The latest loser in one of the largest banking scams in history appears to be U.S. taxpayers. Libor manipulation may have cost mortgage giants Fannie Mae and Freddie Mac up to $3 billion.
The estimate comes from an internal report sent by the inspector general for the Federal Housing Finance Agency to Edward DeMarco, the agency's acting director. The 14-page preliminary study, first reported Wednesday by The Wall Street Journal, says Fannie and Freddie should consider suing the banks that manipulated this key interest rate during the financial crisis.
Why should you care?
Fannie and Freddie have received more than $187 billion in taxpayer's money since they were bailed out during the financial crisis of 2008.
Housing and policy experts say they suspected the rate-rigging scandal had affected the entities, but this is the first estimate of how much Fannie and Freddie may have lost as a result of banks submitting false information to manipulate the Libor.
"I think the surprise is bigger than just cost to (Fannie and Freddie); it’s the whole outrageous Libor rigging scam -- the audacity and scope," says Janneke Ratcliffe, executive director for the Center for Community Capital at the University of North Carolina at Chapel Hill. "It just says so much about the reckless practices of the big financial institutions that got us into the great recession."
Libor -- the London Interbank Offered Rate -- is used as a benchmark for interest rates on more than $300 trillion in financial instruments, including about $10 trillion in loans to consumers and small banks.
Several banks are under investigation for submitting false information to manipulate the rate. Just this week, one of those banks, the Swiss UBS, admitted to fraud and agreed to pay $1.5 billion to settle the charges. Earlier this year, Barclay's was fined $451 million for attempts to manipulate the rate.
During the financial crisis, the banks manipulated the Libor downward to hide their financial troubles. As a result, Fannie and Freddie might have lost money due to artificially lower interest rates on floating-rate bonds and interest-rate swaps, the report says.
Will FHFA try to recoup the supposed losses?
Barry Zigas, director of housing policy for the Consumer Federation of America, says that if the report is accurate, FHFA should try to recover at least part of its losses. The agency has been aggressive in suing lenders to buy back mortgage that were not properly underwritten, he says.
But it's unclear if and when FHFA will act on the issue. On Wednesday, it posted a statement saying it "has not made any determination regarding legal action," and it has "not substantiated any particular Libor-related losses" for Fannie and Freddie. The agency continues to evaluate the issues related to Libor, according to the statement.
FHFA could try to recoup its losses outside of the courts, says Dean Baker, co-director of the Center for Economic and Policy Research.
"Assuming that everything cited in the memo can be solidly supported, Barclay's will undoubtedly want to bargain," Baker says. "There is no point in going to court when you know you will lose, especially when you will look awful in the process."
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