Who could have predicted that giant financial institutions would lie about a key benchmark that they self-report on the honor system and is used to calculate the interest rates used by banks loaning money to each other?

Eight California cities, counties and other entities joined a parade of institutional investors this week who claim they were ripped off by major banks through their manipulation of the London Interbank Offered Rate (Libor), a benchmark used to set interest rates on corporate bonds and other securities. Indications are Libor was manipulated for years preceding the economic meltdown in 2008.

The scandal, which exploded on the financial scene last year, has already resulted in hundreds of millions in fines for Barclays Bank and $1.5 billion for Swiss bank UBS, but the illegal behavior appears to have been widespread. Libor underpins around $350 trillion (with a “T”) in derivatives, was used to evaluate the health of financial institutions during the financial crisis, and is relied upon for setting rates in mortgages, student loans and other financial products.

California’s plaintiffs sued UBS, Barclays and 20 other banks over millions of dollars they claim were lost through violations of anti-trust laws and negligence. The parties are seeking triple damages for actions they claim enriched the banks at their expense.

The counties of San Diego and San Mateo, the cities of Richmond and Riverside and the East Bay Municipal Utility District were among those filing separate lawsuits Wednesday in federal courts seeking to recover damages.  

Emails and text messages from financial traders revealed during the Barclays settlement with U.S. and British regulators last year how blatant and egregious the rate rigging was. One trader wrote to his former employer, Barclays: “i have a huge 1m fixing today and it would really help to have a low 1m tx a lot. . . . because I am aware some other banks need a very high one. . . . if you could push it very low it would help. I have 50bn fixing.”

The Barclays settlement revealed that the banks derivative traders made 257 rate-rigging requests between January 2005 and June 2009.

When the Wall Street Journal first broached the unthinkable subject of Libor manipulation in 2008, it was quickly dismissed by the industry and the media in general. It was thought that big banks wouldn’t foul their own nests by tampering with such an important and omnipresent benchmark. 

But senior Barclays officer reportedly explained to someone at the British Bankers’ Association their rationalization. “We're clean, but we're dirty-clean, rather than clean-clean.” The response was, “No one’s clean-clean.”

–Ken Broder

To Learn More:

California Cities Sue Banks over Libor Rates, Law Firm Says (by Karen Gullo, Bloomberg)

UBS to Pay $1.5 Billion for Faking International Loan Rates, but No Executives Indicted (by Noel Brinkerhoff, AllGov)

“For You . . . Anything.” Barclays Libor Emails Paint Ugly Picture (by Maureen Farrell, CNN)