Teddy Roosevelt would be proud
by. Henry Meier
Late yesterday evening, NCUA demonstrated yet again how aggressive it is willing to get in trying to recoup credit union losses caused by the actions of the banking industry during the financial crisis. It is suing the banks and the British Banking Association, which administered the LIBOR alleging that they conspired to manipulate interest rates and that this manipulation harmed credit unions including WestCorp, US Central and Members United.
LIBOR is supposed to reflect the cost at which banks are willing to lend to each other. The complaint alleges that as cracks began to appear in the banking system, the more than a dozen banks that reported their borrowing costs knowingly underestimated these costs. There was a fear that a bank that honestly reported that it was costing more to take out loans from other banks would signal that it was in trouble.
The complaint alleges that “defendants controlled what LIBOR quote would be reported and therefore controlled the value of investments tied to LIBOR.” NCUA argues that since credit unions had investments tied to LIBOR, the returns on these investments were artificially low. Under anti-trust law, which authorizes treble damages, credit unions could theoretically receive a windfall wiping out the costs of the special assessments to pay back the government for the costs of the corporate clean-up.
But notice, I said theoretically. NCUA faces several hurdles in bringing a successful lawsuit. First, let’s assume that it can demonstrate a conspiracy to manipulate the LIBOR – no easy task since 16 banks contributed quotes that made up the rate. It will still have to demonstrate what damages it suffered as a result of this manipulation. For example, if LIBOR was kept artificially low, then that means that credit unions that tied loans to the LIBOR actually saved money by paying less in interest to their members. And, even with the benefit of the extender statute, the statute of limitations will again be an issue in this case.
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