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The Mechanics
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Economics Mon Jul 09 2012

The Chicago Firm That Sued Big Banks Over Rigging LIBOR

When news broke last week that Barclays Bank had conspired to manipulate the London InterBank Offered Rate (LIBOR), and that more banks were under investigation for similar behavior, several outlets lamented that what was a huge scandal in Europe barely registered in the U.S. media.

One might wonder where those same European media outlets were last year, when Bloomberg reported that Chicago trading firm ElDorado launched a lawsuit against several U.S. banks for the same reason.

A Chicago trading firm accused Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM), UBS AG (UBSN) and Citigroup Inc. (C) of conspiring to manipulate the London interbank offered rate.

The banks drove down Libor to generate billions of dollars in profits from swaps, loans, interest rate derivatives and other financial instruments whose value depended on the rate, Eldorado Trading Group LLC said in a complaint filed July 5 in federal court in Newark, New Jersey.

The civil lawsuit is one of several filed in response to probes by the U.S. Justice Department, Securities and Exchange Commission and Commodity Futures Trading Commission related to whether there were improper attempts to manipulate Libor. The rate, at which banks borrow from one another in the London interbank market, is a short-term, international benchmark.

The banks "had a substantial incentive to manipulate, and in fact did manipulate, Libor downward, in order to increase the income from its interest rate derivatives and similar instruments," according to Eldorado's complaint. "This manipulation resulted in billions of dollars in revenue."

Eldorado owned futures and options contracts based on Eurodollar deposits traded on the Chicago Mercantile Exchange from August 2007 to December 2009, according to the complaint. It seeks to represent similar owners of contracts traded on the Chicago exchange.

As the Chicago Tribune points out, LIBOR was known to be subject to manipulation as far back as 2007.

The seemingly-obscure LIBOR rate affects everything from student loans to mortgate rates. Since LIBOR is the interest rate that the world's largest banks are supposed to pay whenever they borrow money, and since several of the world's largest banks have offices in Chicago, I wonder how much banking fraud and manipulation took place right here in the Windy City?

According to the Wall Street Journal, Australian firms are now mulling over a class action lawsuit against Barclays. If more companies and investors worldwide follow suit, it looks like last June's "Eldorado Trading Group LLC v. Bank of America Corp., 11-cv-3847, U.S. District Court, District of New Jersey (Newark)" will soon have all the LIBOR-rate manipulation evidence it can handle.

 
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