In the wake of the ongoing LIBOR scandal, corporations looking to fruitfully sue Barclays or any other bank on the basis of ill-gotten gain may find it hard to make a convincing case.
In the words of a knowledgeable treasury expert who spoke on condition of anonymity, “We have struggled to find who the net losers are, apart from the banks themselves, and maybe some hedge funds.”
Between 2007 and 2009, Barclays (and perhaps other banks) deliberately submitted low interbank interest-rate data to the British Bankers’ Assn. (BBA), which calculates the London interbank offered rate (LIBOR). For the following reasons, it is difficult to see how corporates could have suffered as a result.
• LIBOR is not used for wholesale deposit rates: the rate paid is negotiated directly with the bank or through a broker. The rate the bank agrees to will be a blended rate, taking into account several factors of which LIBOR may be just one. Any mispricing of LIBOR could not have had anything but a very negligible impact, if any, on the agreed deposit rate.
• Commercial-property mortgages tied to LIBOR would have been cheaper, not more expensive, as a result of the manipulation.
• Corporates that issued fixed-rate bonds and then swapped back into floating rates would have received “fixed” and paid “LIBOR,” which has been understated: again, that is to the benefit of the corporate.
• A corporate swapping “floating” for “fixed” debt would be paying floating rates on its borrowing, receiving floating on the swap, and then paying a fixed rate. It’s therefore both receiving and paying understated LIBOR-related rates: a net neutral.
“If you work through all these swaps, it’s very hard to figure out who is losing apart from the banks. You’ve really got to put your thinking cap on to think of a circumstance which might possibly give rise to a cost,” the treasury expert said. “If you were running a purely speculative swap portfolio, you might be able to construct something in which you lost out, but that’s not what corporates do. It might be what hedge funds do, however.”
In the period between approximately 2005 and 2008, Barclays was apparently manipulating its rate to suit its traders’ books and therefore moving it both up and down. When it was overstating rates, however, its LIBOR submissions were typically “kicked out” of the LIBOR calculations anyway.
That’s because the BBA typically excludes from the figuring the highest 25% and lowest 25% of the 16 submissions typically made during the period in question. If, however, the bank had submitted an accurate rate and then been, say, the fifth-highest submitter (and used in the calculation) rather than the third-highest (and excluded), the difference on the calculated LIBOR rate would have been, the treasury expert said, “equal to one-eighth of the difference between that rate and the one that was excluded.”
To give a measure of the scale, a mispricing of 5 basis points (0.05%) would amount to $50,000 per $100 million of capital issuance; 50 basis points (half a percentage point) would be worth $500,000 per $100 million of issuance.
The treasury expert’s views are broadly supported by those of law firm Eversheds, which said in a client note on pension funds that the firm expects “that UK pension funds are more likely to have been winners rather than losers” from the underpricing of LIBOR.
“The mass public outrage seems to be driven in part by a desire to bash the bankers,” the note said. “However, the first question for any pension fund needs to be more rational: ‘Am I a victim? Have I actually suffered any loss?’”
It explains: “Pension funds that have embarked on de-risking strategies through the use of inflation or interest-rate swap contracts will typically have committed to pay Libor — in return for receiving RPI [retail price index–linked] or a fixed percentage return. They will not have lost out, indeed they may well have gained from the alleged manipulation as it will have reduced the amounts they had to pay.”
Even if loss has been suffered, Eversheds says, “It will be necessary to await the outcome of the further ongoing investigations and the emergence of a fuller picture as to who exactly did what, when and for how long and to understand more fully what impact this had on Libor.”
Andrew Sawers is editor of CFO European Briefing, a CFO online publication.