Skip to main content

Barclays Plc Chairman Marcus Agius resigned after the bank was fined a record 290 million pounds ($455 million) for trying to rig interest rates.

Jason Alden/Bloomberg

The gritty streets of Baltimore are a long way from the City of London. But as reports emerged that a key global interest rate set in Britain might have been manipulated, local officials began to wonder: Did we get stiffed?

Across the United States, governments, investors and regulators are asking that same question. The rate-rigging scandal now gripping the U.K. is crossing over to the U.S., complete with investigations, hearings, and a flood of lawsuits.

"This could be gigantic," said Peter Shapiro, managing director of Swap Financial Group LLC, which acts as an adviser to the city of Baltimore. "The numbers are awesome."

Story continues below advertisement

Baltimore, like many other cities, struck financial contracts with banks based on the benchmark rate. Mr. Shapiro asserts Baltimore suffered when banks artificially low-balled that rate, reducing the city's interest revenue.

In Britain, the scandal has already taken down Robert Diamond, who resigned as chief executive of Barclays PLC.

Mr. Diamond tendered his resignation after the bank agreed to pay $453-million (U.S.) to authorities on both sides of the Atlantic to settle charges that it had acted to manipulate the benchmark interest rate.

Next week, U.K. lawmakers are summoning another Barclays executive implicated in the scheme – former chief operating officer Jerry Del Missier – to speak before a parliamentary inquiry.

U.S. policy makers have questions of their own about what happened to the London interbank offered rate, or Libor, particularly in the depths of the financial crisis, when banks may have tried to project a false picture of their financial health. The rate is generated through a daily survey of the world's biggest lenders, who estimate how much it will cost them to borrow money from other banks. The resulting benchmark is used as the basis for hundreds of trillions of dollars of loans and derivatives, not to mention credit card loans and mortgages.

The U.S. Senate Banking Committee has said it plans to question Treasury Secretary Tim Geithner and Federal Reserve Chairman Ben Bernanke about the problems with Libor at previously scheduled hearings later this month. A lawmaker from the House of Representatives has requested documents from the New York Federal Reserve related to its communications with Barclays on Libor.

Meanwhile, U.S. authorities are conducting civil and criminal investigations of the banks' conduct. Among the banks under scrutiny are J.P. Morgan Chase & Co., Deutsche Bank, Citigroup Inc. and Royal Bank of Scotland, raising the prospect of additional Barclays-like settlements.

Story continues below advertisement

Experts say that the nature of the Libor process, which starts with sixteen banks submitting bids, increases the odds that more than one bank was involved in the rigging. "To manipulate the rate, one needs a group working in harmony," noted Brad Hintz, an analyst at Sanford Bernstein & Co.

The Libor scandal is reminiscent of the bond trading debacle that nearly crippled Salomon Brothers in the early 1990s, Mr. Hintz added. Then, Salomon illegally tried to manipulate an auction of U.S. Treasury bonds, affecting the broader market. Salomon's CEO eventually resigned, the firm paid an enormous fine, and clients sued, alleging they had purchased mispriced securities as a result of Salomon's actions.

Just how much banks might end up paying in damages is a matter of speculation. Analysts at Nomura Holdings, attempting a rough calculation in a recent report, estimated that it could be in the billions.

Baltimore is among a first wave of investors, which includes Charles Schwab Corp. and even some individuals, whose Libor-related complaints have been consolidated in federal court in New York.

Earlier this month, the defendants – the sixteen banks involved in setting the main Libor rate – asked the court to dismiss the case, asserting that the plaintiffs had failed to show that the banks had conspired to influence the rate.

The only Canadian bank named in the lawsuit is the Royal Bank of Canada. RBC declined to comment on the matter beyond a broader statement first issued last week. In it, the bank said "We have determined that … our Libor submissions accurately reflected our perception of our costs of funds and that we did not collude with other banks."

Story continues below advertisement

For the world's largest banks, the mess isn't going away any time soon. "Anyone whose borrowing rates are directly or indirectly linked to Libor may have some concerns," said Darrell Duffie, a finance professor at Stanford University. The resulting lawsuits will "go on in the background for years and years."

Report an error Licensing Options
About the Author
U.S. Correspondent

Joanna Slater is an award-winning foreign correspondent for The Globe based in the United States, where her focus is business and economic news and New York City.Her career includes reporting assignments in the U.S., Europe and Asia. In 2015, she was posted in Berlin, Germany, where she covered Europe’s refugee crisis. More


The Globe invites you to share your views. Please stay on topic and be respectful to everyone. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.

Please note that our commenting partner Civil Comments is closing down. As such we will be implementing a new commenting partner in the coming weeks. As of December 20th, 2017 we will be shutting down commenting on all article pages across our site while we do the maintenance and updates. We understand that commenting is important to our audience and hope to have a technical solution in place January 2018.

Discussion loading… ✨