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News focus: who will bring a Libor claim?
Investment bank Liberum Capital estimates that Barclays global exposure to claims arising from staff’s manipulation of the Libor rate could be $6bn - just over a quarter of the bank’s value.
$6bn is a guess based on the volume of Libor-linked trades (in the trillions in any one year). They may be right, but it is unlikely that the bank will face or pay out claims of that order. Not everyone can be bothered; the risks of a claim vary by jurisdiction and the circumstance of the trade; and the legal mechanics are too complex for many smaller claims to be worthwhile.
So where are lawyers and economists saying losses could have occurred? For a start, the history here can be split between pre- and post- Lehmans’ 2008 collapse.
As John Rathbone, founder of financial risks consultant JC Rathbone, told the Gazette, the ‘inference seems to be that Barclays were looking to push up Libor rates’ before the collapse of Lehmans ‘when liquidity in the market was plentiful’, but looked to quote a lower rate ‘when liquidity dried up’. (Rathbone also points out that there will have been winners from an artificially depressed Libor rate.)
For lawyers advising clients who think they have a claim, the Financial Services Authority has done some of the leg-work with Barclays’ co-operation. The material made public, including the emails of derivatives traders and the ‘submitters’ who sent the rates to the British Bankers Association every day, is damning, and is accepted as such by Barclays.
Similar reports are due on other banks, and there are sound reasons why anyone making a claim would wait on those. The rate published by the BBA knocks off the ‘outriders’ - the few banks with the highest rates and the few with the lowest. So one bank cannot fix the rate, however individually dishonest their staff have been.
The rate can only be fixed with collusion between the banks. That’s when misconduct can lose banks’ counterparties' money, as the rates they agree are linked to the Libor rate.
They may have made a loss pre-Lehmans because the rate was too high. But they could also make a loss in the period where the rate was, in general, too low, as opt-outs and opt-ins can be triggered by even very small shifts in the rates. Those small shifts could be useful to derivatives traders whose concern, as the FSA report makes clear, was profit - not the perceived stability of the bank or the banking system.
There are existing claims in the US - currently being grouped in a New York court - that have been wrong-footed by the Barclays report. The Gazette understands they now face a choice between starting over with amended claims that reflect what is now known, or continuing as they were. Much of what is now known would not have come out until disclosure, and the US claims are some way off that.
A wide variety of organisations, from housing associations to major insurers, are actively looking at trades to see if they have a claim worth pursuing - where a loss occurred because the rate was artificial. As a further complicating factor, at the time of writing criminal charges are being considered. Opinion is divided on the prospect of success here.
The FSA can prosecute some offences - but the Libor misdeeds are not included in that list. Michelmores partner Andrew Oldland QC queries whether the Serious Fraud Office, whose budget has been cut by 35%, has the resources to take up prosecutions that have such an uncertain prospect of success. Oldland points out that under the Fraud Act 2006 and the Theft Act 1968 a ‘dishonesty’ test needs to be met.
If those who were at the coalface, and are most likely to face charges, felt their actions were sanctioned by supervisers, managers - or even the Bank of England - they may not in strict terms be found to have been ‘dishonest’ Oldland says, however strange that may seem to the outside world.
The counter argument comes from Lewis Silkin barrister Owen Watkins, who notes, I summarise here, that illegality being suggested to someone does not exonerate them from all responsibility for that behaviour. (The Bank of England, by the way, has immunity from suit - testing that has been an expensive disappointment in the past.)
It is unclear at this point whether authorities in the US believe offences might have been committed that they could bring charges for. It would, Watkins pointed out, be challenging to try criminal and civil cases in parallel, as much of the evidence would be identical.
But whatever the outcome, with more to come on other banks, and with counterparties and experts starting to look at trades, banks are subject to huge and damaging uncertainty over the scale of claims they could face. And litigation funders, litigation law firm Quinn Emanuel’s partner Robert Hickmott told the Gazette, must be starting to look at this area.
It is doubtful that Barclays will pay out even close to $6bn. But that FSA fine was big, there are some big claims in prospect, and this is a multi-jurisdictional headache. Even in the world of international high finance, even $1bn is quite a lot of money.
Eduardo Reyes is Gazette features editor
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