Libor scandal: Why investors will have difficulty

London

Investors will find it had to prove their claim to damages. Proving actual damages may be difficult for investors, said Brad Hintz, a Sanford C. Bernstein & Co analyst.

“The large fine is for attempting to move the market, not for moving the market,” Hintz said. “The civil guys are going to have to prove that the market was moved here.”

The extent of lenders’ liability may be difficult to determine, Hintz said. Banks may argue that any derivatives trading losses must be determined on a net basis, because such trades typically are hedged.

Sterne Agee’s Hagerman said he didn’t think any of the big US banks had set aside reserves for Libor-related costs.

For bank stock investors “it hasn’t been top-of-mind,” he said. “I’ve only received a couple phone calls about it and the reaction has been surprise.”

David Kovel, a lawyer who represents euro futures traders in the New York federal court litigation, proposes to represent a class including anyone involved in such trading between August 2007 and May 2010, a number of traders he said could be in the thousands. He declined to estimate the value of the alleged damages.

Large impact

“Even a two- to three-basis-point manipulation would have a large impact on the product and the investors in that product,” he said. A basis point is 0.01 of a percentage point.

Two days after the Barclays fine was announced, banks being sued in New York filed motions asking Buchwald to dismiss allegations against them. Exchange-based plaintiffs’ claims are barred by lapse of time and extra-territoriality, lawyers for lenders including Bank of America and Citigroup argued in one filing.

“It is of course a mathematical truism that the published index would have been different if higher or lower rates had been reported by a sufficient number of banks,” lawyers for those same lenders said in arguing against antitrust claims in a different filing. “That might impact financial results to those who chose to incorporate the index in their transactions, but that is not a restraint of trade,” they wrote.

Dismissal motion

Barclays, in its own brief, joined the other bank defendants in asking Buchwald to throw out allegations against it, excepting those contending the exchange-based plaintiffs had made a case for market manipulation.

Jeffrey Shinder, an antitrust lawyer with New York-based Constantine Cannon LLP who has been following that Libor litigation, said potential bank liabilities could be “massive”.

“This is potentially the mother lode in terms of potential damages,” he said.

While it’s not possible to predict a specific loss amount, damages could be in the tens or hundreds of billions of dollars if the lenders are found liable, Shinder said.

“Everyone in the industry knows if you knock down a few basis points here and there billions of dollars shift between counterparties,” Shinder said. Adjusting Libor up or down affects the interest rates on scores of financial instruments. “This is price-fixing,” he said.

Some reserves

Bank of America has said that as of March 31, costs from litigation and regulatory matters could be as much as $4.2 billion (Dh15.42 billion) beyond its accrued liability. The firm said that it sets aside liabilities when losses are “both probable and estimable.” The bank hasn’t said whether Libor liability fell into that category. Bill Halldin, a spokesman for the Charlotte, North Carolina-based bank, declined to say whether it had.

US laws generally require companies that issue securities to disclose information that people reasonably would need to make investment decisions. Regulators typically provide guidance on their expectations without setting specific criteria on what should be disclosed.

Authorities including the Securities and Exchange Commission and the Financial Accounting Standards Board have taken steps in the past two years to pressure banks to disclose more information about potential costs from litigation as claims mounted in the wake of the subprime-mortgage crisis. FASB, based in Norwalk, Connecticut, sets accounting rules for public companies under authority delegated by the SEC.

International probe

Royal Bank of Scotland, which is majority owned by the UK government, acknowledged the ongoing international probe in a February report and said it’s cooperating with authorities including the CFTC and Justice Department, the Financial Services Authority and Japanese regulators.

“It is not possible to estimate with any certainty what effect these investigations and any related developments may have on the group,” Edinburgh-based Royal Bank of Scotland said in a statement at the time.

UBS and Credit Suisse Group AG, Switzerland’s biggest banks, declined to say what, if any, reserves they had set aside for possible Libor-related liabilities. Deutsche Bank, Germany’s biggest lender, also declined to comment on whether it has set aside reserves.

Plaintiffs seeking to prove their cases against the banks may be aided by studies whose “results imply that the Barclays manipulation was probably successful and further imply that more than just one bank was involved in the scheme,” Bernstein analysts led by Hintz said in a June 29 report. Barclays and regulators haven’t said the attempted manipulation succeeded.

“This is a major regulatory issue for the Libor banks that will likely generate significant civil claims over the next four to five years,” the analysts wrote. “Investors should not minimise the importance of this matter.”

The multidistrict case is In Re Libor-based Financial Instruments Antitrust Litigation, 11md2262, US District Court for the Southern District of New York (Manhattan).