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TheStreet Open House

LIBOR Homeowner Lawsuit: Much Ado Over $1.22?

The allegations in the class-action lawsuit were rather different, since they included a period well before the financial crisis, and also alleged a higher bias to LIBOR throughout. These allegations all seemed like a bit of a stretch to us, so we thought we'd conduct some rudimentary analysis to determine the credibility, if any, of the claims in this lawsuit. Although we conducted a couple of reviews, we paid particular attention to the "five-day running average" in the third allegation listed above.

Lawsuit's analysis is unclear to us

The lawsuit is rather vague and thin in terms of providing clues as to how the plaintiff's analysis was put together. The allegations of a two-basis-point differential are all well and good, but the statement does not indicate how this figure was arrived upon. On a straight up, as-defined-in-the-lawsuit basis, it's not possible to compare a single value available on the first business day of any given month against the entirety of the Class Period (110 months) and find such a figure, so there must be some other means by which they did their evaluation.

The allegation of a period where LIBOR on the first of the month was “seven and one-half basis points higher …” suffers from the same issue: higher than when, exactly? The middle of the month? Some rolling or moving average? Again, it is not clear what the allegation intends or the comparison used to arrive at such a figure.

That said, we thought we could analyze at least a contrived version of the five-day average, although the definition of that period isn't completely clear, either. It's unknown if the “five-day running average of the LIBOR 6-month rate surrounding the first business day” uses a “two days before, first of month, and two days after” arrangement, “three before and two after,” “two before and three after”  or other method. Since the allegation was that LIBOR was higher on the first day of the month, we chose to use an average of the five values leading up to the value available on the first business day of the month. If LIBOR was specifically manipulated on the first of the month, it would be expected that the days leading up to it would tend to be lower.

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