Thu Jul 12, 2012, 12:31 AM
Segami (6,904 posts)
LIBOR Scandal Could Turn 'UGLY' As U.S. CITIES BEGIN TO SUE
" The news on Wednesday that cities and states are suing some of the world's largest banks over Libor manipulation shows how this scandal could blow up into one of history's biggest bank frauds. That's because interest-rate manipulation might well have kept your town or state from hiring firefighters or teachers, from paving roads or paying for indigent care or after-school programs for your kids -- adding to the human suffering of the economic collapse these same banks caused in the first place. If it's any consolation, the lawsuits and fines over this manipulation could potentially cost the banks -- which include not only Barclays but Bank of America, JPMorgan Chase, Citigroup, and many more -- billions of dollars.
"This could get very ugly in a hurry for some banks," Peter Tchir of TF Market Advisors wrote in a note. And this could finally be enough to make Americans stop reacting to the Libor scandal with "a shrug," as Joe Nocera recently put it, and push them closer to believing what Robert Shapiro, founder of economic advisory firm Sonecon, calls possibly "the biggest financial fraud in history." Would it be enough, maybe, to finally cause banks to lose the argument that regulating them too much will hurt the economy?
The New York Times wrote Wednesday that several states, towns and other municipalities are rounding up posses of lawyers to sue big banks over their manipulation of Libor, a short-term interest rate that affects borrowing costs throughout the global economy. Barclays has admitted to manipulating the rate for years, paying $450 million in penalties. Other banks are under investigation for doing the same thing. The scandal has already engulfed Treasury Secretary Tim Geithner and Federal Reserve Chairman Ben Bernanke who have been asked to testify before a Senate subcommittee about rate manipulation.
The states and cities suing the banks often bought -- from some of the same banks they're suing -- credit derivatives called interest-rate swaps. The swaps protected them when Libor rose, but hurt them when Libor fell. If these states and cities can prove the banks manipulated Libor lower, then they could have a case that the banks owe them some money. Other potential litigants -- hedge funds, maybe -- bought derivatives that cost them money when Libor rose. Again, if they can prove that banks manipulated Libor higher, then they, too, could have a case that banks owe them money.
How much money are we talking?
Some of Wall Street's best thinkers have scoffed that such lawsuits will likely result in small potatoes, or maybe tater tots at best. It could be hard to suss out how much financial damage somebody really suffered from this, or how much any one bank -- or even more than one bank -- is responsible. And a lot of borrowers, maybe including the same states and cities suing the banks, arguably benefited when the banks manipulated Libor lower, because it lowered their borrowing costs. But the sheer vastness of the derivatives market makes this a potentially huge headache for the banks. There's a general estimate floating around that Libor affects about $800 trillion in notional derivatives -- that's "trillion," not "billion" or "million." Banks are not going to be on the hook for anything near that much, as the bulk of this amount is "notional" -- meaning, roughly, "not real."
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