A Silver Lining in Libor Rigging

Any and every company that has lost money on an interest-rate swap supplied by a bank caught up on the Libor rigging scandal should reach for its lawyers.
Barclays settled a lawsuit related to Libor manipulation rather than fight it out in court. Photographer: Chris Ratcliffe/Bloomberg

Treasurers, start your engines. Any and every company that has lost money on an interest-rate swap supplied by a bank caught up on the Libor rigging scandal should reach for its lawyers, so something good comes out of the odious practice of money-market manipulation.

Barclays Plc today settled a lawsuit brought against it by Graiseley Properties Ltd. The company, which runs elderly care homes, bought swaps to protect it from any increase in interest rates. Instead, Graiseley ended up owing the bank about 12 million pounds ($28 million) on the derivatives contracts.

QuickTake Broken Benchmarks

Here's the twist: Because the swaps are linked to the London interbank offered rate, and because Barclays is one of the gang that regulators have fined billions of dollars for monkeying around with Libor, Graiseley's lawyers argued that the bank should have told the company about the rigging.

The trial was due to start in a few weeks; instead, Barclay has agreed to ``a commercial restructuring of Graiseley's debt'' of about 70 million pounds. Good news for Graiseley and its lawyers, and presumably for the pensioners in the care homes.

It's disappointing, though, for anyone expecting Barclays executives past and present to be held accountable. The smoking gun uncovered by the company's legal team was a 2007 e-mail from Jerry Del Missier, who was previously chief operating officer at Barclays, calling Libor rates ``fantasy.''

Ever since the birth of the derivatives market, banks sold companies complicated products that have yielded handsome profits, sometimes at the expense of their corporate customers.

As far back as 1996, Procter & Gamble Co. successfully sued Bankers Trust for $100 million, aided in large part by taped conversations dating from 1993 in which two employees of the bank discussed the transaction. ``They would never know. They would never be able to know how much money was taken out of that,'' one employee said, referring to the profit potential of the transactions.

Even with due respect for the principle of caveat emptor, it stretches credulity that a nursing-home operator would knowingly make a bet on the path of interest rates that could end up costing it double-digit millions of pounds. And every case seems to have the same plot; a company seeking to guard against market moves buys a derivative from a bank that turns out to be a gamble rather than a hedge, and ends up in the red.

Here's hoping one of the unintended consequences of Libor rigging is an escape route for companies shackled to missold swaps.

To contact the author of this article: Mark Gilbert at magilbert@bloomberg.net.

To contact the editor responsible for this article: James Greiff at jgreiff@bloomberg.net.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.