As the Economist points out:
The sums involved might have been huge. Barclays was a leading trader of these sorts of derivatives, and even relatively small moves in the final value of LIBOR could have resulted in daily profits or losses worth millions of dollars. In 2007, for instance, the loss (or gain) that Barclays stood to make from normal moves in interest rates over any given day was £20m ($40m at the time). In settlements with the Financial Services Authority (FSA) in Britain and America’s Department of Justice, Barclays accepted that its traders had manipulated rates on hundreds of occasions. And the idea that one party’s loss from the manipulation was another’s gain is irrelevant to those on the losing side:
….banks will be sued only by those who have lost, and will be unable to claim back the unjust gains made by some of their other customers. Lawyers acting for corporations or other banks say their clients are also considering whether they can walk away from contracts with banks such as long-term derivatives priced off LIBOR.I expect the firms involved to face a locust swarm of litigation. Lawyers may accomplish what regulators and politicians refused to do: strip the banks of ill gotten gains and bring their preening CEOs and “producers” down a few notches. A day of reckoning may finally be coming. The article from The Economist quoted by Smith documented the potential legal fallout [emphasis added]:
Over the past week damning evidence has emerged, in documents detailing a settlement between Barclays and regulators in America and Britain, that employees at the bank and at several other unnamed banks tried to rig the number time and again over a period of at least five years. And worse is likely to emerge. Investigations by regulators in several countries, including Canada, America, Japan, the EU, Switzerland and Britain, are looking into allegations that LIBOR and similar rates were rigged by large numbers of banks. Corporations and lawyers, too, are examining whether they can sue Barclays or other banks for harm they have suffered. That could cost the banking industry tens of billions of dollars. “This is the banking industry’s tobacco moment,” says the chief executive of a multinational bank, referring to the lawsuits and settlements that cost America’s tobacco industry more than $200 billion in 1998. “It’s that big,” he says.
We've been down this road before
This will, indeed, be another test of the powers of the banking lobby. We've been down this road before. The robo-signing and liar loans excesses that led to the mortgage crisis are well known. But there's more. Yves Smith wrote in November 2010 about the robo-foreclosure scandal in the United States (see Servicer-Driven Foreclosures: The Perfect Crime?):
I’ve been in contact for over the last six months with attorneys involved in foreclosure defense. Unlike the foreclosure mills, which seem to coin money, the attorneys on this front are either laboring pro bono or making considerably less than they could in other lines of work. They also can back up their views with depositions and trial transcripts.
One thing they stress is that a significant number of their clients facing foreclosure has made every single mortgage payment. . Read that again. The post is well worth reading in its entirety. She wrote that gist of the problem is that mortgage servicers, either deliberately, or are sloppy by design, mis-process payments so that borrowers are flagged to be late and therefore the lender can tack on services fees. This makes the mortgage appears to be delinquent (if the borrower doesn't catch the mistake and complain) and that's an excuse for the lender to foreclose.
Smith also documented mortgage documentation fraud where, for a price, a firm will fabricate whatever documentation is necessary for a lender to foreclose on a property. Barry Ritholz has also extensively covered this problem (see his foreclosure fraud linkfest here). At the heart of the problem is Ritholz's contention of Why Foreclosure Fraud Is So Dangerous to Property Rights.
Enter the Mortgage Settlement
So what happened? The mortgage settlement happened. In February 2012, Smith wrote again about The Top Twelve Reasons Why You Should Hate the Mortgage Settlement. The first and most important reason (IMHO) is [emphasis added]:
1. We’ve now set a price for forgeries and fabricating documents. It’s $2000 per loan. This is a rounding error compared to the chain of title problem these systematic practices were designed to circumvent. The cost is also trivial in comparison to the average loan, which is roughly $180k, so the settlement represents about 1% of loan balances. It is less than the price of the title insurance that banks failed to get when they transferred the loans to the trust. It is a fraction of the cost of the legal expenses when foreclosures are challenged. It’s a great deal for the banks because no one is at any of the servicers going to jail for forgery and the banks have set the upper bound of the cost of riding roughshod over 300 years of real estate law. She concluded:
As we’ve said before, this settlement is yet another raw demonstration of who wields power in America, and it isn’t you and me. It’s bad enough to see these negotiations come to their predictable, sorry outcome. It adds insult to injury to see some try to depict it as a win for long suffering, still abused homeowners.
A well-traveled road
Now we have Barclays and the LIBOR manipulation scandal. We saw extensive litigation as a result the mortgage and foreclosure frauds, now we are likely going to see extensive litigation with LIBOR manipulation. Can we expect a result from the litigation where "regulators and politicians" couldn't or wouldn't do?
The banking lobby made the mortgage mess go away for roughly $2,000 per loan. Will things get swept under the rug again? Admittedly, the mortgage scandal was in the United States and pitted the power of the financial system against the ordinary householder. The LIBOR scandal will be a test of strength in the UK, a different jurisdiction, between institutions.
Any way you look at it, this will be another test of the powers of the banking lobby.
Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.
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