LIBOR scandal – what companies need to do now?

$22BN! According to Morgan Stanley twelve global banks could face this much in combined regulatory penalties and damages to investors and counterparties.

The misreporting of LIBOR rates has probably gone on since 1986, the year it was introduced, according to sources in the city. Companies and traders will have won and lost as a result of its manipulation. All that has emerged to date is the fact that LIBOR was manipulated rather than the specific details.

LIBOR was a flawed concept from the outset because it assumed unlimited interbank liquidity. Since the credit crunch many banks have had difficulty accessing interbank funds. With the benefit of hindsight LIBOR (and other benchmarks including EURIBOR and Prime) should have been replaced a long time ago.

The full extent of the manipulation and its effect on the fixing of the LIBOR rates is very difficult to quantify. However, it is likely that more specific details will emerge when other banks (to date Barclays are the only ones to put their hands up) are forced to ‘come clean’. It will then become possible to estimate the losses suffered by corporate clients of these banks.

Companies need to start using modelling tools to interrogate their exposures to historical LIBOR rates and the impact of changes to the cost of/revenue from financial instruments. Investigations by various agencies will surely reveal which banks and on what dates the rates were manipulated and by how much this influenced the level at which LIBOR was set. This is imperative in order to bring this debacle to a satisfactory conclusion.

We then move on to other benchmarks like EURIBOR and Prime. If your company has any financial instruments which are priced off these types of benchmarks you should start digging into your treasury archives now and be prepared.

The salient factors to be considered in a claim will be:

  1. Effect on daily LIBOR rates of manipulation
  2. Time period of financial instrument
  3. Mitigation of losses when netted against gains from other financial instruments
  4. Extent to which damages can be related back to a specific bank
  5. Overall acquiescence of Central Banks/Regulators
  6. Possible claims by banks against other corporates who actually gained

This story has much more to run!