Freddie Mac has filed a complaint in federal court in Alexandria, Virginia alleging that 15 banks, including Bank of America, JP Morgan Chase, UBS, and Citigroup manipulated the London interbank offered rate (LIBOR). This manipulation, Freddie Mac alleges, caused it to suffer substantial losses.
The LIBOR is used as an index to set rates for many financial products and contracts including residential mortgages. According to Bloomberg more than $300 trillion (others say $800 trillion) of such products are linked to LIBOR. The Economist explains the process. "A borrowing rate is set daily by a panel of banks for ten currencies and for 15 maturities. The most important of these, three-month dollar LIBOR, is supposed to indicate what a bank would pay to borrow dollars for three months from other banks at 11am on the day it is set. The dollar rate is fixed each day by taking estimates from a panel, currently comprising 18 banks, of what they think they would have to pay to borrow if they needed money. The top four and bottom four estimates are then discarded, and LIBOR is the average of those left." The numbers are collected through a poll conducted by Thomson Reuters Corp. and sponsored by the British Bankers' Association which is also named as a defendant in the Freddie Mac suit.
The so-called LIBOR Scandal first broke at Barclay's Bank over a year ago when its employees and those of several other banks were accused of trying to rig the LIBOR number repeatedly over a period of at least five years. As many as 20 banks were soon named in various investigations worldwide.
The complaint by Freddie Mac charges that the defendants, by using false and dishonest USD LIBOR submissions to bolster their respective reputations, artificially increased their ability to charge higher underwriting fees and obtain higher offering prices for financial products to the detriment of Freddie Mac and other consumers," The banks, Freddie Mac said, acted collectively to hold down the dollar LIBOR to hide institutional problems and boost profits. Freddie Mac and Fannie Mae use LIBOR to determine interest payments on their investments in floating-rate financial instruments such as bonds and swaps.
The suit includes as defendants both U.S. and European banks including Barclays, Royal Bank of Scotland (RBS), and Credit Suisse Group. Freddie Mac is seeking unspecified damages for financial harm, punitive damages, and treble damages for Sherman Act violations. Bloomberg says a government audit last year estimated that Freddie Mac and Fannie Mae may have lost a combined $3 billion because of the LIBOR manipulation. Barclays, UBS and RBS have already paid out more than $2.5 billion in fines related to the scandal.
