Banks, Collusion, Investigations, Oh My! (C, BAC, UBS)

Did some of the world's biggest banks collude to manipulate a key interest rate before and during the financial crisis? According to the Wall Street Journal, the answer might be yes. Banks in both Europe and the United States may have understated their own borrowing costs, which are used to calculate Libor – the London interbank offered rate. The Wall Street Journal says that Libor, which is set every day in London, is based on submissions by a panel of banks that report the rate they are paying to borrow. Law-enforcement officials have been investigating the situation for the past year. They are concerned that some banks may have formed a “global cartel” and coordinated how to report borrowing costs between 2006 and 2008. The Wall Street Journal says that nearly $10 trillion in loans and $350 trillion in derivatives are tied to Libor, “which affects costs for everything from corporate bonds to car loans.” U.S. regulators are reportedly focusing on Bank of America BAC, Citigroup C, and UBS UBS. The Wall Street Journal says that, according to people familiar with the year-long probe, subpoenas have been sent to these three banks, as well as others. Unfortunately, legal experts have told the Wall Street Journal that collusion cases are hard to prove without e-mail evidence or the testimony of a bank insider. But prosecutors have reportedly interviewed bank employees who could provide a thorough explanation of how Libor was set. Michael Volkov, a former trial lawyer in the antitrust division of Mayer Brown LLP, told the Wall Street Journal that the investigation raises the stakes for banks, “potentially exposing them to costly class-action lawsuits.”