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Biggest Danger For Libor Banks? Rival Firms With Firepower

This article is more than 10 years old.

Here it goes. Lawsuits stemming from the Libor manipulation scandal are here, and it's not looking good for banks under investigation.

Today there's news that a small, New York bank with about $881 million in assets is going after the big banks that allegedly manipulated the Libor rate. Berkshire Bank filed a lawsuit in New York against 21 banks including Citi, Barclays and Bank of America claiming it is owed money as a result of the false rates.

Berkshire is a community bank with 11 branches scattered across New York and New Jersey and seeks to represent a class of New York financial institutions negatively affected by Libor misrepresentations.

Though small compared to the big banks it is going after Berkshire could represent a very big problem for the banks under investigation.

When Barclays paid $450 million to settle charges against that it submitted false Libor rates the bank was hoping the worst was over. Far from it though. The evidence against Barclays cost its CEO Robert Diamond and chairman Marcus Agius their jobs.

The other banks have yet to pay up but it's not the regulators nor lawmakers they should be worried about.

The trouble with the Libor scheme is that the rate is tied to hundreds of trillions of dollars of financial products and instruments. Investors of all sizes use the rate as a basis for a variety of financial products; homeowners mortgages, consumers’ credit cards and even city governments use derivatives contracts tied to Libor when issuing some bonds.

Some of those investors are other financial institutions that were receiving some form of payment from banks based on the Libor rate. If the rate was artificially low then the argument is that they are owed money--which is what Berkshire Bank is claiming.

For the big banks under investigation including JPMorgan, RBS, HSBC, UBS and others that's a problem because large financial institutions, unlike individual investors, have greater fire power when it comes to fighting legal battles.

Think about the recent mortgage repurchase drama between lenders and investors. Most notable Bank of America and a group of large institutions including Pimco and Blackrock. When the latter group first demanded that BofA repurchase faulty mortgage securities the bank's CEO Brian Moynihan refused and called their claims "utterly baseless."

That was in 2010. Last year BofA agreed to a massive $8.5 billion settlement with the group.

Large financial institutions have the money, time and expertise to fight these sorts of cases against other big firms. That's why we're likely to see a lengthy, expensive battle play out amid the Libor mess as large institutional investors like mutual fund companies are currently investigating how they were affected by the false rates. It's been reported that Blackrock is one of the firms that's launched an internal investigatios into whether their funds have been hurt by the rate-rigging.

If Berkshire Bank with its $800 or so million is ready to go after the Libor banks then its likely bigger firms with greater fire power will end up doing the same. Brace yourselves for a long, bumpy Libor-driven ride.