Speculation on LIBOR fines and lawsuit costs: lots of opinions, not a lot of facts

We are already into the next phase of the LIBOR scandal: how much will it cost the banks? Boy that was fast. Numbers are divided up into two broad categories: fines imposed by regulators and legal action taken by injured parties. The figures are all over the place.

We know that Barclays has been fined by the UK’s FSA (£59.5 mm), the US Department of Justice ($160 mm) & CFTC ($200 mm) already. We suppose that other regulators may also extract some cash from Barclays too. How much will the other banks be fined? It’s really anyone’s guess, but back of the envelope it is not hard to get to the tens of billions.

The real hurt will be the lawsuits. A good article to read is www.marketplace.org “LIBOR Pains: How Much Will the LIBOR Scandal Cost US Banks? $35 Billion” by Heidi N. Moore. The author looks at a research piece from Keefe Bruyette & Woods which pegs the damages at a low’ish $35 billion. Not that $35 billion isn’t a sincere amount of money; its just that other estimates are in the hundreds of billions. In Fed Chair Bernanke’s appearance before Congress the topic came up. Senator Herb Kohl, (D-Wisconsin) made an analogy to the $246 billion tobacco settlement, opening up the floodgates for some very high and potentially crippling numbers.

How did KBW get to $35 billion? The article said “…KBW assumed that U.S. banks pushed down LIBOR by .20%, or 20 basis points, on each derivatives contract for four years. KBW assumed the banks did that 25% of the time. Then KBW figured the banks would have to pay only 10% of the perceived “damages” from all this rate-rigging, and came up with a total settlement amount of $34.9 billion…” The KBW piece only included Citi, JPM, BofA, and RBC.

The point is that we’ve entered into the uncertainty phase, where every opinion sounds as good as the next and no one knows which is the most likely path. There will be lots of analysis – which are really just highly educated guesses given the amount of information we all have – that will make great sound bites. If repeated often enough, these sound bites may be confused for facts, especially by politicans. Don’t get us wrong: there is little doubt that there was manipulation and even fewer excuses for it. Exactly who was damaged and who benefited is still being worked out. Don’t hold your breath.

 A link to the www.marketplace.org article is here.

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