Banks in Libor Probe Consider Group Settlement

A group of banks being investigated in an interest-rate rigging scandal are looking to pursue a group settlement with regulators rather than face a Barclays-style backlash by going it alone, people familiar with the banks' thinking said.

Such discussions are preliminary, and it is unclear if regulators will enter these talks, aimed at resolving allegations that banks attempted to manipulate the London interbank offered rate, or Libor, a benchmark that underpins hundreds of trillions of dollars in contracts.

Still, there are powerful incentives for the banks to enter joint negotiations.

Barclays Plc was the first to settle with U.S. and British regulators, paying a $453 million penalty and admitting to its role in a deal announced June 27. Its chief executive, Bob Diamond, abruptly quit the next week, bowing to public pressure and erosion of the bank's reputation.

The sources told Reuters that none of the banks involved now want to be second in line for fear that they will get similarly hostile treatment from politicians and the public. Bank discussions about a group settlement initially took place before the Barclays agreement, and picked back up in the aftermath.

It is unclear which banks are involved in the potential settlement talks. More than a dozen banks are being investigated in the scandal, including Citigroup, HSBC, Deutsche Bank and JPMorgan Chase. They all declined to comment.

HEADLINE-GRABBING FIGURE

A group agreement would appeal to financial watchdogs because they would be able to announce a headline-grabbing figure, showing that they were dealing firmly with the banking industry's misdemeanors, a banker told Reuters on condition of anonymity.

Earlier this year, five top U.S. banks negotiated a $25 billion settlement with the U.S. Justice Department and other federal and state agencies to resolve allegations of mortgage services abuses.

The key regulators involved in the Libor case include the U.S. Commodity Futures Trading Commission and Britain's Financial Services Authority. The CFTC was not available for comment and the FSA declined to comment.

The main obstacle facing such a group settlement is a hesitancy on the part of the investment banks to work together in the fevered atmosphere surrounding the Libor investigations. Negotiations and haggling could drag on for some time and a resolution was far from certain, the banker said.

The fact that each bank possibly had to settle with a different group of regulators, and that the charges were different in each case also made the chances of success of such a settlement small, a source at one of the banks being probed said.

However, if they were able to reach a group settlement it would enable them to share the pain of negative publicity.

PUBLIC PILLORYING

While Barclays received a 30 percent "discount" on the fines for cooperating fully with authorities, it sustained far more serious damage with the subsequent loss of its top management and a public pillorying at the hands of politicians.

The specter of severe penalties from regulators and the possibility of multi-billion dollar class action suits has hung over more than a dozen banks being investigated worldwide since the extent of attempts to rig Libor became clear in CFTC and FSA documents released with the Barclays settlement.

Analysts have estimated that the scandal could cost the industry between $20 billion to $40 billion, further damaging a sector that is struggling to work its way through the aftermath of the 2007-2009 financial crisis, economic downturns in Europe and the United States, and increased regulatory demands.

Libor rates are set daily in London for a range of currencies and maturities. Banks submit rates for unsecured loans to one another and the rates after high and low rates are thrown out, are averaged.

Among the Barclays disclosures that sparked outrage were emails that showed employees asking for the submitted rates to be changed.

"Done ... for you big boy," read a message sent by a Barclays banker to one of the lender's traders, who had asked him to fix Libor at an artificially low level.

"Dude, I owe you big time! Come over one day after work and I'm opening a bottle of Bollinger," a trader from another firm emailed a banker at Barclays, showing his thanks for the rate set artificially low.

The unfolding scandal also has raised questions about what the regulators knew and what actions they took to rein in the activity. Documents released by the Fed show it was repeatedly warned about Libor manipulation.

In 2008, U.S. Treasury Secretary Timothy Geithner, who was then head of the New York Federal Reserve Bank, sent a private email to Bank of England Governor Mervyn King advising him of concerns about the rate's integrity and suggesting six ways to improve it. King passed the suggestions along and minor changes were made, according to documents released last week.

Earlier this week, King put the Libor issue on the agenda of the Economic Consultative Committee of global central bankers that will meet in Basel, Switzerland, on Sept. 9.

Libor rates underpin an estimated $550 trillion in financial products, including consumer loans, mortgages, municipal bonds and corporate paper. They are also considered a gauge of a bank's health. Investigators are looking at whether banks low-balled the rates to hide their borrowing costs in the 2007-09 financial crisis, and to profit on trades before the crisis hit.

The scandal has also raised questions if Libor should be calculated differently. In Asia, the Hong Kong Association of Banks said it was reviewing the mechanism for determining its Hibor benchmark.

The Monetary Authority of Singapore said it was examining the setting of the Singapore interbank offered rate (Sibor), widely used in the pricing of mortgages and other loans in the city-state.

The Japanese banking industry lobby has asked the 18 banks contributing to the Tokyo interbank offered rate (Tibor) to check whether correct procedures were being followed, although the group's head said he did not believe there was a problem.

ALTERNATIVE RATES

Banks on the Libor panel submit rates based on their estimates of how much it costs them to borrow from each other. The rate is thus subjective, as opposed to basing the benchmarks more on actual lending rates, so less manipulation is possible. The Australian Bank Bill Swaps Reference Rates, for example, are based on where paper is actually traded on the market.

The issue is similar for Euribor -- launched with the single currency in 1999 -- prompting the ECB to call for a re-think, including possibly shifting the basis of the calculation to actual lending rates.

(Additional reporting by Douwe Miedema, David Henry and Dan Wilchins; Writing by Alexander Smith; Editing by Edward Tobin, Alwyn Scott, Tim Dobbyn and Jacqueline Wong)