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Did taxpayers lose in Libor scam?

By Polyana da Costa · Bankrate.com
Thursday, December 20, 2012
Posted: 5 pm ET

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."

Follow me on Twitter @Polyanad.

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38 Comments
John
December 30, 2012 at 2:48 pm

Gee Lauren. Have you ever had an original thought or do you just spout the Fox News talking points?

Wildhawg
December 28, 2012 at 8:11 am

NO! Simply NO!

Lauren
December 24, 2012 at 10:30 am

Glen: great point. Gov. Romney was my governor and he was great. He inherited a $3 BILLION deficit, eliminated it within his first two years, AND left a $2 BILLION "rainy day fund." He cut out fraud, waste and duplication.

What many fail to realize, those people who say "yeah, get the evil rich people, pay your 'fair share' -- they are more than paying their fair share in taxes. Also, Romney's company, Bain Capital, SAVED and funded the growth of many companies that were either failing or struggling. Companies like Staples, Sports Authority, etc. Intelligent people see it for what it is: liberals bashing capitalism!
If they love socialism so much, I wish they'd move to socialist countries and stop trying to make America a socialist country! Americans need to realize what is being done to our country before it's too late. In 2014 I will only be voting in fiscal conservatives!

Lauren
December 24, 2012 at 10:19 am

If we keep "giving" away so many entitlements and freebies to many who who did not pay into the TAXPAYER FUNDED SYSTEM, well whom might they vote for?!? This was part of the plan all along though folks. I used to vote primarily Democrat until 2000, when I finally woke up and realized the Democratic party was no longer the party of JFK or Truman. Today both men would be "moderate Republicans!" The GOP is dar from perfect, but at least they don't want to destroy the country from within. There is just too much evidence with the Usurper in rhe WH that poinrs in rhat direction. How very sad for this once great nation that Americans (and many illegal voters!) REELECTED Obama AGAIN!!! Huh?!? Does anyone check voting records and ACTIONS before voting or are we all just relying on the lamestream media?!? It's pathetic. Gov. Romney would have turned around the financial mess Obama and gang have created. Unfortunately most people did not get to learn what an excellent job he did for Mass. and what an honorable and decent man he is. If the media would actually report the FACTS then it should have been a landslide victory for Romney/Ryan. Keep fiving away "free stuff" to those for which it becomes a way of life and they will keep voting in the "giveaway" party, the Democrats! Wake up people!!! I will never vote Democrat again because no matter how good the candidate is, when push comes to shove, they will tow rhe party line like the "moderate blue dog Dem's" did with Obamacare (socialized medicine), financial bailouts, giving BILLIONS of $$ away to foreign countries who are hostile towards America, etc. God help us!!!

Brenda
December 23, 2012 at 11:45 pm

It's about time to make the fat cats that are getting hundreds of thousand in bonuses pay the money back. It's fair for people to barely make a living and jerks like that having anything they want. It's just plain robbery.

Glen Pierce
December 23, 2012 at 10:22 pm

to KW: good points. I want to point out that 2012 Romney was blasted by the Dems for taking over companies, streamlining them, cutting PEOPLE, lowering costs and getting profits going.

2008 Govt Tarp owned at one point 90% of AIG.

12/2012 Govt owns 16% of AIG now. We find out that AIG cut costs and PEOPLE and turned a profit. Govt earned $23 BILLION this month from AIG. A few people quibble over the terminology.

My message is, the Dems said Romney was bad for cutting jobs but it okay for Dems AIG Tarp plan/profits. Inconsistent??