LIBOR Scandal Heats Up

NEW YORK ( TheStreet) -- JPMorgan Chase ( JPM) has another lawsuit to add to its litigation pile of pain.

Fannie Mae ( FNMA) on Thursday filed lawsuits against JPMorgan and eight other major banks, seeking "at least" $800 million in losses, plus punitive damages over the alleged collusion of banks to manipulate LIBOR.

The lawsuits were first reported in the Wall Street Journal. A Fannie Mae spokesperson confirmed the lawsuits had been filed but no other detail was included in the report.

Fannie Mae has not put out a press release discussing the lawsuits, and an email requesting additional comment from the company Friday morning wasn't immediately returned.

Other banks being sued by Fannie Mae, according to the Journal, include Bank of America ( BAC), Citigroup ( C), Deutsche Bank ( DB), Credit Suisse ( CS), Royal Bank of Scotland ( RBS), UBS AG ( UBS), Barclays ( BCS) and Rabobank.

Fannie Mae and its sister government sponsored enterprise (GSE) Freddie Mac ( FMCC) were taken under government conservatorship in September 2008. The GSEs are regulated by the Federal Housing Finance Agency (FHFA). The U.S. Treasury holds $189.4 billion in senior preferred stock in the GSEs, and while the GSEs have paid the government a combined $146 billion in dividends on the senior preferred shares, there is no mechanism in place allowing them to repurchase any of the government-held preferred shares. Under their revised bailout agreements, Fannie and Freddie pay all their earnings as dividends to the government, except for minimal capital buffers.

Freddie preceded Fannie in filing a LIBOR lawsuit against over a dozen banks in March.

LIBOR stands for London Interbank Offered Rate. The rate was originally compiled by the British Bankers' Association from the rate information submitted each day by a group of large banks with international business. LIBOR is a critically important "overnight rate," because many types of loans have their rates indexed to LIBOR, as do many types of derivative securities.

The LIBOR scandal came to light last year, when various media outlets reported that banks had submitted false information used to compile LIBOR. Banks had misstated the rate at which they estimated they could borrow funds overnight from other banks, because admitting to an increased cost for overnight loans would signal that the financial health of the bank submitting the data was weakening.

LIBOR this year came under the supervision of Britain's Financial Services Authority. The Financial Services Authority has been split into the FCA, which now oversees LIBOR, and the Prudential Regulation Authority, which oversees banking in the UK. LIBOR is also being investigated by the U.S. Congress, the Justice Department, the Commodity Futures Trading Commission (CFTC), and many other regulators.

Four major banks have settled LIBOR investigations so far, with executive heads rolling in some instances.

Barclays PLC ( BCS) was the first big bank to settle LIBOR investigations, agreeing in June 2012 to pay U.S. and European regulators $454 million. In its settlement order, the CFTC said the bank's manipulation of overnight lending rate data involved "high levels of management within Barclays Bank." The CTFC also said the submission of artificially low rate data by Barclays "occurred regularly and was pervasive," beginning in 2005.

Following Barclays' settlement, the company's chairman Marcus Agius and its CEO Bob Diamond both resigned.

UBS ( UBS) in December of last year agreed to pay $1.5 billion to settle LIBOR probes with several regulators, and the company's Japanese subsidiary even plead guilty to a Justice Department charge of rate-rigging. The Justice Department also charged two senior UBS traders with criminal conspiracy.

Royal Bank of Scotland ( RBS) in February agreed to pay $610 million to regulators to settle LIBOR. The bank also entered into a deferred prosecution agreement with the Justice Department, pledging to continue to cooperate in several investigations.

Then on Tuesday, Rabobank -- headquartered in Utrecht, the Netherlands -- announced it had agreed to pay various regulators 774 million euros ($1.068 billion) to settle investigations into the bank's "historical Libor and Euribor submission processes." Rabobank's chairman Piet Moerland announced his resignation, "as a matter of principle," although the bank denied any involvement by senior management in rate manipulation.

JPMorgan on Friday in its third-quarter 10-Q filing with the Securities and Exchange Commission said it was cooperating with numerous regulatory requests for information relating to "the process by which interest rates were submitted to the British Bankers Association" in connection with the setting of LIBOR. The company is also a defendant in a class action lawsuit and various individual lawsuits over LIBOR.

It is uncertain just how much additional risk JPMorgan Chase faces from the LIBOR scandal. The company is negotiating a settlement with the Justice Department, regulators and state attorneys general to resolve criminal and civil investigations of the company's mortgage lending and sales activities. The first part of the overall package was a $5.1 billion settlement with the FHFA on Oct. 25, covering losses on private label mortgage-backed securities sold to Fannie Mae and Freddie Mac by JPMorgan, Bear Stearns and Washington Mutual.

JPMorgan admitted no wrongdoing in the FHFA settlement. However, the Justice Department is expected to require some admittance of wrongdoing as part of the overall settlement.

JPMorgan acquired Bear Stearns in a government-sponsored transaction when Bear Stearns was facing a liquidity crisis in March 2008. JPMorgan purchased the failed Washington Mutual from the Federal Deposit Insurance Corp. in September 2008.

According to various media reports, JPMorgan's overall settlement -- rumored to be as high as $13 billion -- is threatened by a dispute over language and over JPMorgan's contention that it isn't liable for actions taken by Washington Mutual before it was shuttered by regulators.

JPMorgan's shares were up slightly in premarket trading Friday, to $51.54.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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