Banks have won a major legal battle against Libor lawsuits, though the war is far from over.
Late on Friday, a federal judge dismissed Libor lawsuits against 16 banks, including JPMorgan Chase and Bank of America, partly because the plaintiffs couldn't jump through all of the necessary hoops to show how they had been harmed by violations of U.S. antitrust laws.
At first glance, this harkens back to the earliest days of the Libor scandal, way back in 2012, when bank defenders said, sure, OK, maybe banks were straight-up manipulating this key interest rate, which affects everything from municipal borrowing costs to trillions of dollars in derivatives. But so what? Who was harmed by such a thing, and how?
The answer is that a lot of different people, both humans and corporate people, were harmed, including those municipal borrowers and counterparties in derivatives trades, to name just a few. But figuring out how much these people were harmed always threatened to be a little tricky. Libor rates of different durations were generated every day, affecting investors and borrowers all over the world a little bit at a time. Adding all of that up would seem to be a nightmare.
That is one reason why the estimates of how much banks were going to end up paying in Libor lawsuits have ranged from $176 billion on the high end to $7.8 billion on the low end, an uncertainty gap wide enough to raise a large extended family in, with room to spare.
Having a federal judge toss out more than two dozen Libor cases at once lowers the odds that the banks will have to pay close to the high end of those estimates. Reuters writes:
While the door was left open for private litigants to refile lawsuits, Buchwald's decision may make it more likely that banks will talk settlement with a significant win in their pocket. The decision also could cast doubt on some of the highest analyst projections about potential Libor damages, and quell some concerns that the banks have not reserved enough for litigation expenses.
In the cases just dismissed, the plaintiffs included a bunch of big institutional bond investors, including pension funds and money managers like Charles Schwab. Many of them argue they were cheated out of some bond income because Libor rates were set too low during the crisis. Barclays, UBS and Royal Bank of Scotland -- among the many defendants in these lawsuits -- have already paid more than $2.5 billion collectively to settle charges that they were manipulating rates, including setting them too low during the crisis, and many more such settlements are on the way.
So what's the problem? It sounds like the judge saw a bunch of technical issues, including a lack of standing to sue the banks either under antitrust laws or the Racketeer Influenced and Corrupt Organizations statutes, which are typically used against the mob.
The judge let some claims under different laws proceed, however. Lawsuits by derivatives traders are going forward. As the New York Times' Peter Henning points out, this setback does not affect Freddie Mac's recent lawsuit against the banks over Libor. And this judge's ruling might still be overturned on appeal.
The judge also pointed out that recent regulatory settlements by Barclays and other banks had brought new evidence to light, including embarrassing emails that show traders asking each other to manipulate rates. Plaintiffs' lawyers could find ways to use that evidence to build better lawsuits and try again.
Regulators, who have a lot more leverage over banks than civil plaintiffs, will keep extracting cash in settlements as the months go forward. But if Libor victims can't make the banks pay more in court, then this whole Libor scandal may well end up being more like the Grenada invasion than World War III.