For all the scandals uncovered in all the banks and counting houses since 2007, few could fairly be called systemic. There was unalloyed greed, there was trickery, and there was group bad behavior. And then there was LIBOR - the London Interbank Offered Rate - set at half ast eleven each morning by the British Banking Association (BBA).
Actually, LIBOR is reported for ten different currencies and 15 different maturities, from overnight to one year. Members of the association - currently 16 banks, including 3 based in the United States - devise "submissions" that are supposed to represent the estimated rate for an unsecured loan between them. The four highest and four lowest submissions are tossed out; the average of the remainder is the LIBOR fix. Lenders use it as a standard - LIBOR plus or minus basis points - to set the daily price of bonds, mortgages, currencies, derivatives, and other assets. The submissions are also a crucial indicator of the creditworthiness and liquidity of member banks. To the BBA, it is the "most important number in the world."
In addition, the number is famously subject to manipulation. In 1996 investment advisors and Federal Reserve Bank analysts warned regulators that the daily LIBOR could be easily rigged. A Wall Street Journal
analysis in May 2008 showed that a number of BBA banks were submitting LIBOR estimates significantly lower than other market measures. By March 2011 the Securities and Exchange Commission, the Commodity Futures Trading Commission (CFTC), and the Department of Justice had begun investigating LIBOR-setting banks. Regulatory investigations are also ongoing in the UK, the Netherlands, Canada, Japan, and Singapore.
By the end of 2011 more than 20 LIBOR-related lawsuits had been filed in U.S. courts. But the pace of private civil litigation quickened in June when the CFTC filed an enforcement order against Barclays Bank under the Commodity Exchange Act that included a summary of the commission's findings. The order stated, "Barclays regularly attempted to manipulate and knowingly delivered, or caused to be delivered, false, misleading or knowingly inaccurate reports concerning U.S. Dollar LIBOR and Euribor, and at times, Yen and Sterling LIBOR, which are all commodities in interstate commerce." (In re Barclays PLC
, CFTC Docket No. 12-25 (June 27, 2012).)
Barclays's subsequent $450 million settlement with U.S. regulators set off a wave of follow-on private litigation under the Sherman Antitrust Act, the Clayton Antitrust Act, civil RICO, the Securities Exchange Act, the Commodity Exchange Act, and various state laws; plus allegations of common law fraud and shareholder derivative suits.
Beginning in 2011, the City of Baltimore, pension funds, and institutional investors filed private civil antitrust lawsuits against the BBA member banks. Last April the antitrust actions were consolidated as multidistrict litigation in New York. (In re LIBOR-Based Financial Instruments Antitrust Litigation
, MDL No. 2262 (S.D.N.Y. order filed April 30, 2012) ECF No. 205.)
Plaintiffs mined the CFTC order for a rich assortment of damning emails between swaps traders and Barclays LIBOR submitters. "Hi Guys, We got a big position in 3m libor for the next 3 days," read one. "Can we please keep the libor fixing at 5.39 for the next few days. It would really help. We do not want it to fix any higher than that. Tks a lot." Another read, "For Monday we are very long 3m cash here in NY and would like the setting to be set as low as possible ... thanks."
The replies from Barclays came back, "Always happy to help, leave it with me, Sir" and, to another trader's request, "Done ... for you big boy." And the traders responded: "Dude I owe you big time! Come over one day after work and I'm opening a bottle of Bollinger! Thanks for the libor."
The settlement with regulators suggested Barclays had manipulated LIBOR in two different ways for different reasons: by submitting either high or low estimates to affect a particular fix, and by submitting low estimates relative to other members to avoid the appearance of financial weakness. For plaintiffs lawyers, the challenge at the pleading stage was to allege that the banks' manipulation of LIBOR submissions represented a plausible conspiracy in restraint of trade in violation of the Sherman Act.
"If the lie was big enough and for a long enough period and anyone entitled to receive payment based on LIBOR can make the claim, the potential damage to the bank is enormous," posted Peter Tchir of TF Market Advisors. "Just 1 basis point on $100 trillion would be $2.5 billion. With reports showing that there are $800 trillion [in] contracts that reference LIBOR, that 1 bp would be $20 billion. If it was more than 1 bp or persisted for more than 90 days, the number would be even bigger. That is without punitive damages."
Tchir ended his post with a warning: "Banks will have to do everything they can to prevent being sued by third parties. If they cannot prevent that, this could get very ugly in a hurry for some banks."
The defendants responded with an audacious motion to dismiss. Their joint filing in support of the motion and subsequent reply briefs by separate banks deny the existence of conspiracy or any agreement in restraint of trade, claiming in addition that the plaintiffs lack standing to allege antitrust injuries or to collect damages for indirect harm.
The boldest defense argument, however, went to the core of the BBA's method for pricing money. "USD LIBOR is not itself a product that is bought, sold, or traded," the brief asserted. "Defendants earn no profits from making USD LIBOR submissions to the BBA. Simply put, the mere submission of rates to the BBA is not an activity that involves buying, selling, or any competition at all."
The daily LIBOR fix, in other words, "is just an index and is not itself a marketplace transaction." To the defendants, it is an elaborate fiction, a financial will-o'-the-wisp, not itself a commodity. In addition, according to their brief, "Defendants are not alleged to, and plainly do not 'compete' in the setting of USD LIBOR." As a result, even allegedly false information cannot qualify as a conspiracy in restraint of trade or commerce - an essential element of a claim under section 1 of the Sherman Act.
Nonsense, the antitrust plaintiffs asserted in a joint reply brief. Because the defendants agreed with direct competitors to fix the returns that plaintiffs received on LIBOR-based investments, they contend, rigging the index itself is per se
As for the metaphysics of LIBOR, the reply brief states, "Accurate market information - particularly about price - is at the very core of the competitive process. ... Entire subfields of established antitrust law would cease to exist under Defendants' position that the Sherman Act has no concern for 'false reports ... to a trade association.' "
In August, Judge Naomi Reice Buchwald stayed a flood of additional antitrust filings until she could rule on the defendants' motion. (In re LIBOR
, MDL No. 2262 (S.D.N.Y. order filed Aug. 14, 2012) ECF No. 205.)
Judge Buchwald will hear about the metaphysics of LIBOR, as well as the antitrust standing issues, at a pending oral argument. But Thomas A. Dubbs, a partner in the New York office of Labaton Sucharow who is not involved in the litigation, predicts, "The argument that LIBOR is some fictional notion out of a Borges short story is not going to carry the day."
Dubbs, however, says that plaintiffs who purchased LIBOR-based securities on exchanges, rather than directly from member banks, may have difficulty surviving the motion to dismiss. "It will be interesting to see if the requirement that plaintiffs allege a plausible conspiracy is applied in a way to trim down the pleadings or manage a huge case to give it shape."
Judge Buchwald may face an existential question: whether some conspiracies are too big, too systemic, and too disruptive to unwind. As financial analyst Tchir put it, "I don't have a good grasp on how much the alleged lie was, or how long it allegedly lasted, but ... the number could be enormous."