Global banks urge US judge not to terminate Libor amid price-fixing suit
Abruptly ending the interbank offered rate would wreak havoc on financial markets, defendants say
Some of the world’s biggest banks are urging a US judge not to terminate Libor immediately after a group of borrowers filed suit claiming the benchmark was the work of a “price-fixing cartel”.
Defendants, including JPMorgan Chase & Co, Credit Suisse Group and Deutsche Bank, said in a November filing that an injunction abruptly ending the London interbank offered rate would wreak havoc on financial markets and undermine years of work reforming the reference rate. The plaintiffs, which include 27 consumer borrowers and credit card users, are also seeking monetary damages.
Attorneys not involved in the case say the chances of an injunction are slim. Yet it underscores the risks and legal costs for banks that continue to prop up Libor, which still underpins hundreds of trillions of dollars of financial assets worldwide. It also highlights the fragility of the discredited benchmark, which in theory could be halted by a single court decision.
“You have to take it seriously because it would be a catastrophe if it was granted,” said Anne Beaumont, a partner at law firm Friedman Kaplan Seiler & Adelman. “They’re likely going to continue to get sued like this as long as it’s there.”
A San Francisco judge has said he will render a decision on the injunction without a hearing. The judge is scheduled for Thursday to hear a request by the banks to transfer the case to a Manhattan federal court.
Libor is derived from a daily survey of bankers who estimate how much they would charge each other to borrow. It’s used to help determine the cost of borrowing worldwide, from student loans and mortgages to interest-rate swaps and collateralised loan obligations.
After the 2008 financial crisis, regulators discovered that lenders had been manipulating the rates to their advantage, resulting in billions of dollars of fines.
For more than three years, policymakers globally have been developing new benchmarks to replace Libor by end-2021. In November, officials proposed an extension for some dollar Libor tenors until mid-2023, to help firms cope with the transition process.
If the benchmark were to be immediately switched off, many derivatives contracts already contain contractual fallback language that would enable them to transition to an alternative rate, according to Y Daphne Coelho-Adam, a counsel at Seward & Kissel who is not involved in the case. But hundreds of billions of dollars of bonds, loans and securitizations lack a clear replacement rate and could pose a threat to financial stability.
Defendants in the case also include UBS Group, Citigroup, HSBC Holdings and ICE Benchmark Administration, which oversees the rate.
“It must be stopped one way or another or neutralised because it’s an illegal price-fixing agreement,” Joseph Alioto, an attorney at Alioto Law Firm representing the plaintiffs, said in an interview. Banks argue “that the sky is falling and all kinds of economic havoc will take place. In the US that doesn’t matter,” he said. “If you’re fixing prices you can’t do it, regardless of the consequences or the business excuse.”
The plaintiffs want Libor to be either prohibited or set at zero with borrowers repaying capital but not interest.
The banks said in a filing that the plaintiffs had not shown they ever paid interest based on Libor; the suit was built on “baseless theories of antitrust liability”. Regulators have warned that even a temporary disturbance of Libor could devastate financial markets, the banks’ attorneys said.
“Plaintiffs allege that the highly regulated process of setting a benchmark that is a fundamental part of the global economy is a per se antitrust violation,” the banks said. “But legitimate co-operative activities, even those involving competitors, often benefit competition.”
Organisations including the International Swaps and Derivatives Association and the US Chamber of Commerce are supporting the banks. In a separate filing, they argue that without mechanisms to determine future borrowing costs, parties would spend “substantial resources” negotiating price schedules, and could be forced to use fixed rates.
Attorneys for the banks did not respond to e-mailed requests for comment.
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