While Geithner Dances, Vultures Circle the LIBOR Carrion

Written by Ricardo Cornejo, GEI Associate

Econintersect:  Just a few days after Treasury Secretary Timothy Geithner testified before the House Committee on Financial Services (Wednesday 25 July 2012) and the Senate Banking Committee the next day, new questions have arisen about the true impact of the manipulation of the London Interbank Offered Rate (LIBOR) by large banks. Geithner assured lawmakers that taxpayers did not incur any costs through the use of the fixed rate to set terms of the different bailout programs used in 2008 to aid banks.  But, even if that were true (and the veracityis contested, see below), what other impacts may have occurred?

Secretary Geithner left lawmakers and the public unconvinced that the lack of affect on TARP and other programs was a correct assessment because he also stated that the impact on the bailout programs was “unknown” up to this point. (Added emphasis by Econintersect.)  In his statement to the Senate Committee on Banking, he told law makers that

“It’s possible that people who borrowed money were advantaged by this. It’s possible that people lent money were disadvantaged, but we don’t really know to the extent that happened.”

A Huffington Post column by Mark Gongloff has offered the view that the use of LIBOR for government loans to banks and AIG was nothing more than another backdoor bailout.  He says that giving the incorrectly lower LIBOR rates to those institutions was an economic benefit to them and an added cost to the U.S. taxpayer.

While there appears to be a debate about the rigging of the rate and costs associated with government stimulus and bailout programs, it is certain that other stakeholders are taking action against banks that may have tampered with the scandal-prone rate.

Cities and municipalities across the United States are within this group as they engaged in the issuing of bonds and other debt financing to cushion the impact of the economic downturn in 2008 in their finances. The city of Baltimore, for example, is now claiming that the manipulation of the rate may have intensified it’s financial troubles leading it to lay off employees and reduce public services for its citizens.

State governments have also started investigating how the illicit adjusting of the rate affected their finances.  States like New York, Massachusetts and Connecticut have begun looking into allegations of the effects of LIBOR manipulation on their finances which could bring about potential legal action against banks such as JPMorgan Chase, Citigroup and Bank of America for taking part in the scandal.  Banks are beginning to see the consequences of the scandal.  Barclays agreed to pay $453 million in penalties to authorities both in the United States and the United Kingdom as a settlement after publicly admitting it willfully adjusted its financial reports to influence the rate.

States and municipalities are not the only ones looking to obtain restitution from their potential losses. The largest U.S. public pension fund, the California Pension and Retirement System, CalPERS, is considering on filing suit against banks if it discovers that its funds were affected by the faulty rate. While it is unknown whether CalPERS, individual investors and other institutions incurred gains and losses from banks fiddling with the rate, they are looking to recover losses which could take a long process as the impact of the scandal remains unclear.

The extent to which claims may be made against banks for losses that occurred because LIBOR was not the true market rate are far from clear.  All major banks may have liability exposure, and that exposure may extend back to 1991 or earlier.  Douglas Keenan reported in the Financial Times this week that misreporting rates was considered a routine process in 1991 when he was a trader at Morgan Stanley.

Hat tip to Roger Erickson.

Sources:

• Geithner doubts Libor manipulation cost taxpayers bailout money (Jim Puzzanghera, Los Angeles Times, 27 July 2012)

• Rate Scandal Stirs Scramble for Damages (Nathaniel Popper, New York Times DealBook, 10 July 2012)

• States weighing Libor scandal suits (Chris Isidore and Logan Burruss, CNN Money, 16 July 2012)

• Analysis: Funds may have won and lost in Libor scandal (Ross Kerber, MSN Money, 17 July 2012)

• Tim Geithner Admits Banks Bailed Out With Rigged Libor, Costing Taxpayers Huge Amount (Mark Gongoff, Huffington Post, 07 July 2012)

• My thwarted attempt to tell of Libor shennanigans (Douglas Keenan, Financial Times, 26 July 2012)

References

GEI News articles about LIBOR

GEI Opinion articles about LIBOR