WICHITA, Kan.-Seeking a potential new source to recoup losses on the corporate credit union failures, NCUA filed suit last week against 13 international banks claiming they violated federal antitrust laws by manipulating interest rates through Libor-the London Interbank Offered Rate-causing major losses to the five corporates.
The filing of the suit in federal court in Kansas-where U.S. Central FCU, the one-time $52 billion central bank for credit unions, was based-came as another bank, ICAP Europe Ltd., was agreeing to pay an $87-million settlement in the Libor scandal. At least three other banks, Royal Bank of Scotland, Barclays and UBS, agreed earlier to pay a total of $2.6 billion to U.S., British and Swiss regulators to settle similar charges.
"So many people are jumping in on this action," said Bert Ely, a longtime Washington banking consultant. "Now the [NCUA] sees all of these other settlements and they want to jump in."
NCUA claims the banks colluded to give false interest-rate information through the Libor rate-setting process "to benefit their investments that were tied to Libor, to reduce their borrowing costs, to deceive the marketplace as to the true state of their creditworthiness, and to deprive investors of the interest rate payments to which they were entitled." The false information, according to the credit union regulator, created the impression the defendant banks were borrowing money at a lower interest rate than they were actually paying.
The defendants in the suit include: JP Morgan Chase, Credit Suisse, Rabobank, Barclays Bank, Lloyds Banking Group, UBS, Royal Bank of Scotland, HBOS, Bank of Tokyo-Mitsubishi, Royal Bank of Canada and Societe Generale.
The suit came the same day NCUA filed a new court action claiming many of the same banks sold faulty mortgage-backed securities to two of the failures, Southwest Corporate FCU and Members United Corporate FCU, the 13th such MBS suit filed by NCUA over the corporate failures.
NCUA said it is suing the banks to recoup the costs of the corporate bailout, projected to amount to $16 billion, all of which is being passed on as annual assessments to the nation's 6,800 credit unions. The other corporate failures were WesCorp FCU and Constitution Corporate FCU.
"We have a responsibility to pursue recoveries through every available avenue against those who caused billions of dollars in losses to credit unions," NCUA Chairman Debbie Matz said. "Some firms were manipulating international interest rates in a way that caused the five corporates to lose millions of dollars. Just as we are doing in our other suits, we are seeking to hold responsible parties accountable for their actions."
Libor is the average daily interest rate a group of leading financial institutions pay when they borrow from one another. The rate is set daily by the British Banking Association for 10 currencies around the world and affects interest rates on trillions of dollars of financial transactions of various kinds. Evidence has emerged to show some of the banks submitted phony rates to either benefit their own trading operations or to make their own balance sheets look better.
While regulators are collecting fines on the Libor scandal, a major impediment to the NCUA suit is the antitrust claim, which was rejected in a separate court and is now review by the Second Circuit Court of Appeals, according to one attorney involved in the case, who did not want to be identified because he was not authorized to speak by NCUA.
In that court the judge rejected the antitrust claim, ruling any financial harm suffered by private plaintiffs must be traceable to the negative effect on competition from the collusion. She concluded, the "injury would have resulted from defendants' misrepresentation, not from harm to competition," as an antitrust claimant would need to prove.
Another Big Question
Another big question, according to Ely, is who benefitted and how by the alleged manipulation of rates, since all of the banks trade, invest and lend on their own?
Though the NCUA Libor suit relates to investments purchased by the corporates as far back as 2007 and 2008, NCUA argues its claims are not time-barred by the three-year statute of limitations on securities suits because it could not have known about the Libor allegations until they were uncovered, which was the past two years. "NCUA did not discover and could not have discovered through the exercise of reasonable diligence that it was injured by Defendants' manipulation of Libor, much less who caused that injury, until at the very earliest March 15, 2011, when the government investigations of Defendants were revealed to the public for the first time," said NCUA in its suit.
"By its nature, Defendants' misconduct was self-concealing," says the suit. "First, Defendants' actual or realistic interest rates were not public information, making any comparison to the rates they reported to the BBA impossible."
"Second, Defendants' internal communications and communications among each other were not public information, rendering impossible any ascertainment of the specific misconduct of individual Defendants or the conspiracy," NCUA says.
"Third, the Defendants' trades on the exchanges or in the markets for Libor products were not public information, making it impossible to discern that they were using false LIBOR reports to cause artificial prices and engage in manipulative trading."
"As a result of the self-concealing nature of Defendants' collusive scheme, no reasonable person or investor would previously have discovered Defendants' conspiracy to manipulate Libor."