LIBOR class-action lawsuit
What is LIBOR, anyway?
Our own review of the data
Lawsuit's analysis is unclear
Our analysis Analysis 1 Analysis 2Analysis 3And another thing…
Effect on borrowers is hit or miss Final thoughts on the lawsuit
If you ever wonder why getting a mortgage is a complicated,
expensive mess, you often don't have to look much further than the
legal system. On the heels of a "robo-signing" settlement--which
cost a group of banks $25 billion in fines--came the "LIBOR
scandal," where Barclays bank was fined around $450 million for
attempting to manipulate the LIBOR rate. And now comes yet another
LIBOR lawsuit, this one is a class-action suit on behalf of
homeowners who allege that LIBOR-setting banks manipulated the
6-month LIBOR rate so that the value was higher on the first
business day of the month, a date when the interest rate on their
Adjustable Rate Mortgages (ARMs) reset. Ultimately proven or
disproven, these things cost banks money to defend, and those costs
are ultimately passed on to customers.
LIBOR class-action lawsuit
The lawsuit-Annie Bell Adams, et al. v. Bank of America, et al,
12 Civ. 7461--alleges that members of the rate-setting panel of the
British Bankers' Association manipulated the LIBOR rate higher on
or before January 2000 through at least February 2009 (referred to
as the "Class Period" in the lawsuit) and "unjustly enriched
themselves" as a result. The lawsuit alleges three separate LIBOR
- "Throughout the Class Period, the LIBOR 6 month rates on the
first business day of each month are, on average, more than two
basis points higher than the average LIBOR 6 month rates
throughout the Class Period."
- "Additionally, from August, 2007 through February,
2009, the LIBOR 6 month rates on the first business day of each
month are, on average, more than seven and one-half basis points
higher than the average LIBOR 6 month rates."
- "Finally, the LIBOR 6 month rates on the first business
day of each month are, the great majority of the time, higher
than the five-day running average of the LIBOR 6 month rate
surrounding the first business day submissions throughout the
What is LIBOR, anyway?
LIBOR is essentially an opinion of a price of money produced
from a trade group of banks. The definition provided by the British
Bankers' Association says LIBOR is "The rate at which an individual
Contributor Panel bank could borrow funds, were it to do so by
asking for and then accepting inter-bank offers in reasonable
market size, just prior to 11am London time."
The methodology of how the LIBOR rate is collected makes it
difficult for a single institution or even group of institutions to
move the needle on the LIBOR value by much (if at all), either up
or down. The final value of LIBOR used for ARMs is constructed by
taking submissions from the contributor panel of banks, where the
rates are ranked into four groups. The lowest and highest groups
are discarded, and the remainder is averaged together to produce a
For example, if the contributor panel was 20 banks, the five
lowest and five highest quotes would be excluded and the rest of
the values would be averaged together.
As LIBOR pertains to the lawsuit, it's important to know that
many of these kinds of ARM contracts generally specify the use of
the LIBOR value
on the first business day of the month as published in The Wall
Street Journal. As such, the value is presented on a one-day-delay
basis; that is, a value created on the 31
of the month is released on the first of the month, and it is the
first of the month value used as the basis of adjusting interest
rates. If you pick up a today's copy of the Wall Street Journal and
look, you will see the value from yesterday, and it is noted by
date as such.
We launched our own review of the LIBOR data
While there have been allegations of LIBOR manipulation during
the worst of the financial crisis (2007, 2008) banks were arguably
quoting LIBOR on the low end, since being able to lend and borrow
at low rates is an indicator of financial strength. At the time,
and with major banks and financial institutions failing, there was
great suspicion about the health of many market players, and if an
individual firm was looking to borrow and being presented with
high-rate offers, it might appear as if they were less than
solvent. As such, the bias of such quotes, if they were
manipulated, would have tended to be generally lower than reality
The allegations in the class-action lawsuit were rather
different, since they included a period well before the financial
crisis, and also alleged a higher bias to LIBOR throughout. These
allegations all seemed like a bit of a stretch to us, so we thought
we'd conduct some rudimentary analysis to determine the
credibility, if any, of the claims in this lawsuit. Although we
conducted a couple of reviews, we paid particular attention to the
"five-day running average" in the third allegation listed
Lawsuit's analysis is unclear to us
The lawsuit is rather vague and thin in terms of providing clues as
to how the plaintiff's analysis was put together. The allegations
of a two-basis-point differential are all well and good, but the
statement does not indicate how this figure was arrived upon. On a
straight up, as-defined-in-the-lawsuit basis, it's not possible to
compare a single value available on the first business day of any
given month against the entirety of the Class Period (110 months)
and find such a figure, so there must be some other means by which
they did their evaluation.
The allegation of a period where LIBOR on the first of the month
was "seven and one-half basis points higher …" suffers from the
same issue: higher than when, exactly? The middle of the month?
Some rolling or moving average? Again, it is not clear what the
allegation intends or the comparison used to arrive at such a
That said, we thought we could analyze at least a contrived
version of the five-day average, although the definition of that
period isn't completely clear, either. It's unknown if the
"five-day running average of the LIBOR 6-month rate surrounding the
first business day" uses a "two days before, first of month, and
two days after" arrangement, "three before and two after," "two
before and three after" or other method. Since the allegation
was that LIBOR was higher on the first day of the month, we chose
to use an average of the five values leading up to the value
available on the first business day of the month. If LIBOR was
specifically manipulated on the first of the month, it would be
expected that the days leading up to it would tend to be lower.
Since the analyses that produced the first two allegations
weren't clear, we chose what we think is a fair method to try to
determine if LIBOR on the first business day of the month was
higher or lower than the value that came immediately before or
immediately after it (value available on last business day of the
prior month and second business day of the new month,
We conducted three main pieces of analysis for the Class Period
(January 2000 through at least February 2009) to determine if the
6-month LIBOR was in fact higher on the first business day of each
We averaged together the five prior daily values of the 6-month
LIBOR and compared them against the value that would have been
available on the first business day of the month to determine if
it was higher or lower than the five-day average. Although it
doesn't strike us as entirely fair to compare a five-day average
value against a single one, we wanted to closely investigate the
third allegation mentioned above.
We also compared the individual value for the last business day
of the month against the first business day of the month.
Finally, we examined the first business day of the month against
the individual value on the second business day of the
Of those 110 months, and relative to the five-day average of the
days before it, here's what we found:
- Higher: LIBOR was higher on the first of the month 57 percent
of the time (63 months). In the months when the LIBOR was higher,
it was higher by an average of 0.03339 percent.
- Lower: LIBOR was lower on the first of the month 43 percent
of the time (47 months). In the months when the LIBOR was lower,
it was lower by an average of 0.05193 percent.
Analysis 1 conclusion:
In the Class Period, although the value was higher in 16 months, we
didn't see a higher first-of-the-month LIBOR than the previous
five-day average "
a great majority of the time
" as alleged in the lawsuit. When it was higher, the amount by
which it was higher was a little over three basis points; when the
value was lower, it was lower by a larger amount (more than five
A caveat of analysis 1
: We did not attempt to determine the trend leading up to the first
of the month. It may well be that the trend was a rising one, with
the value available on the first of the month part of a longer or
more natural rise in response to external market conditions. For
example, if rates had been generally rising for the last 10 days of
the month, and the value available on the first of the month was
part of that rising trend, it of course would naturally be higher
than the values which preceded it… but that does not necessarily
mean it was manipulated to be there.
When we compared the LIBOR value on the first business day of
the month against the value immediately preceding it, the single
value on the last business day of the month, we found:
- Higher: LIBOR was higher on the first business day 36 percent
of the time (40 months). When the value was higher, it was higher
by an average 0.25530 percent.
- Lower: LIBOR was lower on the first business day 46 percent
of the time (51 months). When the value was lower, it was lower
by an average 0.27020 percent.
- Same: LIBOR was the same on the first business day of the
month about 17 percent of the time (19 months).
Analysis 2 conclusion:
Not knowing how the analysis in the complaint was conducted, we
thought this might be one way to uncover any regular pattern. Like
the five-day analysis, we can't find a reliable pattern, and in
this case, the bias actually suggests that LIBOR was the same or
lower in a majority of cases.
Finally, when we looked at the LIBOR value available on the
first business day of the month compared to the value available on
the second business day of the month, we found:
- Higher: LIBOR was higher on the first business day 45 percent
of the time (50 months). When the value was higher, it was higher
by an average 0.22650 percent.
- Lower: LIBOR was lower on the first business day 44 percent
of the time (48 months).When the value was lower, it was lower by
an average 0.22020 percent.
- Same: LIBOR was the same on the first business day of the
month about 11 percent of the time (12 months).
Analysis 3 conclusion
: Again, not knowing how the analysis in the complaint was
conducted, we are at a disadvantage, but thought our method might
be another way to uncover any regular pattern. The data points out
a near-identical split of higher and lower, and if you factor in
the "value the same" component, there's nothing to show that LIBOR
was consistently higher on the first day of the month than the
And another thing…
If LIBOR really was manipulated to produce a higher value for
the first business day of the month, wouldn't it be higher than
the value before
the value after it on a regular basis?
Of the 110 months, the LIBOR value available on the first
business day of the month was:
the previous and next values: 12 percent of the time (13
the previous and next values: 88 percent of the time (97 months).
This includes periods when the value on the first of the month
was the same as a previous or next value.
The effect on borrowers is hit or miss
Before it becomes lost in the conversation, it's also important
to remember that most ARMs tied to the six-month LIBOR adjust only
once every six months. In this way, and even in the cases where a
borrower held a mortgage throughout the Class Period, they would
have been exposed to only two rate changes per year, for a total of
20 possible rate changes--and that if the loan was a fully floating
six-month ARM from the beginning. Even then, a given borrower might
have hit a "lower/lower" pattern, "lower/higher" or "higher/higher"
one, so all borrowers with these products might not have had the
For more on how ARMs work, including adjustments, rounding
and more, read: "ARMs: Hows, Whos and Whys"
Also, fully floating six-month ARMs were and are uncommon. More
likely is that these were fixed for a period of time--two years to
as long as 10 years--and so the instance of exposure to an
incorrect rate change, even if there was one, would have been
At the same time, if the analysis which is the basis of the
complaint is proven to be true, what then? The suit alleges a
two-basis-point differential during the Class Period (and more
during a sub-period). However, our analysis found both higher and
lower readings on average throughout.
Even if we consistently found a two-basis-point increase on the
first of the month, which we didn't, it wouldn't make much of a
fiscal difference. Why?
A two-basis-point differential in the interest rate (from 5.00
percent to 5.02 percent) on a $100,000 loan with a 30-year term
would amount to $1.22 more per month in a given six-month
According to the complaint, the "plaintiffs aver that the class
exceeds more than 10,000 borrowers nationwide," and that's fine,
but what might the actual damages to an
borrower amount to, if they even exist? This is the question which
needs to be answered.
Our final thoughts on the lawsuit
Regardless of the answer to that question, legal teams across
the globe will be assembled to defend against these allegations,
courts will be tied up, a lot of time and money will be spent
putting together documentation and gathering evidence for both
sides, and the costs of all of this will be passed on to new
borrowers, regardless of the outcome. These costs become built into
the price of mortgages, either in the form of higher rates or
higher fees, and it is the next borrower who gets to pay for all
It's a long way around, but based upon our analysis of the data,
we cannot determine a reliable pattern showing an upward spike in
LIBOR available on the first business day of the month.
While we've nothing against injured parties seeking legal
redress, it seems excessive to us to file an expensive class-action
lawsuit to compensate "victims" whose total losses-if they exist
and can be proven-might run into the tens or perhaps hundreds of
dollars over a 10-year period.