(Bloomberg News) BlackRock Inc., Fidelity Investments and Vanguard Group Inc., firms that collectively manage more than $7 trillion, are gauging how their clients have been hurt by Libor manipulation and whether to take legal action as at least a dozen banks are being investigated for rate-rigging.
The money managers can take cues from Charles Schwab Corp. and the city of Baltimore, which in lawsuits predating the record fine levied on London-based Barclays Plc last month, sued lenders for artificially suppressing, Libor, or the London interbank offered rate. Schwab alleged last year that returns on money funds and short-term debt strategies were depressed by the banks' actions, while Baltimore's lawsuit against Barclays and other banks stems from lower returns on interest-rate swaps.
Libor-related litigation "has the potential to be the biggest single set of cases coming out of the financial crisis because Libor is built into so many transactions and Libor is so central to so many contracts," said John Coates, a professor of law and economics at Harvard Law School in Cambridge, Massachusetts. "It's like saying reports about the inflation rate were wrong."
Global regulators are reviewing the rate-setting mechanism and contemplating criminal charges against bank traders who manipulated Libor, a benchmark interest rate for about $500 trillion in financial products. While Libor affects a broad range of investments from money funds to leveraged buyout financing, firms seeking to sue may struggle to quantify losses and pinpoint which banks are responsible for them, according to interviews with more than half-a-dozen industry executives, lawyers and former regulators.
Barclays was fined 290 million pounds ($449 million) by U.S. and U.K. regulators on June 27 after admitting it submitted false rates. The scandal led to the resignation of Robert Diamond as the bank's chief executive officer.
Barclays, like other lenders that help set Libor rates, could potentially face lawsuits from any investor that was on the wrong side of the transactions, who could claim that they were kept in the dark about a key benchmark. Barclays is a defendant in at least 24 interrelated lawsuits that have been aggregated in Manhattan federal court.
Libor is determined by a daily poll carried out on behalf of the British Bankers' Association that asks banks to estimate how much it would cost to borrow from each other for different periods and in different currencies. Quotes in the top and bottom quartile are excluded and an average of the remaining entries is calculated.
Libor is used as the basis for pricing securities including the rate of return on short-term variable and fixed-rate bonds as well as for the pricing and settlement of Eurodollar futures and options. The British Bankers' Association has called it "the world's most important number" on its website.
For investment firms, money-market funds would probably be most affected by Libor-rigging, said Robert Pozen, a senior lecturer at Harvard Business School. Returns earned by investors in money funds, which hold only short-term debt, would decline if Libor were kept lower, he said.
BlackRock, which oversees $3.56 trillion; Fidelity, which manages $1.6 trillion; and Vanguard, with $2.1 trillion, said they're examining the impact on clients.
"On behalf of our clients and shareholders, we have been following developments in the Libor market and the related litigation activity for some time," Vincent Loporchio, a spokesman for Boston-based Fidelity, said in an e-mailed statement. "We have noted recent news with interest and continue to evaluate our options."
BlackRock, the world's largest asset manager, said litigation surrounding Libor is complex and that "it will be some time before greater clarity emerges," according to Bobbie Collins, a spokeswoman for the New York-based company.