Innocent until proven guilty in a court of law is the way of the land and US banking institutions will certainly have to put forth a lion’s share of effort defending themselves in the wake of the recent LIBOR manipulation scandal. The London Interbank Offered Rate (LIBOR) is the benchmark interest rate for rates around the world, essentially. Barclays recently admitted it colluded to manipulate LIBOR and got slapped with a hefty $455 million fine and essentially escaped criminal prosecution for coming clean right away. It has cost the bank its iconic CEO Bob Diamond, who resigned Tuesday morning in addition to now former Chairman Marcus Agius.
Manipulating interest rates is a violation of the Sherman Antitrust Act and a criminal offense. It is ironic in the sense that what little “trust” was left in the markets has all but evaporated at this point. As regulators both domestic and abroad begin their probes and investigations into financial institutions and the LIBOR scandal, it is becoming clear that this could very well be the worst thing to happen to banks since the 2008 financial crisis.
The past six years have seen regulators and politicians dole out an immense amount of restrictions and control over US banks. From Dodd-Frank provisions like Durbin to the Volcker Rule to the (estimated and still climbing) $49 billion in mortgage putback settlements, it has not been an easy journey. Three key players in the US have to worry about the effects of what we will refer to as LIE-BOR: JP Morgan Chase (JPM), Citigroup (C) and Bank of America (BAC). These are the large cap US banks who participate in setting LIBOR. It is worth noting that Goldman Sachs, Morgan Stanley and Wells Fargo are not affected by this mess.
With regulators breathing down their backs, essentially zero public trust and a slew of lawsuits in the wind, the bearish case for BAC, C and JPM is getting stronger by the day. JP Morgan in particular has it rough after getting grilled over its $2 billion+ trading loss out of – where else? London.