San Mateo County and several other public agencies across California including some in the east Bay Area, filed suit Wednesday in federal court claiming they were cheated out of income by banks that manipulated a global benchmark interest rate known as LIBOR.
All of the plaintiff public entities are represented by Cotchett, Pitre & McCarthy, LLP, and the defendants in each lawsuit are 20 current and former financial institutions that set LIBOR, including Barclays, UBS, Bank of America, JP Morgan, and Citigroup.
LIBOR, or the "London Interbank Offered Rate," is the world’s benchmark interest rate used for setting short-term interest rates on a wide range of financial instruments – from simple car loans to complex municipal derivative investments by public entities. LIBOR-based investments are in the trillions of dollars every year.
LIBOR is set every day by the British Bankers’ Association (BBA), based on an average of the interest rates that each LIBOR member bank reports it could borrow money from the other LIBOR member banks with. LIBOR is accepted by the global financial system as the true cost of borrowing between financial institutions because it was believed to represent the true interest rate at which borrowers are able to borrow money.
In a statement sent out Wednesday evening, the County said the LIBOR member bank’s reported interbank borrowing rate is not based on an actual interest rate, but is a "self-certified" rate that a LIBOR member bank believes it might pay to borrow funds from a fellow member bank.
Until recently, a LIBOR member bank’s reported interbank borrowing rate was believed to be a reflection of its credit worthiness. If a bank could borrow money at a lower rate, it was believed to be more credit worthy. According to the lawsuits, "this self-certified market proved too tempting to the LIBOR member banks for manipulation."
In March of 2011, government regulators in the United States, United Kingdom, Switzerland and Japan announced they had launched investigations of LIBOR rate manipulation affecting global financial markets. LIBOR member banks were under scrutiny for manipulating LIBOR upward to increase their own profits, and for manipulating LIBOR downward to report suppressed borrowing rates to create the illusion of financial strength.
In July of 2012, Barclays admitted manipulating LIBOR with other member banks, and in December of 2012, UBS agreed to pay a penalty of more than $1.5 billion.
At the same time, a former UBS trader and two brokers were arrested in London in connection with the investigation, and criminal charges were brought in New York Federal Court against two former UBS traders.
As a result of the LIBOR manipulation, San Mateo County said it is suspected that many California public entities and other investors have received reduced interest payments on interest rate swaps, corporate bonds and other investments that were tied to LIBOR as a benchmark interest rate.
John C. Beiers, County Counsel for San Mateo County, said in the statement Wednesday, "LIBOR was manipulated on a global scale, and it’s a sad fact that the rigging of LIBOR is just another outrageous example of how self-regulated financial markets take advantage of average hardworking people and Main Street public entities."
"As with previous improper financial manipulations and activities by large banks and financial institutions, when there is evidence that San Mateo County has been negatively impacted by such activities and manipulations, San Mateo County and its Board of Supervisors is quick, and usually one of the first, to seek recovery of the financial benefits that have been denied the citizens of the County," he continued.
San Mateo County Supervisor Don Horsley said, "It’s the local taxpayers and those that need services such as healthcare that suffer when these global institutions think only about their bottom line, and nothing about who they might harm. We are going to aggressively pursue this lawsuit and others to ensure that these faceless and heartless institutions do not benefit at the expense of those in need."