On September 24, the Chairman of the CFTC, Gary Gensler, addressed the European Parliament Economic and Monetary Affairs Committee about the state of LIBOR. His comments came in the wake of the LIBOR scandal, initially revealed to the public in March 2011, and in advance of the Financial Services Authority’s recommendations on the future of LIBOR.
Chairman Gensler’s remarks included a call to look at the possibility of adopting alternate rates to replace LIBOR. His reasoning alluded to many of the same problems found in the emerging allegations of improper conduct against member banks. Gensler noted the banks lack “specific controls to prevent [them] from intentionally or unintentionally herding together and reporting the same or similar rates” and that banks have “inherent conflicts of interest” when submitting their own borrowing rates.
Governmental agencies in the US have been investigating the sixteen banks that set LIBOR for the US dollar since reports of the scandal began to surface last year. British bank Barclays has already paid a settlement of over $453 million to authorities in the US and UK.
While political wrangling over the future of LIBOR continues, civil litigation that began last year is developing rapidly. Last year, investors across the country filed derivative securities class actions. These cases have been consolidated in the Southern District of New York. Plaintiffs claim that sixteen defendants violated Section 1 of the Sherman Antitrust Act by conspiring to manipulate USD LIBOR to represent falsely their stability to the public and to benefit financially from a reduced interest rate with regard to certain financial instruments they offered to consumers. In particular, plaintiffs claim defendants benefited from an artificially low LIBOR in interest rate swaps. Plaintiffs in the case allege that small manipulations to LIBOR resulted in large financial gains for the defendants and substantial losses for the investors who purchased these financial instruments, many of which were local government municipalities.
In August, Defendants jointly moved for summary judgment. Following the Barclays settlement, Plaintiffs asked the judge to postpone her review of the summary judgment motion, so they may amend their complaint to include facts made public from settlement. This motion was denied, and plaintiffs have since jointly filed their opposition to the summary judgment motion. The judge’s decision is expected in the near future.
Civil, criminal, and political investigations of LIBOR will continue into the foreseeable future. A focus of these investigations will be determining whether the banks solely sought to manipulate “the most important number in the world” to stop eroding market confidence during the 2007-2008 global financial crisis (and the ensuing financial benefit was simply concomitant to this action) or if reaping financial benefit from LIBOR manipulation was a distinct motive in itself.