Did we overpay on our interest payments?-A A +A
Sunday, March 30, 2014
RECENTLY, we read a rosy report about the country’s external debt. As of 2013, total external debt, both public sector and private sector obligations, totaled 58.5 billion dollars. For those obligations, we paid last year 6.86 billion dollars in principal and interest.
While in absolute amounts, the total foreign debts have gone up over the years, the debt ratio has gone down considerably vis a vis our gross national product. Also, compared to our international reserves of around 83 billion dollars, our public sector debt of 40.5 billion dollars is at a very comfortable level.
In sum, from the point of view of liability management, every thing looked just fine.
My enthusiasm, however, was somewhat dampened by lingering questions especially after reading the latest news on the LIBOR fixing scandal which rocked the financial world in 2012.
Is it possible that over the years, we have been over-paying on our interest payments?
If we go by the claims of the Federal Deposit Insurance Corporation (FDIC) and various US cities, states and local agencies, the answer is definitely YES!
Just this month, the Federal Deposit Insurance Corporation (FDIC) sued 16 of the biggest names in banking. Among the banks named as defendants were Bank of America Corp, Barclays PLC, Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG, HSBC Holdings PLC, JP Morgan Chase and Co, The Royal Bank of Scotland and UBS AG.
The lawsuit, filed in the federal district court in New York, alleged that the defendants’ conduct of conspiring to manipulate LIBOR caused substantial losses to 38 banks that the US regulator had taken into receivership since 2008.
The City of Baltimore as well as other US cities, states and municipal agencies also feel short-changed and have likewise filed suits against a dozen banks.
FDIC has not yet quantified the full extent of the 38 bank’s losses. On the other hand, according to early estimates, the rate manipulation scandal cost US states, counties and local governments at least 6 Billion dollars in fraudulent interest payments.
Coincidentally, this is the exact amount of fines that regulators in the United States, United Kingdom, and the European Union have already slapped on banks for participating in rigging interest rates. UBS topped the list when it paid a whooping 1.5 billion dollars, an amount authorities said reflected the severity and extent of the LIBOR scandal. The others which have been heavily fined in varying amounts include UBS, RBS, Deutsche Bank, JP Morgan, and Citigroup.
An investment bank estimates that the banks being investigated for LIBOR manipulation could end up paying an approximate 35 billion dollars, separately from any payment to regulators. The same investment bank concedes, however, that “(r)elative to the size of the 16 banks ….. 35 billion dollars is chump change.”
Meanwhile, a top US law firm has stepped into the largest class action lawsuit filed against Barclays. Barclays’ name was the first to crop up in the scandal in 2012 – causing its Chief Executive Officer to resign and to forfeit a substantial portion of his benefits. Barclays is now being sued by Guardian Care Homes over claims Barclays mis-sold Guardian Care interest rate hedging products.
The London Interbank Offered Rate, or LIBOR, is one of the most important numbers in the financial world. And until 2012, LIBOR was something that borrowers just accepted without any question.
Essentially, LIBOR is one of the main rates used to determine the borrowing costs for trillions of dollars in loans. These loans include not only sovereign loans, corporate loans, as well as consumer loans such as mortgages, student loans and credit card accounts. LIBOR has also been used to price derivatives.
Interest rates on aforesaid transactions rise or fall when LIBOR moves.
It was only in 2012 that an international investigation revealed a widespread plot by multiple banks to leverage LIBOR for profit. Investigators have uncovered that the rate rigging may have started as early as 2001 and continued all the way to 2009.
The FDIC and the other aggrieved parties surely face many hurdles in proving damages. For one, it may be difficult to unbundle the rates used between 2001 and 2009. For another, the rate riggers maneuvered the rates upward or downward (not just one way) depending on the traders’ positions.
But one thing is sure. The rate riggers made tons of money. And as in any financial transaction, for every winner, there is a loser.