Toxic Libor could be the new asbestos
IS LIBOR the new asbestos? It’s certainly an increasingly toxic affair for the banking sector and the alarming asbestos parallel was being drawn by some in the City of London this week as a High Court judge gave the go-ahead for the first British trial for damages as a result of the widespread rigging of the key interest rate.Since the scandal first erupted in the summer, there have been a number of legal moves against the banks involved, largely in the United States. This includes a lawsuit launched on behalf of American homeowners, who claim the knock-on effect of Libor-rigging was to push up their mortgage payments while traders at the banks “unjustly enriched themselves.” A number of those seeking compensation have had their homes repossessed.
In the UK, the action being brought against Barclays bank by a little-known care home operator is regarded as a landmark case that could open the floodgates for similar claims from thousands of other companies against Barclays and the rest of the banks involved.
This could be followed by a raft of claims from consumers who had mortgages and loans during the period of several years that Libor was routinely being rigged.
Based in Wolverhampton in the Midlands, Guardian Care Homes used Barclays’ services in 2007 to hedge its position on interest rates, buying two interest rate swaps from the bank, a deal it says cost it £12 million (€14.9 million). Its action, which Barclays maintains has no merit, claims the bank sold the swaps despite knowing that they were based on a false Libor rate.
In allowing the case to proceed to trial, Mr Justice Flaux had some harsh words for Barclays at the pre-trial hearing on Monday.
“Any senior management who gave the matter a moment’s thought would have concluded any customer would be entitled to expect that the rate had not been manipulated,” he said. In attempting to have the case dismissed, Barclays had argued that Guardian Care Homes entered into the swaps deals “with sufficient understanding to exercise their own judgment.”
Given that former Barclays boss Bob Diamond, who resigned over the scandal, claimed to have no knowledge of the widespread rate-rigging in his own bank, it would have been a big ask for a small Wolverhampton care homes operator to have had much of a clue about what was really going on in London trading rooms.
The case, which is likely to come to trial next autumn, raises the prospect of more embarrassing revelations for Barclays. It has already seen a number of damming emails released as part of the findings of the three-year investigation into the bank’s Libor dealings. These memorably included the “dude” email from an unnamed trader in another bank, thanking his Barclays counterpart for help in reducing the Libor rate: “Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger.”
In giving the go-ahead for the Guardian Care Homes case, the judge said that Barclays should hand over more of the documents it provided to the regulators, as well as naming the senior managers involved in the manipulation. That will cause more embarrassment for the bank, which mistakenly thought it was drawing a line under the affair when it became the first – and, as yet, only – bank to settle with the authorities, paying fines of £290 million (€360 million) to UK and US regulators in June. Other banks remain under investigation.
Barclays will be back in the spotlight today when it updates the market on third-quarter trading. It will be followed tomorrow by Lloyds Banking Group and on Friday by RBS. The stand-out feature of this reporting season is the mounting bill for the mis-selling of payment protection insurance. Last week Barclays set aside an extra £700 million (€868 million) to meet PPI claims, taking its bill to £2 billion (€2.5 billion). For Lloyds, the cost has been even more astronomic, at more than £4 billion, and is certain to rise further still.
The banking industry has set aside £10 million (€12.5 million) for PPI, a figure that could eventually double, according to some estimates. That’s a massive hit for the sector but would ultimately look like small change should Libor cases follow the same path as asbestos litigation.
As any lawyer will happily tell you, asbestos litigation is the largest and most expensive mass tort in US legal history. Cases have been going through the courts for four decades now and total costs in the US alone have been estimated at more than $200 billion (€154 billion).
Fiona Walsh writes for the Guardian newspaper in London