Federal Home Loan Mortgage Corporation
) or Freddie Mac is dragging more than a dozen financial
institutions along with British Bankers Association to court. The
reason being the massive losses it suffered from alleged rigging
of London Interbank Offered Rate (LIBOR) by these institutions.
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Freddie Mac has accused the banks of teaming up together to bring
down the benchmark rate during the period from 2007 to 2010,
which resulted in Freddie Mac receiving lower payments on the
LIBOR associated products. The lowering of the LIBOR was
beneficial for the banks as it augmented the capacity to charge
higher underwriting fees and obtain higher offering prices for
financial products at the cost of Freddie Mac and other
Due to the rate rigging, Freddie Mac suffered considerable losses
on hundreds of swap transactions that were indexed to LIBOR and
lost billions of dollars on mortgage securities with coupon
payments based on the same benchmark rate.
Freddie Mac sued BBA, stating that the association was a part of
the rigging scandal for its own advantage. The BBA manipulated
the LIBOR to safeguard its revenue that was generated by selling
LIBOR licenses and to conciliate banks present in the LIBOR
panel. The other defendants include
Bank of America Corporation
JPMorgan Chase & Co
Credit Suisse Group AG
The lawsuit seeks an unspecified amount as compensation. Freddie
Mac detected the fraud last June when the British bank
) admitted to rate rigging and shelled out $453 million to settle
with British and U.S. authorities.
Rigging of the benchmark rate by some of the largest financial
institutions has resulted in severe action by the regulatory
bodies across Europe and America. This has turned out to be a
huge swindle with nearly $300 trillion of loans, mortgages,
financial products and contracts being linked to LIBOR.
Besides Barclays, UK and U.S. authorities have come down hard on
such unwarranted activities of other banks including UBS AG and
The Royal Bank of Scotland Group plc
). Both the banks have settled by paying fines of $1.5 billion
and $612 million, respectively.
LIBOR is a widely accepted benchmark rate. LIBOR rates are
calculated for 10 currencies and 15 borrowing periods ranging
from overnight to a year and are published daily at 11:30 am
(London time) by Thomson Reuters. Several financial institutions,
mortgage lenders and credit card agencies lay down their own
rates relative to it. Nearly derivatives and other financial
products worth $350 trillion are connected to the LIBOR.
Therefore, manipulation of the same will necessarily undermine
the importance of the rate and will have financial repercussions
on an unimaginable scale.