FDIC Sues Banks Over LIBOR Rigging - Analyst Blog

The Federal Deposit Insurance Corp. (FDIC) became the latest regulator to file a lawsuit against banks for rigging the major benchmark rate. Last week, the aforementioned body filed a suit against 16 U.S. and foreign banks as well as the British Bankers Association (BBA) for their alleged role in manipulating the London Interbank Offered Rate (LIBOR).

The accused U.S. banks are Bank of America Corp. BAC, Citigroup Inc. C and JPMorgan Chase & Co. JPM. The foreign banks that have been sued are Barclays PLC BCS, Lloyds Banking Group plc LYG, HSBC Holdings plc (HSBC), Deutsche Bank AG DB, Credit Suisse Group AG CS, Societe Generale Group (SCGLY), UBS AG UBS, The Royal Bank of Scotland PLC RBS, Royal Bank of Canada RY, Portigon AG as well as Netherlands-based Centrale Raiffeisen-Boerenleenbank, B.A.(Rabobank) and Japanese banks, namely Norinchukin Bank and The Bank of Tokyo-Mitsubishi Ltd.

Allegations

The FDIC seeks to recover unspecified losses as a receiver of 38 failed banks that were taken over by it. The case was filed in a federal court in Manhattan. The FDIC charges the banks for breach of contract, misrepresentation, unjust benefits, fraud and conspiracy.

The FDIC accused the banks of rigging LIBOR from Aug 2007 until mid-2011 and alleged that by submitting the wrong estimate for their borrowing costs used for calculating LIBOR, the banks fraudulently suppressed it. This caused huge losses to 38 banks which eventually collapsed.

Moreover, the banks did this for their own benefits as the lowering of LIBOR increased the banks' capacity to charge higher underwriting fees and obtain higher offering prices for financial products that use LIBOR as benchmark rate.

Outcome of Lawsuits: A Long-Drawn Wait?

LIBOR is a widely accepted benchmark rate. Several financial institutions, mortgage lenders and credit card agencies lay down their own rates in relation to LIBOR. Hence, manipulation of the same undermines the importance of the rate and can have unprecedented financial consequences.

Notably, LIBOR rigging by major financial institutions has resulted in investigations by regulatory bodies across Europe, Asia and America. Further, lawsuits have been filed by many U.S. cities and municipal agencies against the banks for manipulating LIBOR. Moreover, Fannie Mae FNMA and Freddie Mac FMCC have sued the banks on similar grounds. However, it seems that it will take considerable time before these cases receive a court ruling.  

If proven guilty, the above-mentioned banks would suffer a setback as the legal expenses would rise and adversely affect the companies' financials. Nevertheless, regulatory authorities across the world are determined to put forth a landmark judgment regarding such manipulative practices that will bring justice to sufferers and punish the guilty.