Bank of America Corp, Citigroup Inc and Credit Suisse Group AG were among 16 of the world’s biggest banks sued by the US Federal Deposit Insurance Corp (FDIC) for allegedly manipulating the London interbank offered rate from 2007 to 2011.
The FDIC, acting as receiver for 38 failed banks including Washington Mutual Bank, IndyMac Bank FSB and Colonial Bank, claimed that institutions sitting on the US dollar LIBOR panel “fraudulently and collusively suppressed” the rate. Also named in the suit, filed on Friday in the Manhattan federal court, is the British Bankers Association, an industry group that oversaw LIBOR.
Regulators around the world have been probing whether firms colluded to manipulate interest-rate benchmarks including LIBOR, which affects more than US$300 trillion of securities worldwide. Financial institutions have paid about US$6 billion so far to resolve criminal and civil claims in the US and Europe that they manipulated benchmark interest rates.
The cost for global investment banks could climb to US$46 billion, analysts at KBW, a unit of Stifel Financial Corp, said in a report last year. JPMorgan Chase & Co and HSBC Holdings PLC may face an EU complaint as soon as next month from the bloc’s antitrust chief.
The failed banks “reasonably expected that accurate representations of competitive market forces, and not fraudulent conduct or collusion,” would determine the benchmark, the FDIC said in its complaint.
Barclays PLC, Rabobank, UBS AG and Royal Bank of Scotland PLC have resolved LIBOR-related investigations.
Investigators claim the banks altered submissions used to set the benchmark to profit from bets on interest-rate derivatives or to make the lenders’ finances appear healthier than they were.
In addition to Bank of America, Citigroup and Credit Suisse, the banks sued yesterday are JPMorgan Chase, HSBC, Barclays, Rabobank, UBS, Royal Bank of Scotland, Deutsche Bank AG, Lloyds Banking Group PLC, Societe Generale SA, Norinchukin Bank, Royal Bank of Canada, Bank of Tokyo-Mitsubishi UFJ Ltd and WestLB AG.
In its complaint, the FDIC claimed the fixed rates caused the failed banks to pay higher prices for LIBOR-based financial products and to get lower interest payments from the defendants and others.
Many of the failed banks sought out LIBOR-based derivatives as protections, not to seek capital gains, said Robert DeYoung, a University of Kansas professor who is a research fellow at the FDIC.
“There’s an awful lot of proof that the FDIC has to come up with to make their case,” DeYoung said.
The FDIC, which insures bank deposits, has previously sued big, global banks for misrepresenting securities based on mortgages and harming banks that went on to fail.
The suit filed on Friday is “very consistent with the cases they’ve brought on mortgage-backed securities,” said Michael Krimminger, a former FDIC general counsel who represents banks at Cleary Gottlieb Steen & Hamilton LLP in Washington. The difference is in the complexity of proving harm, raising “much more difficult questions of proof for the FDIC,” he said.
The FDIC claims breach of contract on behalf of 10 of the failed banks, including Washington Mutual and IndyMac, which entered into LIBOR-based interest-rate swap contracts with banks that are named as defendants.
The FDIC alleges the banks committed fraud and violated US antitrust laws in fixing the US dollar LIBOR benchmark. It is seeking unspecified damages on behalf of the failed banks, including punitive damages and triple damages for price-fixing.