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Freddie Mac Sues 15 Banks over LIBOR Scheme

by devteam March 20th, 2013 | Share

Freddie Mac has filed a complaint inrnfederal court in Alexandria, Virginia alleging that 15 banks, including Bank ofrnAmerica, JP Morgan Chase, UBS, and Citigroup manipulated the London interbankrnoffered rate (LIBOR).  This manipulation,rnFreddie Mac alleges, caused it to suffer substantial losses.   </p

The LIBOR is used as an index to setrnrates for many financial products and contracts including residentialrnmortgages.  According to Bloomberg more than $300 trillionrn(others say $800 trillion) of such products are linked to LIBOR.  ThernEconomist explains the process.  “Arnborrowing rate is set daily by a panel of banks for ten currencies and for 15rnmaturities.  The most important of these, three-month dollar LIBOR, isrnsupposed to indicate what a bank would pay to borrow dollars for three monthsrnfrom other banks at 11am on the day it is set. The dollar rate is fixed eachrnday by taking estimates from a panel, currently comprising 18 banks, of whatrnthey think they would have to pay to borrow if they needed money. The top fourrnand bottom four estimates are then discarded, and LIBOR is the average of thosernleft.”rn The numbers are collected through a pollrnconducted by Thomson Reuters Corp. and sponsored by the British Bankers’rnAssociation which is also named as a defendant in the Freddie Mac suit.  </p

The so-called LIBOR Scandal first brokernat Barclay’s Bank over a year ago when its employees and those of several otherrnbanks were accused of trying to rig the LIBOR number repeatedly over a period ofrnat least five years.  As many as 20 banksrnwere soon named in various investigations worldwide. </p

The complaint by Freddie Mac chargesrnthat the defendants, by using false and dishonest USD LIBOR submissions tornbolster their respective reputations, artificially increased their ability torncharge higher underwriting fees and obtain higher offering prices for financialrnproducts to the detriment of Freddie Mac and other consumers,” The banks,rnFreddie Mac said, acted collectively to hold down the dollar LIBOR to hiderninstitutional problems and boost profits. Freddie Mac and Fannie Mae use LIBOR to determine interest payments on their investments in floating-rate financialrninstruments such as bonds and swaps. </p

The suit includes as defendants bothrnU.S. and European banks including Barclays, Royal Bank of Scotland (RBS), andrnCredit Suisse Group.  Freddie Mac isrnseeking unspecified damages for financial harm, punitive damages, and treblerndamages for Sherman Act violations.  Bloomberg says a government audit lastrnyear estimated that Freddie Mac and Fannie Mae may have lost a combined $3rnbillion because of the LIBOR manipulation. rnBarclays, UBS and RBS have already paid out more than $2.5 billion inrnfines related to the scandal.

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About the Author

devteam

Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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