wine at a restaurant. They flew back late on Sunday, in time for a 6am start the next day.

The trip was organized by London-based ICAP, the world’s biggest interdealer broker, which lines up buyers and sellers of securities and takes a per centage from every trade. Brokers such as ICAP and RP Martin Holdings Ltd., also in London, were sounding boards for those trying to set rates, especially after money markets dried up, traders interviewed by Bloomberg said.

ICAP said in May that it had received requests from government agencies probing banks’ Libor submissions and is cooperating fully. The firm has suspended one employee and placed three others on paid leave pending the outcome of the investigation. Brigitte Trafford, an ICAP spokeswoman, declined to comment. Two RP Martin brokers were arrested in London on Dec. 11 as part of an inquiry into Libor-rigging. RP Martin spokesman Jeremy Carey declined to comment.

RBS has fired four traders and suspended at least three others for alleged rate manipulation, according to a person with knowledge of the probe. Barclays has disciplined 13 employees and dismissed five, Ricci, now head of corporate and investment banking, told British lawmakers on November 28.

 It’s just another example of how the banks have manipulated everything in their power. I will fight them to the day I die to save my home
Dennis Fobes, 59, a plaintiff in a class action alleging that 12 banks colluded to push Libor higher on the dates when repayments are set

More than 25 people have left UBS after the Zurich-based lender’s internal probe, a person with knowledge of the investigation said last month.
Not until Barclays settled with regulators in June, five years after flaws in the rate-setting process emerged, did the U.K. government order an inquiry into Libor. It recommended stripping the BBA of its oversight role, handing it to the Bank of England and introducing criminal sanctions for traders seeking to rig the benchmark rate.

“Governance of Libor has completely failed,” FSA managing director Martin Wheatley, who led the review, said as he released the report. “This problem has been exacerbated by a lack of regulation and a comprehensive mechanism to punish those who manipulate the system.”

In the final chapter of his report, published in September, Wheatley said Libor wasn’t the only rate vulnerable to abuse.

Two months later, the UK’s US$480 billion gas market came under the spotlight for alleged manipulation after a journalist at the ICIS price agency reported deals he suspected were being done below “prevailing” levels. UBS and RBS suspended four traders in Singapore for rigging benchmarks used to set prices on foreign-exchange contracts.

“Libor is just the beginning,” said Rosa Abrantes-Metz, an economist with New York-based consulting firm Global Economics Group Inc., an associate professor at New York University’s Stern School of Business and co-author of “Libor Manipulation?” a paper published in August 2008. “Regulators are carrying out a general review of dozens of benchmarks around the world, and most of them are built the same way.”

The ubiquity of contracts pegged to Libor leaves banks vulnerable to lawsuits. Barclays was ordered by a British judge last month to release the names of all individuals involved in Libor-rigging at the bank after Guardian Care Homes Ltd., a Wolverhampton, England-based owner of about 30 homes for the elderly, sued the bank for 38 million pounds over interest-rate swaps that lost it money.

In Alabama, mortgage-holders have filed a class action in federal court alleging that 12 banks colluded to push Libor higher on the dates when repayments are set.

The plaintiffs include Annie Bell Adams, a pensioner whose home was repossessed, and Dennis Fobes, a 59-year-old salesman of janitorial supplies whose house in Mobile is now worth less than his mortgage. He said he refinanced in 2006 with a US$360,000 adjustable-rate mortgage linked to six-month dollar Libor.

“It’s just another example of how the banks have manipulated everything in their power,” Fobes said. “I will fight them to the day I die to save my home.”

Savers also are suing. The city of Baltimore and Charles Schwab, the largest independent brokerage by client assets, have filed suits claiming banks colluded to keep Libor artificially low, depriving them of fair returns. At least 30 such cases are pending in federal court in New York.

“Our hope is that the exposure of this illegal conduct results in systemic changes in Libor that prevent similar abuses in the future,” Sarah Bulgatz, a spokeswoman for Schwab, said in an e-mail.

In London, lawyers at Collyer Bristow, a 252-year-old firm, are working on a plan that would force banks to reimburse customers for any payments they made under derivatives contracts pegged to Libor. Three of the five partners on the financial- litigation team are working full time on Libor-related cases.

Stephen Rosen, who runs the practice, said clients who entered into interest-rate swaps with banks are entitled to cancel those contracts because manipulation was so entrenched. Swaps are contracts that allow borrowers to exchange a variable interest cost for a fixed one, protecting them against fluctuations in interest rates.

“It’s possible on legal grounds to set aside the swap contract entirely, which could mean you can recover all the payments you’ve made under the swap,” Rosen, who wears thick-rimmed glasses and speaks in clipped, precise tones, said in an interview at his office in a Georgian townhouse in the legal district of Gray’s Inn.

“The bank, when they entered into the swap, made an implied representation that Libor would not be unfairly manipulated.”
Rosen said his clients include a publicly traded real estate company, three nursing homes and at least 12 more firms that bought Libor-linked interest-rate swaps from banks. He declined to identify them by name, citing confidentiality rules.

“The client will argue, ‘Had you told me the truth -- that you were fraudulently manipulating this rate -- I would never have entered the contract with you,’” he said. “We are calling this the nuclear option.”

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