Countless municipalities, pension funds and hedge funds are conducting inquiries into losses and preparing lawsuits and financial bloggers are condemning the apparent fraud committed by bank employees, but one group can't seem to summon up much outrage over the Libor scandal: the companies whose funding costs are linked to the benchmark.
The Association of Financial Professionals, a trade organization with roughly 16,000 members, largely corporate CFOs and treasurers, says its phone lines have not been flooded with calls from angry members, and the reason is simple: They may actually have benefitted when traders from Barclays and other banks accused of manipulating Libor between 2005 and 2009 set the rate at artificially low levels.
Keeping Libor artificially low was undoubtedly harmful to investors whose interest payments were linked to the benchmark. It was especially harmful to some investors and to some issuers, notably U.S. municipalities, involved in the interest-rate swaps market. But for corporate borrowers whose debt payments are based on Libor, well, it was actually kind of good.
"As a borrower, I would prefer, philosophically, a clean index because I will benefit in the long run. Once you open it up for manipulation it can go the other way," said Brian Kalish, director of finance practice at the AFP. "And yes, it looks like there was a fraud committed, and that's illegal. We're not trying to be flippant — no, people should not be lying. But if [the traders] were setting too low a level, for most borrowers, they're okay with that."
The London Interbank Offer Rate, a measure of how much banks must pay to borrow money from one another in the short term, is set through a daily poll of banks, which report their borrowing costs to the British Bankers Association. The BBA then compiles the information to publish benchmark borrowing rates for a range of currencies, including U.S. dollars, euros, U.K. pounds and yen.
All said, trillions of dollars' worth of financial instruments globally, from leveraged loans to mortgages to municipal bonds and derivatives contracts, are pegged to the benchmark.
"The reason Libor got so big is because people liked it," Kalish said.
"We're not hearing from our folks; they're not pounding on the table looking for a new index to base their floaters on," partly because they don't really see a viable alternative.
"People really don't like [credit default swap] spreads," he said. "They're more comfortable with Libor because of the manipulation that can exist with CDS. You can create a CDS when there's no public debt, you can get people betting against me. Libor is certainly not a function of me as an individual company. Maybe it's not as true an indication of what the banks' cost of funds were as we thought, but it doesn't seem as dangerous as something like CDS spreads. It's more of a true interest rate indicator than anything else."
Regulators in the U.S. and U.K. are now investigating the 16 banks that determine Libor, including Bank of America Merrill Lynch, JPMorgan Chase, Citibank and Deutsche Bank; the City of Baltimore has been leading a battle in Manhattan federal court against the banks; and now states and municipal agencies nationwide, including Massachusetts, Nassau County on Long Island, and California's public pension system, are calculating losses and weighing legal action.
The complaints being voiced by municipalities, many of which have been particularly hard hit by the recession, are mostly related to their use of interest-rate swaps. States and cities generally enter into these swaps because they issue floating rate debt but don't want to worry about fluctuations in the cost of servicing this debt. So they agree to pay banks a fixed rate and receive a floating rate payment in return that is pegged to Libor. If Libor is artificially low, the municipality is stuck paying the same fixed rate, but it receives a smaller variable payment from its bank.
Dozens of lawsuits filed by cities, pension funds and hedge funds have been consolidated into a few related cases against the banks. Last month, Barclays admitted to regulators that it tried to manipulate the benchmark and paid $450 million to settle the charges. It said other banks were doing the same, but so far none of them have been accused of wrongdoing.
