Effects of the LIBOR Scandal Still Smoldering

It is not a secret that the LIBOR (London InterBank Offered Rate) interest rate was tampered with and there were fines levied against some major banks. (4,5,6,7) Is this the end of the story? Even though the fines were large, and names were made public, the effects are still smoldering. The LIBOR rate affects many different interest rates that spawn over many financial contracts. The dollar amounts involved are in the hundreds of billions of dollars, and the number of players affected is large.

So what is coming next? There is a wave of lawsuits brewing in the courts concerning how institutions were affected by this tampering, and how much they should be compensated. It is assumed that the fines levied so far are only concerning the crime itself, and setting a precedent for future behaviour. The damages inflicted from such behaviour tend to get sorted out in civil court – or through lawsuits between the parties affected. This stage takes much longer, but the effects will have a much deeper impact. If you use a $100 billion notional amount as an example, and interest rates vary by 1% compared to what they should be, this is a $1 billion “damage claim” every year. Multiply this by 10 or 20 years, and make the $100 Billion amount equal to $500 Billion, and you are realizing how big these lawsuit amounts can be. There may also be secondary effects such as “if I had known the interest rate was 5% instead of 4%, this would have impacted such and such an investment decision, which would have lead to further losses”. This could be labelled as speculation – but if you have proof that this would have happened, who knows what the verdict will be? (1)(2)(3)

This LIBOR scandal is one of the biggest in history in terms of dollars and people affected once the damages have been sorted out down to the level of the common person. Has this issue been resolved by the regulators? It seems that the answer is a long time coming.

Sources:

1)                  http://www.ipe.com/guest/dutch-giants-apg-pggm-exploring-possibility-of-future-libor-claims_55888.php#.UhNrq3-0fN5

2)                  http://www.bdlive.co.za/world/europe/2013/08/19/investors-go-after-banks-involved-in-libor-scandal

3)                  http://www.businessweek.com/articles/2013-06-27/calculating-the-cost-of-the-libor-scandal-to-investors

4)                  http://www.telegraph.co.uk/finance/libor-scandal/9614822/New-laws-will-criminalise-Libor-manipulation.html

5)                  http://www.guardian.co.uk/business/2012/oct/15/rbs-suspends-trader-libor-investigation

6)                  http://www.ft.com/intl/cms/s/0/2a4479f8-c030-11e1-9867-00144feabdc0.html?goback=.gde_38535_member_128901063#axzz1zkCJ4kKc

7)                  http://www.delawareonline.com/article/20120717/BUSINESS05/307170040/LIBOR-flaws-allowed-banks-rig-benchmark-without-conspiracy?odyssey=mod|newswell|text|Business|s&nclick_check=1