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LIBOR Homeowner Lawsuit: Much Ado Over $1.22?

Since the analyses that produced the first two allegations weren't clear, we chose what we think is a fair method to try to determine if LIBOR on the first business day of the month was higher or lower than the value that came immediately before or immediately after it (value available on last business day of the prior month and second business day of the new month, respectively).

Our analysis

We conducted three main pieces of analysis for the Class Period (January 2000 through at least February 2009) to determine if the 6-month LIBOR was in fact higher on the first business day of each month: 
  • Analysis 1: We averaged together the five prior daily values of the 6-month LIBOR and compared them against the value that would have been available on the first business day of the month to determine if it was higher or lower than the five-day average. Although it doesn't strike us as entirely fair to compare a five-day average value against a single one, we wanted to closely investigate the third allegation mentioned above.
  • Analysis 2: We also compared the individual value for the last business day of the month against the first business day of the month.
  • Analysis 3: Finally, we examined the first business day of the month against the individual value on the second business day of the month.

Analysis 1

Of those 110 months, and relative to the five-day average of the days before it, here's what we found:
  • Higher: LIBOR was higher on the first of the month 57 percent of the time (63 months). In the months when the LIBOR was higher, it was higher by an average of 0.03339 percent.
  • Lower: LIBOR was lower on the first of the month 43 percent of the time (47 months). In the months when the LIBOR was lower, it was lower by an average of 0.05193 percent.

Analysis 1 conclusion: In the Class Period, although the value was higher in 16 months, we didn't see a higher first-of-the-month LIBOR than the previous five-day average " a great majority of the time" as alleged in the lawsuit. When it was higher, the amount by which it was higher was a little over three basis points; when the value was lower, it was lower by a larger amount (more than five basis points).

A caveat of analysis 1: We did not attempt to determine the trend leading up to the first of the month. It may well be that the trend was a rising one, with the value available on the first of the month part of a longer or more natural rise in response to external market conditions. For example, if rates had been generally rising for the last 10 days of the month, and the value available on the first of the month was part of that rising trend, it of course would naturally be higher than the values which preceded it… but that does not necessarily mean it was manipulated to be there.

Analysis 2

When we compared the LIBOR value on the first business day of the month against the value immediately preceding it, the single value on the last business day of the month, we found:
  • Higher: LIBOR was higher on the first business day 36 percent of the time (40 months). When the value was higher, it was higher by an average 0.25530 percent.
  • Lower: LIBOR was lower on the first business day 46 percent of the time (51 months). When the value was lower, it was lower by an average 0.27020 percent.
  • Same: LIBOR was the same on the first business day of the month about 17 percent of the time (19 months).  

Analysis 2 conclusion: Not knowing how the analysis in the complaint was conducted, we thought this might be one way to uncover any regular pattern. Like the five-day analysis, we can't find a reliable pattern, and in this case, the bias actually suggests that LIBOR was the same or lower in a majority of cases.

Analysis 3

Finally, when we looked at the LIBOR value available on the first business day of the month compared to the value available on the second business day of the month, we found:
  • Higher: LIBOR was higher on the first business day 45 percent of the time (50 months). When the value was higher, it was higher by an average 0.22650 percent.
  • Lower: LIBOR was lower on the first business day 44 percent of the time (48 months).When the value was lower, it was lower by an average 0.22020 percent.
  • Same: LIBOR was the same on the first business day of the month about 11 percent of the time (12 months).

Analysis 3 conclusion: Again, not knowing how the analysis in the complaint was conducted, we are at a disadvantage, but thought our method might be another way to uncover any regular pattern. The data points out a near-identical split of higher and lower, and if you factor in the “value the same” component, there's nothing to show that LIBOR was consistently higher on the first day of the month than the second.

And another thing…

If LIBOR really was manipulated to produce a higher value for the first business day of the month, wouldn't it be higher than both the value before and the value after it on a regular basis?

Of the 110 months, the LIBOR value available on the first business day of the month was:
  • Higher than both the previous and next values: 12 percent of the time (13 months)
  • Not higher than both the previous and next values: 88 percent of the time (97 months). This includes periods when the value on the first of the month was the same as a previous or next value.

The effect on borrowers is hit or miss

Before it becomes lost in the conversation, it's also important to remember that most ARMs tied to the six-month LIBOR adjust only once every six months. In this way, and even in the cases where a borrower held a mortgage throughout the Class Period, they would have been exposed to only two rate changes per year, for a total of 20 possible rate changes--and that if the loan was a fully floating six-month ARM from the beginning. Even then, a given borrower might have hit a "lower/lower" pattern, "lower/higher" or "higher/higher" one, so all borrowers with these products might not have had the same experience.

For more on how ARMs work, including adjustments, rounding and more, read: “ARMs: Hows, Whos and Whys

Also, fully floating six-month ARMs were and are uncommon. More likely is that these were fixed for a period of time--two years to as long as 10 years--and so the instance of exposure to an incorrect rate change, even if there was one, would have been somewhat less.

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