US bank bosses set for tough Libor questions

This week's earnings reports to put American managers in the dock
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The Independent Online

American bank bosses are set to be questioned on what they knew about Libor rate-rigging and how much the scandal could cost their institutions.

Analysts and investors in Libor panel banks Citigroup and Bank of America get their first chance to quiz management since the £291m Barclays settlement when they report earnings this week. The results come after a new estimate that says banks could end up paying $14bn in regulatory fines and legal settlements.

The whole affair took further twists late last week when it turned out that US Treasury Secretary Timothy Geithner wrote to Bank of England Governor Sir Mervyn King warning that there might be "deliberate misreporting" of Libor. Mr Geithner was Sir Mervyn's counterpart of the New York Federal Reserve bank.

Sir Mervyn faces the Treasury Select Committee on Tuesday, where he might also be asked what he knew about suggestions in 2007 that Lloyds Banking Group's Libor submissions appeared artificially low. Such actions can distort market lending rates.

The risks are rising for other banks that have not yet settled the multiple criminal and regulatory investigations into Libor around the world, according to Glen Schorr, banking sector analyst at Nomura. In response to JPMorgan Chase's results last Friday, Mr Schorr expressed surprise that the bank had not increased its legal fighting fund. "We note that the second quarter results did not include any litigation reserve builds, which we expect to increase given the potential risks of the scandal," he said.

JPMorgan Chase, Citigroup and BofA are the three US banks on the panel that submits estimates of their borrowing costs for inclusion in the daily Libor averages, which underpin trillions of dollars of derivatives contracts and affect interest rates for everyone from mortgage and credit card holders to small businesses. Mr Schorr predicted it could be several years before the full cost of the scandal is known, because as well as regulatory investigations there are also multiple lawsuits in the US from investors alleging they lost money on derivatives because of the manipulation.

Morgan Stanley estimated on Friday that between them, the 11 largest banks which contribute Libor submissions could have to pay out $14bn, knocking between 2 per cent and 33 per cent from Citigroup's and BofA's earnings per share this year. Citigroup is due to report its second quarter results early tomorrow, with BofA following on Wednesday.

The question of how much regulators knew about Libor manipulation during the credit crisis in 2007 and 2008 could be raised, too, by politicians when Ben Bernanke, chairman of the Federal Reserve, gives his semi-annual testimony to Congress on Tuesday and Wednesday.