The Federal Home Loan Mortgage Corporation or Freddie Mac is dragging more than a dozen financial institutions along with British Bankers Association to court. The reason being the massive losses it suffered from alleged rigging of London Interbank Offered Rate (LIBOR) by these institutions.
Freddie Mac has accused the banks of teaming up together to bring down the benchmark rate during the period from 2007 to 2010, which resulted in Freddie Mac receiving lower payments on the LIBOR associated products. The lowering of the LIBOR was beneficial for the banks as it augmented the capacity to charge higher underwriting fees and obtain higher offering prices for financial products at the cost of Freddie Mac and other consumers.
Due to the rate rigging, Freddie Mac suffered considerable losses on hundreds of swap transactions that were indexed to LIBOR and lost billions of dollars on mortgage securities with coupon payments based on the same benchmark rate.
Freddie Mac sued BBA, stating that the association was a part of the rigging scandal for its own advantage. The BBA manipulated the LIBOR to safeguard its revenue that was generated by selling LIBOR licenses and to conciliate banks present in the LIBOR panel. The other defendants include Bank of America Corporation (BAC - Free Report) , JPMorgan Chase & Co (JPM - Free Report) , UBS AG (UBS - Free Report) and Credit Suisse Group AG (CS - Free Report) .
The lawsuit seeks an unspecified amount as compensation. Freddie Mac detected the fraud last June when the British bank Barclays PLC (BCS - Free Report) admitted to rate rigging and shelled out $453 million to settle with British and U.S. authorities.
Rigging of the benchmark rate by some of the largest financial institutions has resulted in severe action by the regulatory bodies across Europe and America. This has turned out to be a huge swindle with nearly $300 trillion of loans, mortgages, financial products and contracts being linked to LIBOR.
Besides Barclays, UK and U.S. authorities have come down hard on such unwarranted activities of other banks including UBS AG and The Royal Bank of Scotland Group plc (RBS - Free Report) . Both the banks have settled by paying fines of $1.5 billion and $612 million, respectively.
LIBOR is a widely accepted benchmark rate. LIBOR rates are calculated for 10 currencies and 15 borrowing periods ranging from overnight to a year and are published daily at 11:30 am (London time) by Thomson Reuters. Several financial institutions, mortgage lenders and credit card agencies lay down their own rates relative to it. Nearly derivatives and other financial products worth $350 trillion are connected to the LIBOR.
Therefore, manipulation of the same will necessarily undermine the importance of the rate and will have financial repercussions on an unimaginable scale.