The more we learn about the manipulation of the London interbank offered rate, the more expensive the scandal becomes for the financial institutions involved. If banks want to control the damage, they would do well to come clean sooner rather than later about the full extent and effect of their misbehavior.
In thousands of incidents throughout much of the 2000s, traders sought to manipulate Libor and other benchmark interest rates that influenced the value of hundreds of trillions of dollars in loans, bonds and derivatives. Judging from the traders’ communications, they often succeeded and profited handsomely.
While we can expect government settlements with the banks to be costly, it’s safe to assume that the ensuing civil litigation will be more expensive still.
As Bloomberg Markets reports in its latest issue, the lawsuits are piling up. At least 30 cases are pending in federal court in New York, many claiming triple damages under antitrust and other statutes.
Intransigence and obfuscation would serve mainly to delay the reckoning and increase everyone’s legal bills. Alternatively, the banks could try to head off the litigation before it gets out of hand, taking an approach similar to that of oil giant BP after the 2010 Deepwater Horizon disaster. This would entail releasing all available information on the banks’ actual borrowing transactions and making a best-possible estimate of how much Libor was off. It would also require all the banks involved to contribute to a joint fund and set up a mechanism to compensate victims willing to settle out of court.
A well-executed compensation fund would have the added advantage of demonstrating that the banks want to make a clean break with the sordid past and that they care how their behavior affects their customers. The question, then, is whether they really do.
Bloomberg News (Jan. 31)