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Global banks warn of market chaos if court will abolish LIBOR

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SOME OF THE world’s biggest banks are urging a US judge not to immediately terminate the London Interbank Offered Rate (Libor) after a group of borrowers filed suit claiming the benchmark was the work of a “price-fixing cartel.”

Defendants in the case, including JPMorgan Chase & Co., Credit Suisse Group AG and Deutsche Bank AG, said in a November filing that an injunction abruptly ending the Libor would wreak havoc on financial markets and undermine years of work reforming the reference rate. The plaintiffs, which include 27 consumer borrowers and credit card users, are also seeking monetary damages.

Attorneys not involved in the case say the chances of an injunction are slim. Yet it underscores the risks and legal costs for banks that continue to prop up Libor, which still underpins hundreds of trillions of dollars of financial assets around the world. It also highlights the fragility of the discredited benchmark, which in theory could be halted by a single court decision.

“You have to take it seriously because it would be a catastrophe if it was granted,” said Anne Beaumont, a partner at law firm Friedman Kaplan Seiler & Adelman LLP. “They’re likely going to continue to get sued like this as long as it’s there.”

A San Francisco judge has said he will render a decision on the injunction without a hearing. The judge is scheduled Thursday to hear a request by the banks to transfer the case to Manhattan federal court.

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Libor is derived from a daily survey of bankers who estimate how much they would charge each other to borrow. It’s used to help determine the cost of borrowing around the world, from student loans and mortgages to interest-rate swaps and collateralized loan obligations.

In the wake of the 2008 financial crisis, regulators discovered that lenders had been manipulating the rates to their advantage, resulting in billions of dollars of fines.

If the benchmark were to be immediately switched off, many derivatives contracts already contain contractual fallback language that would enable them to transition to an alternative rate, according to Y. Daphne Coelho-Adam, a counsel at Seward & Kissel LLP who is not involved in the case. But hundreds of billions of dollars of bonds, loans and securitizations lack a clear replacement rate and could pose a threat to financial stability.

The banks said in filing that none of the plaintiffs have shown that they ever paid interest based on Libor, adding that the suit is built on “baseless theories of antitrust liability.” Regulators have warned that even a temporary disturbance of Libor could devastate financial markets, the banks’ attorneys said. — Bloomberg

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