U.S. mortgage giants Fannie May and Freddie Mac may have lost as much as US$3 billion due to manipulation of the benchmark interest rate known as Libor, according to a federal watchdog agency.
The memo from the inspector general, reported by Reuters on Thursday, advises Freddie and Fannie’s regulator, the Federal Housing Finance Agency, to consider suing the banks responsible for setting Libor.
The London Inter-Bank Offered Rate (Libor) is the interest rate banks pay to borrow money from each other. They are calculated for different currencies each day under the watchful eye of the British Bankers’ Association, using quotes submitted by banks on a panel, based on the banks’ estimated borrowing costs.
Because of the massive volume traded under the Libor – more than US$800 trillion in securities and loans are linked to the interest rate, including US$350 trillion in swaps and US$10 trillion in loans, including auto and home loans – even small movements or inaccuracies affect investment returns and borrowing costs, for individuals, companies and professional investors.
Several major banking institutions have already paid out hundreds of millions in settlements for their role in manipulating the rate. British banking firm Barclay’s agreed to pay nearly US$500 million last July; Swiss banking giant UBS settled with prosecutors for US$1.5 billion on Thursday.
Other banks are still being investigated for allegedly rigging Libor, including Citigroup, Deutsche Bank, J.P. Morgan Chase, and The Royal Bank of Scotland.
Operating procedures at Freddie Mac and Fannie Mae became a partisan talking point for Republicans in explaining the financial meltdown of 2008.