Banks consider global Libor deal as costs of scandal rise
Lenders ponder how to compensate those hit by rate-rigging if victims take their claims to court
The more we learn about the manipulation of the London interbank offered rate (Libor), the more expensive the scandal becomes for the financial institutions involved. If banks want to control the damage, they would do well to come clean sooner rather than later about the full extent and effect of their misbehaviour.
Recent revelations about misdeeds at Barclays, Royal Bank of Scotland, and UBS - only three of more than a dozen banks under investigation - are enough to keep lawyers and courts busy for years.
In thousands of incidents throughout much of the 2000s, traders sought to manipulate Libor and other benchmark interest rates that influenced the value of hundreds of trillions of dollars in loans, bonds and derivatives. Judging from the traders' communications, they often succeeded and profited handsomely.
What's more, the culture of deception was sometimes institutional. During the 2008 financial crisis, banks misrepresented their borrowing costs to make themselves look healthier than they were - behaviour that would have skewed payments on Libor-linked financial contracts worldwide.
While we can expect government settlements with the banks to be costly, it's safe to assume that the ensuing civil litigation will be more expensive still. If, for example, payments on US$300 trillion in financial contracts were off by only 0.1 percentage point for a year, plaintiffs could potentially demand compensation for US$300 billion in losses.
That's the equivalent of more than four years' net income for the 16 banks involved in setting Libor in 2008.
And the lawsuits are piling up. At least 30 cases are pending in the Federal Court in New York, many claiming triple damages under antitrust and other statutes.
