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Fannie Mae Sues Banks over LIBOR Rigging

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There seems to be no end to the legal woes for major global banks. Now, Fannie Mae has filed a lawsuit against 9 major banks and British Bankers Association (BBA) for their alleged role in rigging London Interbank Offered Rate (LIBOR).

The accused banks are Bank of America Corp. (BAC - Free Report) , Citigroup Inc. (C - Free Report) , JPMorgan Chase & Co. (JPM - Free Report) , Barclays PLC (BCS - Free Report) , UBS AG (UBS - Free Report) , The Royal Bank of Scotland PLC (RBS - Free Report) , Deutsche Bank AG (DB - Free Report) , Credit Suisse Group AG (CS - Free Report) and Rabobank Group.

While filing the suit in the U.S. District Court in Manhattan, Fannie Mae stated that it suffered losses of about $332 million in interest rate swap transactions that were indexed to LIBOR and lost billions of dollars on mortgage securities with coupon payments based on the same benchmark rate. Hence, it is seeking $800 million of compensation from the banks.

The banks have been accused of conniving to bring down LIBOR, which resulted in Fannie Mae receiving lower payments on LIBOR-related products. The lowering of LIBOR was beneficial for the banks as it increased their capacity to charge higher underwriting fees and obtain higher offering prices for financial products at the cost of Fannie Mae and other consumers.

The case is similar to the one filed by Freddie Mac in Mar 2013 against more than a dozen financial firms. Freddie Mac had alleged that the banks and BBA colluded together to reap profits from LIBOR manipulations from 2007 to 2010.

Manipulation of LIBOR by major financial institutions has resulted in thorough investigations by regulatory bodies across Europe, Asia and America. This has turned out to be a huge scam with nearly $300 trillion of loans, mortgages, financial products and contracts being linked to the tampered LIBOR.

Regulatory authorities in the U.S. and the U.K. have come down hard on such unwarranted activities of banks including Barclays, UBS, Rabobank and Royal Bank of Scotland. These banks have reached an agreement by paying penalties of aggregately $3.6 billion. These banks also admitted their wrongdoings.

LIBOR is a widely accepted benchmark rate. Several financial institutions, mortgage lenders and credit card agencies lay down their own rates in relation to it. Derivatives and other financial products worth about $350 trillion are connected to LIBOR. Therefore, manipulation of the same will necessarily undermine the importance of the rate and can have unprecedented financial repercussions.

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