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

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

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

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Barclays Plc, Britain's second-biggest bank by assets, lastmonth was fined 290 million pounds ($453 million) for submittingfalse rates for Libor, a benchmark interest rate for financialproducts valued at $360 trillion. Royal Bank of Scotland Group Plc,UBS AG, Lloyds Banking Group Plc and Deutsche Bank AG are amonglenders facing inquiries over alleged rigging of Libor.

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Barclays traders who allegedly manipulated rates from 2005 to2007 may be charged by U.S. prosecutors before Labor Day, Sept. 3,according to a person familiar with the U.S. Justice Department'sinvestigation. The scandal led to the resignation of Robert Diamondas the bank's chief executive officer.

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New York and Connecticut are investigating whether the statesincurred losses as the result of manipulation, according toSchneiderman's office. Jaclyn Falkowski, a spokeswoman for Jepsen,said the states are investigating “with the goal of providingrestitution to state agencies, municipalities, school districts andnot-for-profit entities nationwide that may have been harmed by anyillegal conduct.”

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

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

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

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Interest Rates

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Declines in interest rates have left state and municipalgovernments that sold debt with variable rates mired in swaps theycan't afford to unwind because of high penalty rates.

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

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Other borrowers stayed in swaps because they haven't beenwilling or able to pay the cost of unwinding them. The city ofBaltimore and the New Britain Firefighters' and Police Benefit Fundin Connecticut consolidated and amended a complaint againstCitigroup Inc., Credit Suisse AG, Bank of America Corp. and otherbanks alleging they artificially suppressed Libor, according todocuments in Manhattan federal court.

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Interest-rate swaps, designed to cut and fix the cost ofvariable-rate debt, are agreements between borrowers and banks inwhich they exchange interest payments, with the cost tied toindexes such as swaps. Some interest-rate swaps backfired whenyields fell precipitously.

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The California Public Employees Retirement System, the largestU.S public pension with $233 billion of assets, is examining theimpact of Libor fixing on its portfolio and will make a judgmentabout whether to seek damages, said Chief Investment Officer JoeDear.

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“If we were harmed by specific actions by specific banks, wewill seek remedial correction,” Dear said. “My hope is that theauthorities will review the situation and prosecute where possiblethose who have done the system harm. It is difficult tounderestimate the magnitude of the Libor rate fixing as an episodethat fundamentally undermines investors' confidence in our capitalmarkets.”

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Shum Preston, a spokesman for California Attorney General KamalaHarris, declined to comment about whether the office isinvestigating.

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Bloomberg News

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