Barclays Plc investors, blindsided by the bank's $451.4 million regulatory fine for trying to rig benchmark rates, saw the stock drop 16 per cent a day later. Other bank shareholders may be just as surprised.
Barclays, like other lenders that help set key rates for $360 trillion in securities, has given investors scant guidance on the liability they face for alleged market manipulation. More than a dozen banks are being probed by US, Asian and European regulators for collusion in setting interbank lending rates. The others have mirrored Barclays on minimal disclosure.
“The automatic reaction from investors is: ‘Who’s next?’” said Todd Hagerman, a New York-based analyst at Sterne Agee & Leach. who recommends investors remain “cautious” on the biggest US banks. “It's fair to assume that legal and related professional fees and associated reserves are going to continue to remain elevated, if not increase.”
Bank of America Corp, Citigroup, Royal Bank of Scotland Group Plc and UBS AG are among the lenders whose participation in setting the London and Europe interbank offered rates, known as Libor and Euribor, are under investigation. None of the banks would say if they set aside reserves to cope with potential liabilities and, if so, how much.“I believe that Barclays had previously reserved for only about one-third of their ultimate liability" in regulatory fines, Charles Peabody, a banking analyst at New York-based Portales Partners LLC, said in an email. Other banks' reserves "will probably prove inadequate."
Barclays's fines were the first in a two-year, inter- continental investigation into manipulation of Libor and Euribor, benchmarks used globally for setting borrowing rates. Among the 18 lenders on the US dollar panel are the three biggest American banks, JPMorgan Chase & Co, Bank of America and Citigroup, as well as Barclays and Zurich-based UBS. The 16- member British pound panel includes Barclays, UBS, JPMorgan and Frankfurt-based Deutsche Bank AG.
"The two-year investigation into banks rigging Libor, which has taken a toll on Barclays, has the potential to hurt Citigroup, JPMorgan and Bank of America," Mike Mayo, an analyst at CLSA Ltd. in New York, wrote in a July 2 research note. The banks face risks of fines, lawsuits, negative news and new regulations, according to Mayo.
"While there is no evidence that the three US money- center banks did anything wrong, there is a heightened possibility of scrutiny after recent events at Barclays," Mayo said.
Barclays shareholders were notified of the Libor probe, while getting little information on how much money was set aside for potential fines and legal costs. First-quarter operating expenses for the firm's investment bank rose four per cent to £2.14 billion, reflecting a 115 million-pound increase in provisions for legal and regulatory costs, partly offset by non-performance cost savings, the bank said in an April regulatory filing. The company didn't specify whether any of the increase was due to Libor-related provisions.
The regulatory fine is just the beginning for London-based Barclays, which is a defendant in some of the 24 interrelated Libor lawsuits that have been aggregated before US District Judge Naomi Reice Buchwald in Manhattan federal court.
"The global quantity of claims against Barclays as a result of it having manipulated Libor, it could stretch from the hundreds of millions into the billions," said Robert Hickmott, an attorney with Los Angeles-based Quinn Emanuel Urquhart & Sullivan LLP. He said litigation in London may follow soon.
US liabilities may be higher because American plaintiffs are allowed to ask for punitive damages for bad conduct, while the British are limited to compensatory awards, Hickmott said.
Criminal liability could be added to those regulatory fines and civil lawsuits. The UK Serious Fraud Office said July 2 that it would decide within a month whether to open a criminal investigation into Libor-fixing. The US Justice Department already is conducting a criminal probe into the attempted manipulation of interbank-offered rates.
Barclays, in its accord with US authorities, agreed to cooperate with the joint British-American investigation in exchange for a two-year non-prosecution agreement.
"Barclays's cooperation has been extensive, in terms of the quality and type of information and assistance provided, and has been of substantial value in furthering the department's ongoing criminal investigation," the Justice Department said in a statement last week.
"Specific disclosure on litigation reserves for any Libor suit settlements is completely lacking in any regulatory filings," Portales's Peabody said, referring to all banks. "My guess is that litigation reserves for civil suits from municipalities, class action suits, etc. are non-existent."
Lawsuits could be filed "by anyone stuck on the wrong side of these transactions," said Anthony Maton, an attorney at Washington-based Hausfeld LLP, which is representing claimants in the New York litigation and working on a British case to be filed later this year. "Large corporate local authorities, other banks and financial institutions on the wrong side of the trades, pension funds, a very large variety of people that have been affected by this."
The US Commodity Futures Trading Commission, one of the agencies investigating the Libor manipulation, said last week that Barclays employees tried to manipulate Libor and Euribor by making false interest-rate reports to increase derivatives- trading profits and to decrease losses from 2005 to 2009.