Barclays could become the first bank to be sued for manipulating the Libor (London interbank offered rate) interest rate after a High Court judge cleared the way for legal action. Guardian Care Homes is suing the bank for £38m.
It claims it was mis-sold two products by Barclays – known as interest rate swaps – to protect it from rising interest rates. The price of the products was based on Libor. Guardian is claiming Barclays’ manipulation of Libor unfairly increased its costs.
Despite Barclays’ best efforts to get the case thrown out, it will be heard next year. If Barclays loses it could open the floodgates to more lawsuits across the globe. The size of potential claims against the banks could be huge. This is because Libor is used as the key reference rate for the pricing of derivatives contracts estimated to be worth over $300trn.
What the commentators said
Shawn Baldwin in Forbes reckons that litigation over Libor will drive down the profits of banks for years to come. He says: “We could be seeing the nascent stages of a series of lawsuits that may someday rival the most expensive and longest-running set of cases in history: asbestos litigation.”
Larry Elliott writing in The Guardian reckons 18th-century economist Adam Smith would have been the perfect eye witness in any upcoming trial. In 1776 Smith said “People of the same trade seldom meet together even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
But Barclays isn’t just in the dock for alleged Libor fixing. Its power trading business is now being investigated in the US as is its compliance with the US Foreign Corrupt Practices Act.
Meanwhile it, along with many other banks, still has to deal with the fact that revenues at its investment banking business are slowing down – the latest earnings figures fell short of forecasts – while its costs are too high. Given the mounting risk of lawsuits, regulatory probes and uncertainty over future revenue, we’d avoid the shares of Barclays and other UK banks.