US Banks Sweat Libor Scandal Spanking

Assuming some U.S. banks are found culpable of interest rate fixing and their top executives remain in place, there is also the threat of lawsuits, several of which are already working their way through the courts. Libor rates affect hundreds of trillions worth of financial products, and a July 4 estimate by Nomura's London-based analysts argues $7 billion worth of claims per bank could be considered "a low level of loss." As for what a high level of loss would be, Nomura's analysts merely state "when the starting point of losses is in hundreds of trillion dollars, then even a slice of that could be considerable."

Thursday's report from Nomura, however, which was co-authored by the bank's London- and New York-based analysts, was more circumspect.

"We think there are a handful of reasons that the ultimate financial exposure could be less than worst fears," it states. Thursday's report from Nomura contends that manipulating rates lower likely benefitted individuals and many companies by allowing them to pay less on loans. Nomura's analysts also argue that the short duration and constant resetting of Libor-based loans may make it difficult to pinpoint losses due to manipulation. Finally, "the complexity of the Libor setting process and specific legal protections could make it very hard to prove joint manipulation and even quantify losses given any banks limited ability to impact the average rate that was used," the report states.

Top executives at JPMorgan, Bank of America and Citigroup are sure to be asked about the Libor case when they report earnings over the next few days, but it seems unlikely they'll say anything of substance.

It is doubtful we'll have to wait more than a few months for the next settlement. The investigation of Barclays and other banks related to Libor manipulation was first reported by The Wall Street Journal in 2008, meaning regulators have had four years to build their cases. Also, analysts are raising questions about statutes of limitations, another factor that could speed things up.

It is hard to argue Barclays investors should have been worrying in 2008 about a potential 16% share price drop four years later. At this stage, however, shareholders of other Libor banks will have to decide whether they are comfortable that this scandal has already dealt its most serious body blow to the banking industry.

-- Written by Dan Freed in New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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