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Banks may face claims worth billions over rate-rigging

The interest-rate fixing scandal that rocked the financial world earlier this summer looks set to rear its ugly head again.

In late June, Barclays paid $453 million to regulators in the U.K and the U.S. to settle accusations that it had tried to influence LIBOR, or the London interbank offered rate -- a benchmark interest rate that affects the price at which consumers and companies across the world borrow funds.

A report in The Wall Street Journal Monday says other banks under investigation for manipulating the key lending rate face the possibility of tens of billions of dollars in claims filed against them in dozens of lawsuits brought by parties as varied as cities, individual investors and financial institutions.

Banks that have disclosed that they are under investigation for LIBOR manipulation include Citigroup and JPMorgan Chase. HSBC, Deutsche Bank and the Royal Bank of Scotland are also being probed.

In the lawsuits the plaintiffs allege that they were cheated out of returns on bonds because the rates on those bonds were kept artificially low, or in other instances they alleged collusion among traders meant they were squeezed financially, the Journal said.

There are likely to be many instances where corporations or financial institutions want to get out of a losing position in a trade, arguing that a manipulated interest rate was to blame for the losses, according to Bart Naylor, an expert in financial regulation at the consumer advocacy group Public Citizen.

“If I’m a financial institution and I have to pay $100 million because LIBOR is where it is, instead of $90 million when LIBOR is where it should be, I don’t want to pay that extra amount,” said Naylor.

The next step in the LIBOR scandal is likely to involve hefty fines for the world’s biggest and most powerful banks, Naylor added.

“It seems inconceivable to me that the financial regulators would have spent four years just concentrating on Barclays,” Naylor said.

“I think the next thing we will see is the naming and fining of additional banks, and one can imagine that the penalties for those banks will be even more intense, given that Barclays has said other banks were complicit in the scandal and we know that regulators look dimly on institutions that don’t admit to wrongdoing,” he added.

The Barclays settlement in June led to a flurry of lawsuits against the bank and other institutions, the Journal said. The LIBOR cases have been piling up for months, although the exact number isn’t clear, according to the newspaper, which reviewed filings in federal and state courts. For the plaintiffs to win their cases in court they must prove that banks successfully manipulated interest rates, leading to a loss for the plaintiff, the paper noted.

Some analysts say the eventual bill for the LIBOR scandal could cost Wall Street dearly, with estimates for the cost of the scandal to Wall Street ranging from $47.5 billion to $176 billion, the report said.

Among those parties looking at litigation against banks over LIBOR are Charles Schwab, which says it deserves damages related to fixed-rate investments held by its funds and investments linked to LIBOR, the Journal said.

Money managers BlackRock, Vanguard Group and Federated Investors are also investigating possible harm to their funds from LIBOR, the paper said, as is the California Public Employees' Retirement System -- the largest public pension fund in the U.S.

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