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Banks face lawsuits worth billions over Libor scam

  • @cahalan

The interest-rate fixing scandal could leave British banks exposed to multi-billion-pound civil actions, experts have warned.

City insiders have raised the prospect of "BP-style" mass litigation against Barclays and other banks implicated in the Libor scam. BP was forced to set aside $20bn (£12.6bn) to just to cover civil compensation claims resulting from the 2010 Gulf of Mexico oil disaster, and still faces a raft of civil litigation.

Some lawsuits have already started in the US, including one filed by US broker Charles Schwab against a number of banks including Barclays, HSBC, Lloyds and RBS.

Fears that Britain's leading banks will face a wave of costly actions were highlighted in a memo from analysts at investment bank Morgan Stanley (MS) following a meeting with Barclays' embattled chief executive Bob Diamond on Thursday. The memo said: "[We believe] shares will continue to drift lower until we have much greater certainty on the following: litigation risk (taking BP as a case in point), political and regulatory backlash [and] management's accountability."

The oil disaster, which became the largest accidental marine oil spill in the history of the petroleum industry, may end up costing BP an estimated £24bn, including fines. It is believed the final Libor (London Inter-Bank Lending Rate) scandal bill could also run into several billions.

This is because banks may choose to settle claims early as the burden of proof in civil claims is much lower than those in criminal cases – in the UK on the balance of probabilities rather than beyond reasonable doubt – making a prosecution more likely.

Key to whether those claims are successful could hinge on whether any claimant can prove they were directly affected by the manipulation.

"Civil claims would be difficult unless you establish the manipulation of the Libor was effective. The Financial Services Authority (FSA) has stopped short of saying so, it is not a straightforward issue. The FSA might have more luck with criminal investigations where you do not necessarily have to establish cause," a senior political source said. "But if it were established to a high degree that manipulation was effective it would open the gate for very large civil claims."

Regardless, lawsuits will now inevitably follow from investors who believe they have lost out because of banks' manipulation of Libor, include individual shareholders or institutional investors which look after pensions for example. Banks are now likely to set aside funds to cover possible damages awarded as a result of such lawsuits – much as they have done for the PPI mis-selling.

And yesterday, the Independent on Sunday revealed that court documents filed in the US in April accused Bank of England (BoE) officials of failing to act on questions surrounding the "integrity of Libor", which were raised during meetings of the BoE's Money Markets Liaison Group as early as 2007. One meeting was chaired by the BoE deputy governor, Paul Tucker, and attended by officials from institutions including at least seven that have since been named in Libor investigations.

The British Bankers Association – which sets the interbank Libor rate – assured group members of its "quality control measures", and said that "they speak to contributing banks regularly". But a decision not to investigate further effectively enabled British bankers to go unchecked for more than a year.

The FSA joined the investigation into Libor manipulation in October 2009, after other countries had already launched their own inquiries.

It is believed 16 banks in addition to Barclays are being investigated by the Department of Justice. Inquiries into alleged market manipulation are being carried out in the UK, the US, Japan, Canada, the European Union and Singapore and involve nine government agencies.

It is believed the Department of Justice is investigating 16 banks in addition to Barclays