It's likely that Royal Bank of Scotland will this week become the third bank to pay a substantial fine to settle charges that its traders tried to manipulate Libor interest rates. More will follow. The problem for the banks and for their investors is that dealing with the regulators is only the start of it.
Libor is used to price all sorts of financial contracts, from interest rate swaps to some mortgages. Anyone with a Libor-related contract, or one linked to one or more of its sisters, could have grounds to seek compensation if they can prove they were disadvantaged by the traders' shenanigans. Those people range from small borrowers, fighting on a no-win no-fee basis, to big hedge funds able to afford skilled and very expensive legal help.
It's a potential car crash, and has even been described as the banks' "tobacco moment". That's a reference to the string of lawsuits tobacco companies fought successfully, until the dam burst.
What should investors do? I talked to all four banks, as well as analysts, and lawyers. Let's start with the banks. None has yet made any provisions against the potential cost of Libor-related lawsuits. This is the response I got from Lloyds: "We have not taken any provision as it's just not possible at the moment to predict the scope and outcome of the various regulatory investigations or private lawsuits that are out there. That's both in terms of timing or scale."
RBS, Barclays, and HSBC are taking a broadly similar stance. Lloyds and HSBC may not be in it quite as deeply as RBS and Barclays.
How about the legal angle? Rich Eldridge, a finance partner at Manches, was kind enough to help. Here's what he had to say: "To be successful borrowers will have to show the basis on which they were led to believe Libor would be calculated was false and this was material. No one knows how likely the claims are to succeed, but judges will know successful claims could potentially bankrupt state-owned banks and hit pension funds."
So when it comes to provisions: "I doubt anyone knows the cost to the banks if the courts decide to award compensation for Libor fixing. Firstly, banks will need to repay customers who were overcharged. Secondly, judges may cancel interest rate swap contracts based on Libor and banks may be forced to compensate hedge funds who bought a bank's side of swap transactions. Investors in bank shares will no doubt be wary with no published figure of the potential exposure. A concern for a lot of people is bank shares can form a sizeable proportion of investments by pension funds."
In other words: this potential car crash could actually close off half the motorway.
How does the market feel about this? Ian Gordon is one of the more independent minded and thoughtful analysts. He says almost no one has this issue "front of mind".
"Two reasons for that. One, the market has increasingly convinced itself that the burden of proof is very high. So other than the potential for a "grand settlement" the potential for an individual bank suffering a multi-billion hit feels much lower now than it did perhaps in early July.
"And, two, my guess is that any such settlement won't hit until 2016/17 which removes any spectre of an unmanageable hit to capital. Just a potential hit to a (hopefully) more healthy income statement."
So not the end of the world. Who's likely to get hit? The received wisdom is Barclays and RBS, as a result of the attempts at manipulation by their traders (worth pointing out that it's yet to be proved how successful they were). But Mr Gordon has an interesting theory: "I can't help thinking that it was allegedly the [Libor] submissions of Lloyds [through HBoS] and RBS which were persistently low-balled over an extended period and by a material amount."
So his theory is the potential "tail risks may be longest for Lloyds and RBS? Just a theory".
Of course, the role of the Bank of England in the "low ball" submissions of Lloyds and RBS is somewhat murky. The central bank was desperately worried about the impact of a collapse in confidence in these two banks. But even if it was proved to have subtly endorsed the tactic you can't sue a central bank. If you want to grade the worries, RBS probably comes top followed by Barclays and Lloyds. HSBC shareholders may be able to breathe easier. Its sins were largely committed elsewhere.
As for valuations, they are still discounting difficulties for the banks. Even though Barclays shares have doubled since the summer it trades on only 0.6 times the book value of its businesses and a shade over 8.6 times earnings. As for Lloyds, it is on 0.8 times book, 12.7 times earnings, while RBS is on a remarkably similar valuation (0.8 times, 13.3 times). HSBC, by contrast, sits on 1.3 times book, and 11.5 times this year's earnings.
The only bank I've been recommending recently is Lloyds. Take profits. The banks' shares have been run up a lot and I'm taking a cautious view of the outlook.