Banks seek dismissal of Libor litigation

Lawyers for 16 banks involved in setting U.S. dollar-denominated Libor rates have filed joint defense papers in New York federal court seeking to dismiss mounting antitrust litigation against them, aguing the plaintiffs have failed to make their case that banks acted together to manipulate rates.

Though the plaintiff lawsuits are styled as antitrust claims, the banks say the plaintiffs have failed to assert any claims of collusive behavior.

The filings, made late Friday and Saturday, come as legal and regulatory scrutiny grows concerning the setting of Libor rates. Last week, Barclays Bank Plc paid $453 million to settle with U.S. and U.K. regulators that are conducting rate-manipulation probes. The civil cases are beginning to provide a tangible sense of who might have been harmed by Libor rate manipulation and how, giving definition to what has until now been a somewhat abstract controversy.

The filings also provide a first look at how banks may seek to defend themselves against damage claims that experts say could reach hundreds of billions of dollars, given the prevalent use of Libor in setting rates on everything from consumer loan securitizations to sophisticated interest rate derivative products.

"Certainly the magnitude of the potential losses that were caused by this represents a huge number when aggregated across world," said Andrew Lo, a professor of finance at MIT's Sloan school of management.

Libor, short for London Inter-Bank Offered Rate, is set at 11 a.m. GMT each day, as banks surveyed by the British Bankers Association report their perceived borrowing costs for loans from other banks of various maturities. There are multiple panels for rates set in other currencies.

The class-action litigation, consisting of four different plaintiff groups, has been consolidated in federal court in New York. Among the lead plaintiffs are the City of Baltimore, which bought Libor-based instruments directly from banks on the rate-setting panel, and Charles Schwab Corp., which held Libor-based instruments in money market and mutual funds.

Among the 16 defendant banks are Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co., UBS AG, Barclays and Deutsche Bank AG, which are, or were, members of the dollar-denominated Libor panel between August 2007 and February 2009.

In its amended complaint filed April 30, Baltimore accused the banks of colluding to supress Libor rates so they could reduce the amount of interest payments they had to pay out on Libor-based instruments sold to investors. Baltimore bought interest rate swaps from the banks to hedge its risk on floating-rate municipal bonds it issued, court papers say.

But in their response, the banks say the plaintiffs have failed to adequately assert that the banks acted in concert to manipulate the rates. The lawsuits "do not adequately plead joint action by competitors to restrain competition in some market," adding they "are devoid of any direct factual allegations of an actual agreement among defendants to supress USD Libor throughout the class period."

In its filing, Baltimore cited an affidavit filed in a Canadian proceeding asserting traders at banks involved in setting yen-denominated Libor communicated with one another to put the rate at levels that would aid their trading positions.

The banks also assert it would be "highly speculative" to try to assess the amount of damage caused by rate manipulation, given that the numbers banks submit are based on a hypothetical survey question of their perceived borrowing costs and "there is no objectively verifiable 'correct' USD Libor," the filing states. The precise wording of the BBA's survey question is: "At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 a.m.?"

The banks also maintain that false reporting in the survey does not constitute a restraint of trade, since compiling the rates is not a competitive act. "There are no buyers or sellers, no market, no profit and no competiiton of any kind associated with the mere reporting of rates or setting of USD Libor," the filing states.

The dismissal motions seek a hearing for oral argument.

(Published by WSJ - July 2, 2012)