In a recent development, 9 of the world’s largest banks have been sued by the city of Philadelphia over London Interbank Offered Rate (LIBOR) manipulation. The 9 banks include Bank of America Corporation (BAC - Analyst Report), Barclays PLC (BCS - Analyst Report), Citigroup, Inc. (C - Analyst Report), Credit Suisse Group AG (CS - Snapshot Report), Deutsche Bank AG (DB - Analyst Report), JPMorgan Chase & Co. (JPM - Analyst Report), Royal Bank of Canada (RY - Snapshot Report), The Royal Bank of Scotland Group plc (RBS - Snapshot Report) and UBS AG .
Philadelphia charged these banks and its subsidiaries in the Pennsylvania Federal Court in order to seek damages suffered due to rigging of the LIBOR. Philadelphia also stated that the local government was forced to pay huge penalties in order to terminate investment agreements.
Between 2009 and 2011, Philadelphia was forced to pay around $110 million in total as termination fees to several banks in order to terminate swap agreements based on interest rates that included the LIBOR.
The manipulation resulted in the city sustaining losses worth billions of dollars, depletion of treasuries, adversely affecting the budget and hampering the delivery of public services.
In the past, the governments of Baltimore and the California counties of San Diego and Sacramento accused several banking majors of rigging the LIBOR. Recently, the Sacramento indicted BofA, Deutsche Bank, Citigroup and 15 other banks of manipulating interest rates in order to maximize their profits that resulted in the county incurring heavy losses.
Last week, Houston charged a group of banks including BofA, Barclays and Citigroup over alleged LIBOR manipulation. Houston seeks an undisclosed amount as damages for paying both artificially high rates and receiving less interest rates on municipal investments due to rigging of the LIBOR.
Earlier in Jul 2012, Baltimore filed a federal lawsuit in Manhattan against several major banks for rigging the LIBOR. These banks included JPMorgan, BofA, Barclays, Citigroup and Deutsche Bank. The lawsuit accused the bank of deceptively maintaining a low LIBOR during the financial crisis that resulted in losses worth millions of dollars in returns on investments such as interest-rate swaps.
As per the local governments, the rate swap agreements used by the cities to hedge borrowing costs were rigged by the banks in order to maximize profits at the expense of the counties. The governments asserted that they incurred huge losses due to the alleged manipulation as they either received less interest rate payments as compared to what they should have received or had to shell out falsely overrated rates due to the manipulation.
Over the last one year, three banks have arrived at civil settlements with regulators in the U.S. and Britain over LIBOR manipulation, Barclays being the first. The bank reached a settlement worth $453 million with the U.S. and European regulators in Jun 2012.
In Dec 2012, UBS agreed to pay a penalty of $1.5 billion to the U.S., U.K. and Swiss authorities to resolve charges against the bank for its involvement in the manipulation of the LIBOR.
Moreover, in Feb 2013, The Royal Bank of Scotland conceded to pay a penalty of $612 million to the Financial Services Authority, Commodity Futures Trading Commission and Department of Justice to resolve charges against the bank for its involvement in the manipulation of the LIBOR.
If proven guilty, these financial institutions would suffer a setback as the expenses would be elevated. Alongside, the reputation of these banking big shots would be at stake.