Bank investors have clearly decided to apply the cockroach principle to the Barclays settlement for Libor fixing -- that where you see one, there are likely a whole lot more where that came from. And who can blame them?
Bank stocks are getting whacked as investors worry that more banks may get hit by fines, and that the settlements may provide the basis for lawsuits that could add multiples to the costs for banks.
After all, the London Interbank Offered Rate (known mostly by its short form, Libor) is the basis for all sorts of loans, from consumer credit to leveraged buyout funding. Anybody who can argue they were disadvantaged by a torqued Libor rate can try to seek redress.
That may result in costs vastly higher than the initial $453-million (U.S.) that Barclays has agreed to pay to British and American regulators to settle the case. And for other banks, the spectre of big settlements now looms large. The U.K. is amping up the power of its probe, which also includes Citigroup, HSBC and Royal Bank of Scotland.
UBS AG is already cooperating with regulators. Barclays may too end up working with regulators now to help bring in evidence against other banks, predicted Harvey Pitt, the former chairman of the Securities and Exchange Commission.
“This is the proverbial tip of the iceberg,” he said on Bloomberg Television. “It is in Barclays’ interest to prove the old adage ‘misery loves company’ and I expect they’ll be implicating a lot of their colleagues at other banks. It’s a huge problem and the government is going to milk this for all it’s worth.”
Barclays, according to the settlement allegations, tried to sway Libor to help traders profit on positions, and to make the bank look stronger than it really was by submitting lowball financing cost numbers.
Libor is set by a group of banks that provide their best estimate of the cost of overnight interbank financing to a central collector. That collector then tosses out high and low scores and comes up with an estimate of overall financing costs. Because of that, it’s not clear that Barclays actually had much success in influencing the rate.
Nonetheless the allegations have led some, notably the folks at the blog Zerohedge.com, to term Libor “Lie-bor.”
Canada’s Competition Bureau has asked Royal Bank of Canada for information relating to Libor.
RBC was one of the 16 banks that helped set Libor in U.S. dollars from 2006 to 2008. Each financial institution on the panel of 16 banks is believed to have received at least an informal request for information relating to the probe.
A spokeswoman for RBC said the bank had "no update" on how the probe was progressing. It is not clear how long the bureau plans to investigate. RBC has not received subpoenas but is cooperating with the request for information.
In addition to RBC and Barclays, the other banks asked to provide information are Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, HSBC, JPMorgan Chase, Lloyds, Rabobank, Bank of Tokyo-Mitsubishi, Norinchukin Bank, Royal Bank of Scotland, and West LB.
With files from reporter Grant Robertson in Toronto.