Last Friday, the Federal Deposit Insurance Corporation filed a lawsuit against 16 of the world’s biggest banks over their alleged rigging of the LIBOR interest rate. LIBOR, of course, stands for the London Interbank Offered Rate, an average, base interest rate that sets the benchmark for many commercial interest rates around the world. (Think home mortgages, car loans, student loans, and derivatives.) The LIBOR is supposed to reflect the rate at which large banks lend to each other, and it’s based on data that the banks report daily. But what if it’s rigged?
The problem is that even small fluctuations in the LIBOR can significantly affect borrowing costs and investment returns for people and businesses whose activities link to it. So if the underlying data that is used to calculate the LIBOR is manipulated, then some bankers and traders will hit pay dirt on their LIBOR-related bets while others are left holding the bag.
In the FDIC case, the agency is suing on behalf of 38 banks that it took over after they went bankrupt during the financial crisis. The agency is alleging that these banks incurred a lot of their losses from certain interest-rate-sensitive financial products that were sold to them by the bigger banks, and their losses were compounded by the bigger banks’ manipulation of the LIBOR.
The FDIC lawsuit is the latest in a series of civil, regulatory, and criminal actions that span the Atlantic and began in the throes of the financial crisis, ripening around 2012. They include criminal investigations by the Justice Department in the U.S. and the Serious Fraud Office in the U.K. that have resulted in criminal charges on both sides of the pond.
Indeed, prosecutors are negotiating a mild turf war to divvy up defendants, and they plan to charge additional cases over the next year.