Weekend Economists Waiting for FDR July 13-15, 2012

[Demeter]

34. Corporations Dodge LIBOR Scandal Bullet: It’s banks and hedge funds that look like the losers.

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In the wake of the ongoing LIBOR scandal, corporations looking to fruitfully sue Barclays or any other bank on the basis of ill-gotten gain may find it hard to make a convincing case.

In the words of a knowledgeable treasury expert who spoke on condition of anonymity, “We have struggled to find who the net losers are, apart from the banks themselves, and maybe some hedge funds.”

Between 2007 and 2009, Barclays (and perhaps other banks) deliberately submitted low interbank interest-rate data to the British Bankers’ Assn. (BBA), which calculates the London interbank offered rate (LIBOR). For the following reasons, it is difficult to see how corporates could have suffered as a result.

• LIBOR is not used for wholesale deposit rates: the rate paid is negotiated directly with the bank or through a broker. The rate the bank agrees to will be a blended rate, taking into account several factors of which LIBOR may be just one. Any mispricing of LIBOR could not have had anything but a very negligible impact, if any, on the agreed deposit rate.

• Commercial-property mortgages tied to LIBOR would have been cheaper, not more expensive, as a result of the manipulation.

• Corporates that issued fixed-rate bonds and then swapped back into floating rates would have received “fixed” and paid “LIBOR,” which has been understated: again, that is to the benefit of the corporate.

• A corporate swapping “floating” for “fixed” debt would be paying floating rates on its borrowing, receiving floating on the swap, and then paying a fixed rate. It’s therefore both receiving and paying understated LIBOR-related rates: a net neutral.

“If you work through all these swaps, it’s very hard to figure out who is losing apart from the banks. You’ve really got to put your thinking cap on to think of a circumstance which might possibly give rise to a cost,” the treasury expert said. “If you were running a purely speculative swap portfolio, you might be able to construct something in which you lost out, but that’s not what corporates do. It might be what hedge funds do, however.”...MORE