08/27/2012 11:46 am ET Updated Aug 27, 2012

Libor Scandal's Potential Costs Exploding To $88 Billion Or More

Funny thing about the Libor scandal: Even when there doesn't seem to be a lot going on, the cost to banks just keeps on rising.

The latest estimates are found in a Wall Street Journal piece published Monday on all the lawyers piling up like brains-hungry zombies to file lawsuits against banks accused of manipulating Libor. The plaintiffs include small banks, like Berkshire Bank of New York, that claim they missed out on some sweet lending cash because rates were manipulated too low. They include state and local governments and other municipalities that say they lost money on interest-rate swaps because of Libor rigging. They include hedge funds and other investors who claim they were duped in trades with Libor manipulators.

The high-end estimate of the potential cost to the 16 banks being investigated in the Libor probe has risen to $176 billion, the WSJ writes, citing a July report by Australian firm Macquarie Research. Actually, the report (via zerohedge) suggested the banks might end up paying $88 billion in fines and settlements as a result of $176 billion in investor losses, but who's counting? Other estimates are a lot lower, including a Keefe, Bruyette & Woods estimate of $35 billion last month and a Morgan Stanley estimate of less than $8 billion.

I am no expert on the law, or anything else, but I will take the over on this bet. And it will probably take much higher numbers to get the attention of the banks, which have $35 billion rattling around in that drawer in the kitchen full of dead batteries and rubber bands.

Some of these estimates of legal liabilities are entirely separate from the regulatory fines, which will almost certainly also total in the billions -- though for individual banks, they will be the equivalent of slaps on the wrist. The next big event in the scandal could be a settlement by the Royal Bank of Scotland. That bank's involvement in messing around with Libor could be even bigger than that of Barclays, one British member of Parliament said last week.

Barclays kicked off the Libor scandal proper by agreeing to pay $450 million to settle charges it was stone-cold manipulating Libor higher and lower, day and night, for years. It's wild to think that another bank might have been screwing Libor harder than Barclays, but there's an ex-RBS trader suing the bank for wrongful termination, who claims it was bank policy that "anyone can change Libor," apparently inspired by the old Radiohead song "Anyone Can Play Guitar."

And that's not to mention Citigroup, which according to one report was the biggest Libor manipulator of all during the financial crisis.

The Libor scandal, and its costs, have only just begun.



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