See that swirl on the weather map? Looks like a cat 5 hurricane headed for landfall on the big banks

In ‘Blood in the water’, The Economist describes the swelling number of lawsuits against the big banks who are accused of manipulating LIBOR.

From the article:

So far, at least 28 serious lawsuits have been filed. The most recent, for fraud, came from Berkshire Bank, a small lender, on July 25th. It echoes a case filed in May by Wisconsin’s Community Bank & Trust under Wisconsin racketeering statutes against Citigroup, Bank of America, and JPMorgan Chase (the American banks on the LIBOR panel).

That would be 28 suits since the issue exploded about a month ago.

The claims, as I mentioned in my earlier post, are that the banks suffered because of lost interest income on their loans. They had loans which were indexed to LIBOR. Thus, if the rate was artificially held low, then they didn’t charge enough interest to their customers.

I’m guessing there will be a huge volume of lawsuits over the next few years.

Not that it’s going to be easy for the small banks.

Moreover, it will not be easy to establish what harm has been done. That will require determining what the rate should have been for each trading day, minus any potential benefit. Working this out will be mind-wrenchingly complex for many.

Another complication – even if an academician or statistician can establish a persuasive argument, the legal team needs to persuade a jury. Remember the old line that when you go to court, it’s as if your case will be decided by the next 12 people through the fast food drive-in window.  That will be a major challenge in the LIBOR suits.

On the other hand, if I were working at one of the big banks, don’t think I’d take too much comfort from the difficulty of proving the case.  If one or two small banks prevail, all the others will duplicate their arguments.

If multiple banks have to settle charges against them by their regulators, that will likely make it a bit easier for the small banks to win.

Looks like a hurricane over the horizon.