Libor-Rigging Banks Leave London Customers Disillusioned

Guardian’s U.K. Libor Suit May Signal Start of European Backlash
Guardian, a Wolverhampton, England-based company that provides housing for the elderly, claims a Libor-based interest-rate swap bought from Barclays isn’t valid because the bank knew, or should have known, the rate wasn’t accurate. Photographer: Simon Dawson/Bloomberg

British lawyer David Doble held a conference at a Frankfurt hotel this month to tell an audience of German Landesbank executives they had good reason to seek punishment for those who rigged interest rates.

It was an about-face for Doble to be touring Europe talking to investors about how to recoup losses from lenders. He used to work for big banks drafting securitization deals, so he’s more familiar than most with esoteric financial products and what happens when they go wrong.

While U.S homeowners, a futures trader and the City of Baltimore have sued banks claiming they were harmed by the manipulation of the London interbank offered rate and other benchmark rates, potential victims in Europe have been slower to come forward. Guardian Care Homes Ltd., one of the few companies to file a Libor-related lawsuit in the U.K., started laying out its case at a London court hearing today.

“Individuals within the banks that were manipulating Libor were doing so in contemplation of making gains for themselves and their trading desks,” Doble said at the event. “If they were making gains, then somebody out there was suffering losses.”

Regulators across the globe are investigating claims banks altered submissions that were used to set Libor in an effort to benefit traders, or to appear financially healthier than they were. Barclays Plc paid a 290 million-pound ($465.5 million) fine in June to settle with regulators over rate rigging.

Guardian Lawsuit

Guardian, a Wolverhampton, England-based company that provides housing for the elderly, claims a Libor-based interest-rate swap bought from Barclays isn’t valid because the bank knew, or should have known, the rate wasn’t accurate. The deal cost Guardian, which isn’t represented by Doble, about 12 million pounds, according to the lawsuit.

“With Libor fixed to stay low, banks knew full well that there was no way businesses like mine would do anything but lose out on a hedging product,” Guardian Chief Executive Officer Gary Hartland said in an e-mail. It’s right that “individuals involved should face criminal charges for the damage caused, and that these toxic products based on Libor be rescinded.”

Guardian wants its money back and for the swaps to end without having to pay a break fee. The company’s lawyer, Tim Lord, today used evidence from U.S. and U.K. regulators to link London-based Barclays to Libor manipulation.

Fixing Purposes

Barclays and its senior managers “consistently sought to lower submissions for the purposes of the Libor fixing process,” Lord said. Guardian is also seeking disclosure of thousands of internal e-mails from Barclays.

Lawyers for the bank sought to remove the Libor-related claims from the Guardian lawsuit, which was filed before the scandal was widely publicized.

“This business had a suite of advisers, including Rothschilds, as well as several law firms and a lot of financial experience and skill in-house,” said John McGuinness, a Barclays spokesman. “Barclays understands the client entered into their swap agreements with sufficient understanding to exercise their own judgment as to whether the products would meet their business objectives. This is a significant business which owes Barclays 70 million pounds. We do not believe any aspect of the case has merit and are defending it.”

Doble is working with lawyers pushing investors, consumers and companies like Guardian to hold lenders accountable for shifting the baseline on which about $300 trillion of contracts worldwide are built.

Lost Business

How much those losses may total and what the banks will have to cover -- or suffer in lost business -- isn’t clear. Morgan Stanley analysts predict Libor-related lawsuits may end up costing 16 banks, including Royal Bank of Scotland Group Plc and Deutsche Bank AG, as much as $6 billion collectively.

The New York Attorney General subpoenaed nine additional lenders including Societe Generale SA, Royal Bank of Canada, and Bank of America Corp. in its Libor manipulation probe, a person familiar with the matter said last week. That brings to 16 the total number of banks subpoenaed in the states’ investigation.

The fallout goes beyond litigation costs. Jane Coffey, who manages 12 billion pounds as head of U.K. equities of Royal London Asset Management Ltd., said Libor and other controversies have made her reluctant to invest in British banks.

Culture Breakdown

“The Libor scandal is another example of the breakdown of culture within these organizations,” she said in an interview. “There are so many scandals banks can be fined for, or will have to compensate for, that it is difficult to quantify.”

A $2.3 billion loss at UBS AG on unauthorized trades and mis-selling of loan insurance and interest swaps, which prompted Barclays to set aside 1 billion pounds to cover customer claims, have hit bank profits and damaged London’s reputation as a financial center.

PGGM NV, a Dutch pension provider that manages about 125 billion euros ($163 billion), said it’s taking action, though not necessarily in the courts. As part of its responsible investment program, the money manager said Libor activities will be a factor in deciding which banks it does business with.

“PGGM is concerned about this scandal, which increases the distrust in the financial sector and affects PGGM and its institutional clients,” spokeswoman Ellen Habermehl said.

Traders Suspended

The company, based in Zeist, was part of a U.S. class-action lawsuit by shareholders against Bank of America Corp. over losses from its acquisition of Merrill Lynch & Co. Bank of America agreed to pay $2.43 billion to settle the case last month.

More evidence about how rates were manipulated has emerged since August, when RBS fired four traders. This month the bank suspended its head of rates trading in Europe and Asia-Pacific, Jezri Mohideen, as it probes evidence traders and their managers regularly tried to influence Libor submissions between 2007 and 2010, according to a person familiar with the matter that declined to be identified. RBS is investigating its procedures and cooperating with regulators, Linda Harper, a bank spokeswoman, said in an e-mailed statement.

Internal Messages

Internal messages from both RBS and Barclays show traders boasting of how they influenced Libor submissions. That doesn’t mean suing them will be easy, said Edward Allen, a lawyer at London-based Enyo Law, who spoke at the Frankfurt meeting.

“There is no silver bullet,” he said. Part of the problem is determining what the Libor rate should have been, without manipulation, to work out what, if anything, was lost and by whom.

Swaps that had a “trigger provision” linked to Libor -- meaning if the rate reached a certain level, the bank paid less interest to the contract holder, causing an easy-to-measure loss -- may be the focus of the first cases, Doble said at the conference. Doble, who specializes in advising investors on their derivative contracts with banks, presented data showing that as much as $230 trillion of swaps were tied to Libor.

Other claims may come under antitrust law if regulators find banks colluded to fix rates, according to Cologne-based lawyer Maxim Kleine, who is advising some German municipalities.

If Guardian gets its way and a judge rules its swap was invalidated by Libor rigging, it could have ramifications for $300 trillion worth of contracts worldwide.

Tom Hibbert, a lawyer at U.K. firm RPC who isn’t involved in the suit, thinks it unlikely any judge will tear up contracts instead of awarding damages for losses.

“The impact of that on the financial system would be substantial,” he said. “It’s a brave judge who causes that sort of apocalypse.”

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