By: Brandon Kinnard

The United States Federal Deposit Insurance Corporation (FDIC), acting as a receiver for a handful of failed banks, filed a lawsuit on Friday, March 14th, against some of the largest banks in the world for allegedly manipulating the London Interbank Offered Rate (LIBOR).[1] Among those being sued are some of the most powerful international financial institutions, including Bank of America, Citigroup, HSBA, UBS, JPMorgan Chase & Co., and Barclays Plc.[2] These banks are responsible for setting the LIBOR rate on a daily basis, affecting over $500 trillion in financial products.[3]

The LIBOR rate has been used since 1986 to determine the short-term interest rate for which banks can borrow money from one another.[4] This rate represents how much it costs the most preferred borrowers in the world to borrow money, which directly affects the interest rates charged by banks that lend money to less preferred borrowers.[5] In order to set the rate, the largest banks submit the rate at which they are willing to lend money; the highest and lowest rates are then discarded and the middle offers are averaged to arrive at the daily LIBOR rate.[6] The LIBOR rate can apply to loans that mature anywhere from one day to one year from the date the money is borrowed.[7]

In the context of the lawsuit instituted by the FDIC, the alleged LIBOR rate manipulation caused ten banks that failed during the financial crisis to suffer substantial losses.[8] The FDIC is suing based on a theory of breach of contract – alleging that the large banks broke a number of swap contracts that they entered into with the failed banks when they colluded to manipulate the LIBOR rate in order to increase their own profits.[9] The rates and terms of the contracts entered into were tied to the LIBOR rate.[10] In addition to their breach of contract claim, the FDIC is also alleging fraud and violation of United States anti-trust laws.[11]

This is but the latest allegation in a scandal that has been developing since 2007, when Barclays Plc and a number of other banks were accused of submitting artificially low LIBOR rates in order to convey market strength and mask financial turmoil.[12] In 2012 the banks were fined for this manipulative conduct, after which a number of bank executives resigned, admitting to the market manipulation.[13]

The FDIC has neither released the magnitude of losses suffered by the failed banks nor how much they will be seeking in punitive damages.[14] The banks have come to an agreement with the United States Justice Department which will allow them to avoid criminal prosecution so long as they meet certain conditions.[15]

[1] Bob Van Voris and Jesse Hamilton, BofA, Citigroup, Credit Suisse Sued by FDIC Over Libor Rigging, Bloomberg Businessweek (March 15, 2014), .

[2] Id.

[3] Nate Raymond and Aruna Viswanatha, U.S. Regulator Sues16 Banks for Rigging Libor Rate, Reuters (March 14, 2014, 5:11 PM), https://www.reuters.com/article/2014/03/14/us-fdic-libor-idUSBREA2D1KR20140314.

[4] London Interbank Offered Rate – LIBOR, Investopedia, https://www.investopedia.com/terms/l/libor.asp (last visited Mar. 15, 2014).

[5] See id. (explaining that a multinational corporation with a good credit rating may be able to borrow money at the LIBOR rate, plus a few points).

[6] Marc L. Ross, The LIBOR Scandal, Investopedia (July 18, 2012), https://www.investopedia.com/financial-edge/0712/the-libor-scandal.aspx.

[7] Id.

[8] F.D.I.C. Sues 16 Big Banks Over Rigging of a Key Rate, The New York Times (March 14, 2014), https://www.nytimes.com/2014/03/15/business/fdic-sues-16-big-banks-over-rate-rigging.html.

[9] Raymond, supra note 3.

[10] Id.

[11] Van Voris, supra note 1.

[12] Ross, supra note 6.

[13] See id. (explaining that Bob Diamond of Barclays Plc. and Greg Smith of Goldman Sachs, among others, resigned after the fines); see also Barclays Boss Bob Diamond Resigns Amid Libor Scandal, BBC Business News (July 3, 2012, 9:57), https://www.bbc.com/news/business-18685040.

[14] Raymond, supra note 3.

[15] F.D.I.C. Sues 16 Big Banks Over Rigging of a Key Rate, supra note 8.