On Monday, Manhattan federal judge Naomi Reice Buchwald opened her courtroom doors to 18 class actions from around the country that allege international banks artificially depressed a critical lending rate in the teeth of the economic crisis. The judicial panel on multidistrict litigation ordered the cases consolidated before Judge Buchwald on Friday, agreeing with the bank defendants and one group of plaintiffs lawyers that the cases should be litigated in New York. The MDL panel’s decision rejected arguments by other plaintiffs lawyers who called for the litigation to be based in Chicago, New Jersey, and (improbably) Minnesota. It also sets up a fight for control of litigation that could be worth billions, although we’re a long, long way from there.
The class actions, which claim damages under federal antitrust laws and the Commodities Exchange Act, involve the London Interbank Offered Rate, which is often used as an alternative to the U.S. prime rate to peg adjustable interest rates. The U.S. dollar LIBOR is set by the private British Bankers Association, in a self-reporting process. Every workday, 16 international banks inform the BBA of the interest rate at which they can borrow U.S. dollars. The top four and bottom four reported rates are discarded and the other eight are averaged to produce the daily LIBOR. (The BBA recently increased the number of reporting banks from 16 to 20, but the allegations in the litigation predate that change.)
The relative value of LIBOR-indexed financial instruments-from simple loans to the most arcane Eurodollar futures contracts, derivates, and swaps-can change quite dramatically based on where the rate is pegged. Trillions of dollars in financial instruments are LIBOR-indexed, so the potential damages, if what the plaintiffs lawyers claim is true, could be eye-goggling indeed.
There are two different sorts of allegations in the class actions that have been filed so far. One is that as the world economy began to wobble in 2007, banks were afraid to admit that it was costing them more to borrow dollars in London. Banks were worried that they’d appear to be in trouble, this theory goes, so they lied to the BBA about the interest rates they were being charged. The more sinister (and less plausible) theory is that a group of banks conspired to depress the LIBOR in order to profit from trading in derivatives and swaps that were affected by the artificially low index rate.