Banks under SEC antitrust investigation for rate manipulation

A Bank of America branch logo.

Bank of America Corp. and other large banks may have colluded to manipulate interest rates in their favor, allege the U.S. Justice Department and SEC. (Photo Credit: CC BY/MoneyBlogNewz/Flickr)

The Wall Street Journal reports that the U.S. Justice Department and Securities and Exchange Commission are examining whether a group of the world’s largest banks – led by Bank of America Corp, Citigroup Inc. and UBS – colluded to manipulate the London Interbank Offered Rate of interest (LIBOR) on trillions of dollars in loans and derivatives before and during the global financial crisis. LIBOR represents the rate at which banks borrow funds from each other. It is the world’s most widely used benchmark interest rate and is applied to everything from adjustable rate mortgages (ARMs) to corporate bonds and car loans.

LIBOR collusion investigation ongoing for past year

Law enforcement officials have been investigating whether banks have intentionally been understating their own borrowing costs to benefit a secret global banking cartel. It is suspected that such LIBOR interest rate manipulation occurred in excess between 2006 and 2008. If banks that were secretly struggling with bad debt and liquidity had reported borrowing at higher interest rates then peers, the plight would have been revealed to the public.

Currently, the LIBOR collusion case is being handled by antitrust and anti-fraud prosecutors, according to insiders close to the situation. Investigators are searching for signs of collusion like price fixing and bid rigging. Legal experts note that corporate collusion cases are difficult to prove without email evidence or bank insider testimony.

James Rill, the former assistant attorney general of the Justice Department’s Antitrust Division, told the WSJ that the prosecution will ideally need the assistance of at least two witnesses or hard evidence to make collusion charges stick.

‘Remarkably similar costs’

In 2008, a study conducted by the WSJ found that bank borrowing costs remained “remarkably similar,” despite the fact that each bank faced different kinds of financial trouble. In the first quarter of that year, the three-month borrowing rates for 16 banks remained within a 0.06 percentage-point range, compared to the average LIBOR of 3.18 percent.

At the time, economists at the Bank for International Settlements questioned whether LIBOR was being manipulated. The economists noted that if enough banks colluded, the impact upon LIBOR would be significant.

Class action suits waiting in the wings

In the event that the Justice Department and SEC can prove LIBOR collusion in the antitrust case, the banking consortium would likely be exposed to numerous class-action lawsuits by private plaintiffs harmed by interest rate manipulation. If successful in their suits, plaintiffs would be awarded triple the normal amount of damages, said former Justice Department antitrust lawyer Michael Volkov.



Wall Street Journal


A LIBOR primer

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