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Will your bank be sued over Libor?

By Claes Bell, CFA · Bankrate.com
Wednesday, August 1, 2012
Posted: 4 pm ET

A scandal over interest rate manipulation? Li-boooring. But there's a good chance it could affect a bank you do business with now.

In case you haven't heard, 16 banks that help set the London interbank offered rate, or Libor, are being sued by a smaller bank called Berkshire Bank of New York over allegations they conspired to manipulate the rate for short-term gains on derivatives.

Three of those banks, Citi, Bank of America and JPMorgan Chase hold about a quarter of all the deposits in the U.S.

Berkshire contends that the Libor manipulation cost it big money by artificially depressing the loan rates it got from borrowers. We'll likely see a bunch of banks follow suit, writes Jean Eaglesham in the Wall Street Journal:

Legal experts said the allegations could be used as a template for similar suits by banks, credit unions and other lenders in other U.S. states. In the worst-case scenario for the financial firms under investigation for interest-rate manipulation, they might be forced to defend themselves against claims from thousands of lenders across the U.S.

"Libor could well be the asbestos claims of this century," said James Cox, a law professor at Duke University in Durham, N.C. "Misreporting an index used around the world" has "ginormous" ramifications, he added. Some legal experts believe the eventual cost of a likely epidemic of class-action litigation accusing banks of damages caused by rigging rates could be at least as much as fines and other penalties paid to regulators.

Last month, Barclays paid about $450 million as part of a deal with U.S. and U.K. regulators in which the U.K. bank admitted that traders and executives tried to manipulate Libor. More than a dozen banks are under investigation by government officials in Asia, Europe and North America for allegedly fudging Libor and other interest rates.

Additional settlements are widely expected, with billions of dollars to be paid by banks that reach agreement with regulators, according to people close to the probes.

The asbestos comparison is interesting. While I don't think any of these massive banks will go under the way a lot of asbestos producers did as a result of this litigation, there is one similarity: in the same way that asbestos was deeply embedded in the superstructure of many buildings across the U.S., Libor is deeply embedded in millions of contracts for variable-rate loans, and will be very difficult to dislodge.

So what's that going to mean for customers of those megabanks? We could see banks attempt to pass those costs down to consumers in the form of higher fees. Failing that, banks may cut costs by closing branches and ATMs, which would generally be a negative for customers, too.

More importantly, those three banks are considered industry leaders. When they take a step to raise fees or cut services, it affects the entire industry. So even if your bank wasn't directly affected, the legal and regulatory battle over Libor could have consequences for you down the line.

What do you think? Is the Libor scandal a big deal to you? Do you think you'll be affected?

Follow me on Twitter: @ClaesBell

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