Freddie Mac sues the banks

In the first government-sponsored litigation to come out of the Libor rigging scandal, Freddie Mac filed suit against the largest banks and the British Bankers’ Association. The lawsuit claims the mortgage company was harmed by “collusive activity.”

Here’s the Wall Street Journal story:

Freddie Mac sued more than a dozen of the world’s biggest banks for alleged manipulation of interest rates, in the first government-backed private litigation over the rate-rigging scandal.

The lawsuit, filed in U.S. District Court for the Eastern District of Virginia, by the mortgage-finance giant joins scores of other suits piling up in U.S. courts, seeking billions of dollars in damages from banks that allegedly manipulated the London interbank offered rate and other crucial financial benchmarks.

Freddie Mac sued the British Bankers’ Association alongside the banks, putting the private association of large British banks for the first time in the cross hairs of a Libor lawsuit.

A probe by U.S. and U.K. regulators has uncovered evidence of widespread rate rigging by some traders. Three banks have agreed to pay penalties totaling about $2.5 billion, and about a dozen companies remain under investigation. The BBA has agreed to transfer its responsibility for overseeing Libor to a new operator.

Regulators leading the investigation haven’t criticized the BBA, but the organization has come under fire from British lawmakers over its alleged failures to spot or prevent the rate rigging.

The Freddie Mac lawsuit alleged the BBA “participated” in a scheme to rig Libor to protect the income it got from the benchmark and “appease” its member banks.

The New York Times analysis of the lawsuit says that Freddie Mac may have a better chance of actually winning in the settlement:

Banks involved with the scandal also face legal action from other plaintiffs. A raft of class-action lawsuits have been filed by a number of parties, including states and local governments that issued bonds and bought interest rate swaps. The cases have been consolidated in the Federal District Court in Manhattan for pretrial proceedings.

The banks have sought to dismiss the claims, arguing that the various plaintiffs cannot show that they were directly harmed by any antitrust violation, if one even occurred. In a brief filed in the case, the banks assert that if merely having economic exposure to the dollar-based Libor, or USD Libor, is enough to be part of suit, then “there is no limit to potential plaintiffs, because anyone, with respect to any transaction, might choose to reference USD Libor.”

Unlike some class-action plaintiffs, Freddie Mac looks to be in a stronger position to survive a motion to dismiss on these grounds. The company dealt directly with many of the banks accused of manipulating Libor by arranging for swaps, including Barclays, UBS and the Royal Bank of Scotland, all of which admitted to violations. The success of its trading in mortgage securities and hedging its risk was usually tied into Libor, the most important benchmark rate for mortgages.

Freddie Mac has taken an even more aggressive position in its lawsuit by naming the British Bankers Association as a defendant. The association was responsible for collecting the data from banks and then issuing the Libor benchmark, marketing it as a valuable tool for setting interest rates across a number of currencies.

It is not clear whether the claim against the association can survive a preliminary motion to dismiss, however. Freddie Mac claims that the organization was aware of the manipulation by the banks but did nothing to stop it. But the fact that one is aware of misconduct by others, and even that their services are being used, is usually not enough to show participation in a conspiracy.

Bloomberg offered these details and context.

The complaint lists 15 banks as defendants as well as the British Bankers’ Association. They include Citigroup Inc. (C), Barclays Plc, Royal Bank of Scotland Group Plc (RBS), the Royal Bank of Canada, Deutsche Bank AG and Credit Suisse Group AG. (CSGN)

Freddie Mac accuses the banks of fraud, violations of antitrust law and breach of contract. The housing financier is seeking unspecified damages for financial harm, as well as punitive damages and treble damages for violations of the Sherman Act.

“To the extent that defendants used false and dishonest USD LIBOR submissions to bolster their respective reputations, they artificially increased their ability to charge higher underwriting fees and obtain higher offering prices for financial products to the detriment of Freddie Mac and other consumers,” the U.S.-owned company said in the complaint.

I thought the NYT summed up the story best, so I’ll leave you with their last paragraph:

For the banks, Freddie Mac is the type of plaintiff that can be expected put up a tough fight because, now that it is controlled by the federal government, the real beneficiaries of its lawsuit are taxpayers. Add to that the prospect of a similar claim by Fannie Mae, and the banks involved in Libor manipulation will be dealing with this issue for quite a while.