States Probe Libor Losses

At least 5 state attorneys general investigate alleged rigging of benchmark rate.

Attorneys general in at least five states are conducting investigations tied to alleged manipulation of the London interbank offered rate, adding to probes by U.S. and U.K. authorities.

The probes by New York, Connecticut, Massachusetts, Florida and Maryland are in different stages, according to the states. New York Attorney General Eric Schneiderman and George Jepsen in Connecticut are working together, and Massachusetts is talking with other states about possible coordination.

“The New York and Connecticut attorneys general have been looking into these issues for over six months, and will continue to follow the facts wherever they lead,” James Freedland, a spokesman for Schneiderman, said yesterday in an e-mail.

Barclays Plc, Britain’s second-biggest bank by assets, last month was fined 290 million pounds ($453 million) for submitting false rates for Libor, a benchmark interest rate for financial products valued at $360 trillion. Royal Bank of Scotland Group Plc, UBS AG, Lloyds Banking Group Plc and Deutsche Bank AG are among lenders facing inquiries over alleged rigging of Libor.

Barclays traders who allegedly manipulated rates from 2005 to 2007 may be charged by U.S. prosecutors before Labor Day, Sept. 3, according to a person familiar with the U.S. Justice Department’s investigation. The scandal led to the resignation of Robert Diamond as the bank’s chief executive officer.

New York and Connecticut are investigating whether the states incurred losses as the result of manipulation, according to Schneiderman’s office. Jaclyn Falkowski, a spokeswoman for Jepsen, said the states are investigating “with the goal of providing restitution to state agencies, municipalities, school districts and not-for-profit entities nationwide that may have been harmed by any illegal conduct.”

Massachusetts is looking into the effect on state investments and is working with state agencies and municipalities, said Brad Puffer, a spokesman for Attorney General Martha Coakley. Massachusetts is talking with other states about the possibility of working together. Puffer declined to name the states.

“We are currently investigating the serious allegations around the manipulation of the Libor and working diligently to determine what, if any, impact it may have on Massachusetts investments,” he said in an e-mailed statement.

Florida Attorney General Pam Bondi’s office is “reviewing the matter,” spokeswoman Jenn Meale said. The inquiry isn’t a formal investigation, she said. Maryland Attorney General Douglas Gansler is “looking into” the allegations, spokesman David Paulson said. Meale and Paulson declined to comment further.

 

Interest Rates

Declines in interest rates have left state and municipal governments that sold debt with variable rates mired in swaps they can’t afford to unwind because of high penalty rates.

The penalties are tied to Libor and other indexes that have fallen to near historic lows since the financial crisis that began in 2007, forcing at least $4 billion of payments to end the agreements, according to data compiled by Bloomberg.

Other borrowers stayed in swaps because they haven’t been willing or able to pay the cost of unwinding them. The city of Baltimore and the New Britain Firefighters’ and Police Benefit Fund in Connecticut consolidated and amended a complaint against Citigroup Inc., Credit Suisse AG, Bank of America Corp. and other banks alleging they artificially suppressed Libor, according to documents in Manhattan federal court.

Interest-rate swaps, designed to cut and fix the cost of variable-rate debt, are agreements between borrowers and banks in which they exchange interest payments, with the cost tied to indexes such as swaps. Some interest-rate swaps backfired when yields fell precipitously.

The California Public Employees Retirement System, the largest U.S public pension with $233 billion of assets, is examining the impact of Libor fixing on its portfolio and will make a judgment about whether to seek damages, said Chief Investment Officer Joe Dear.

“If we were harmed by specific actions by specific banks, we will seek remedial correction,” Dear said. “My hope is that the authorities will review the situation and prosecute where possible those who have done the system harm. It is difficult to underestimate the magnitude of the Libor rate fixing as an episode that fundamentally undermines investors’ confidence in our capital markets.”

Shum Preston, a spokesman for California Attorney General Kamala Harris, declined to comment about whether the office is investigating.


 

Bloomberg News

 

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