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Advisen Analysis on LIBOR: Estimating and Proving Damages

Source: Susanne Sclafane, Advisen

Posted on 27 Sep 2012 by Neilson

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Libor ScandalSpeculations about the implications of the LIBOR scandal vary widely, with recent press reports citing a stunning figure of $176 billion from Macquarie Research as the largest estimate of LIBOR losses.

The figure from the Australian firm is cited in an August 26, 2012 Wall Street Journal article titled, "Suits Mount in Rate Scandal," and characterized there as "the potential legal liability of banks." Other sources, including a blog, explain that the three-digit-billions are actually meant to represent total investor losses, with the price tag for banks for regulatory fines and civil action liabilities estimated at $88 billion.

The lower figure is still a gigantic leap from a Morgan Stanley estimate of bank liabilities of $6.0-$7.8 billion (with the high-end based on individual estimates for 11 bank ranging from $60 million to $1.06 billion, according to a July 12 research report), and a Keefe Bruyette & Woods damage estimate of $35 billion for European banks (contained in an equity research report published in July 16, 2012).

Even the description of LIBOR often included in the Wall Street Journal and other financial publications as the "world's most important number" is the subject of some debate, Advisen has found. While articles attribute the description British Bankers Association, the BBA denies ever making this assertion, attributing it to a BBC feature instead. The BBA blog item containing the denial also attempts to set the record straight on a Bloomberg report that says it the association sets LIBOR, noting that it is actually Thomson Reuters that calculates the index from the input of BBA member banks.

Kevin LaCroix, executive vice president of RT ProExec, a division of R-T Specialty, who has been following the liability insurance implications for his D&O Diary blog-and pointing out the factors that will limit D&O insurers' exposure-does not put much stock in Macquarie's total liability figure for FI sector. But he also says the problem isn't as finite as analysts leaning in the other direction may believe.

"We talk about LIBOR as if one thing, but in fact, it is a series of rates for 15 different loan maturities in different currencies. And the panel that sets each one of those is different," he said, noting that the panel say for the 3-month dollar LIBOR rate would be different than the panel for the one-year yen LIBOR rate.

"And it's not just LIBOR, it's EURIBOR and TIBOR and STIBOR," he said, referring to Eurozone, Tokyo and Singapore benchmark rates. For EURIBOR, there is a panel of over 40 banks from 15 different countries, he said.

"So there is a bigger set of potential defendants than you think of at first," LaCroix said.


Plaintiffs filing antitrust lawsuits against the banks will face some hurdles in proving their cases, not the least of which is proving damages.

"How you feel about the possibility that LIBOR [may have been] depressed depends on whether you were a borrower or an investor," LaCroix said. If you were a borrower, you probably benefited, while investors may have been hurt by depressed returns. "The challenge in these cases is that any given claimant probably experienced both" impacts, he said.

"Any reasonably sophisticated financial institution probably had transactions in which they were on both sides of that equation. So whether they were net ahead or net behind is actually a complicated question," he said, during an Advisen webinar.

Referring to a case filed by Charles Schwab, which essentially represents the interests of investors in their funds, LaCroix noted the conflicting interests of customers during a follow-up interview. An investor may have had mutual fund investments that were sensitive to the LIBOR rate, but at the same time, that investor may have had an adjustable rate loan that was favorably impacted by lower interest rates.

Even some of the regional banks and asset management firms that claim to have been harmed because of downward manipulation of LIBOR rates were also "very heavily hedged," he said. So it isn't just a matter of showing how LIBOR manipulation harmed them by lowing their interest income or amounts they could have gotten from mortgage loans. They would have to take the next step and show that the hedges they had in place didn't protect them entirely from the manipulations alleged, LaCroix noted.

The broker noted that there are also some technical legal defenses specific to antitrust litigation, which will represent hurdles for plaintiffs overcome, including a defense known as the "Illinois Brick Doctrine." He explained that the U.S. Supreme Court, in a case called Illinois Brick, held that indirect purchasers of products and services cannot assert antitrust claims.

Was Charles Schwab a direct consumer of LIBOR rates? Did community banks purchase goods or services related to the LIBOR manipulation, he asked, underscoring the difficulty of overcoming Illinois Brick.

LaCroix notes that one case filed by New York-based Berkshire bank in late July, on behalf of all New York banks, savings and loans, and credit unions that originated or purchased interests in loans tied to LIBOR from August 2007 to May 2010, gets over this hurdle because it does not allege claims under federal antitrust laws, as most other lawsuits filed to date do. By asserting only common-law claims for fraud and unjust enrichment, the suit also gets past the significant obstacle of having to prove that LIBOR banks acted in concert.


LaCroix and other D&O and E&O insurance coverage experts say insurance losses are likely to be limited by lack of insurance (large financial institutions are buying Side-A-only over higher retentions) and the fact that antitrust claims naming only entities as defendants are not covered under D&O policies, among other issues.

"I am not aware of anybody crying from the rooftops that this is going to be a credit crisis kind of thing," said Scott Schechter, a coverage defense attorney with Kaufman Borgeest & Ryan LLP, noting that while this "has the potential to be bad for a handful of financial institutions," the fact that the world's biggest institutions have bought less insurance coverage since the 2008 credit crisis is one factor limiting insurers' potential exposure.

"This doesn't seem to have the bite of the credit crisis," he added, citing the pervasiveness of that crisis. "Some of those losses are still unknown," he said.

The LIBOR scandal "is just one more time you scratch your head over," as revelations emerge about "what goes on in the business world and on Wall Street," Schechter concluded.