Fannie Mae Sues Banks Over Alleged Libor Manipulation

Audience at the AFL-CIO headquarters in downtown Detroit during a rally against foreclosures by Fannie Mae and Freddie Mac. The event was held on February 13, 2013. (Photo: Abayomi Azikiwe), a photo by Pan-African News Wire File Photos on Flickr.

Fannie Mae sues banks over alleged Libor manipulation

By Danielle Douglas, Published: October 31

Fannie Mae filed a lawsuit Thursday against nine of the world’s largest banks over losses that the mortgage finance giant suffered from the alleged ma­nipu­la­tion of the global interest rate known as Libor.

Fannie joins a long list of pension funds, asset managers and municipalities that have sued banks involved in setting the London interbank offered rate, which serves as a standard interest rate for loans between banks and as a benchmark for about $360 trillion in lending to businesses and consumers.

The lawsuit, filed in federal court in Manhattan, said Fannie lost about $800 million on “swaps, mortgages, mortgage-backed securities and other variable rate transactions” tied to Libor. Fannie Mae estimates that it lost $332 million just on interest-rate swaps — financial instruments used to hedge interest-rate risk on products such as mortgages.

Fannie Mae accused Barclays, UBS, Internal Rabobank Groep, Royal Bank of Scotland, Deutsche Bank, Credit Suisse, Bank of America, Citibank and JPMorgan Chase of colluding to artificially lower the rate from 2007 to 2010.

Rigging the rate could have caused banks to appear stronger than they were during the financial crisis of 2007 and 2008 by suggesting that they were trading with low interest rates. But the banks could also have cost investors millions of dollars.

As a part its complaint, Fannie Mae is also suing the British Bankers’ Association, a private association that used to collect the data submitted by banks to set the daily Libor rate. In July, the association transferred the administration of the benchmark to NYSE Euronext to restore integrity to the system.

The BBA and the banks named in the complaint declined to comment on the case.

Fannie Mae’s lawsuit largely mirrors a case filed by Freddie Mac in March. Freddie Mac, another mortgage finance company, sued the BBA and 15 banks involved in setting Libor for fiddling with Libor at its expense.

Both Fannie Mae and Freddie Mac conducted their own analysis of the impact of the rate-fixing, but the issue was first raised by the inspector general for the Federal Housing Finance Agency, which regulates the two mortgage companies.

In December, the inspector general said the ma­nipu­la­tion probably caused Fannie Mae and Freddie Mac to lose billions of dollars on their holdings of more than $1 trillion in interest-rate swaps, floating-rate bonds, mortgage-backed securities and other assets linked to Libor from September 2008 to 2010.

To date, four banks — Barclays, UBS, RBS and Rabobank — have admitted their role in manipulating Libor and reached multimillion-dollar settlements with U.S. and British authorities. Britain’s ICAP became the first interdealer broker to settle in the global inquiry in September.