Another day, another lawsuit alleging collusion and interest rate manipulation by our Too Big To Jail/Too Big To Fail Banks.
Freddie Mac, i.e., the Federal Home Loan Mortgage Corporation, was created in 1970 to increase liquidity in the secondary mortgage market as a means to make home ownership more affordable. As a result, Freddie Mac did, and still does, a lot of business with the major financial institutions that provide liquidity in the secondary mortgage markets. Now Freddie Mac is claiming those same banks collectively manipulated the London Interbank Offered Rate (LIBOR) in order to defraud Freddie Mac and other consumers out of billions of dollars:
Freddie Mac accuses the banks of fraud, violations of antitrust law and breach of contract. The housing financier is seeking unspecified damages for financial harm, as well as punitive damages and treble damages for violations of the Sherman Act.
“To the extent that defendants used false and dishonest USD LIBOR submissions to bolster their respective reputations, they artificially increased their ability to charge higher underwriting fees and obtain higher offering prices for financial products to the detriment of Freddie Mac and other consumers,” the U.S.-owned company said in the complaint.
The financial institutions named in the lawsuit include Citigroup, JPMorgan, Barkleys and Credit Suisse, among others. Here’s how the alleged fraud worked. By manipulating the LIBOR rate to keep it artificially lower, the Banks cheated Freddie Mac and others out of higher payments on Credit Swaps and Mortgage Backed Derivatives, as explained in the complaint:
In its complaint, Freddie Mac points out two ways that the artificially lower rates cost it money. First, the company hedged is mortgage positions by buying swaps on the fixed-rate mortgages it held so that it received floating-rate payments. When Libor was pushed down by the banks, Freddie Mac received lower payments from the swaps.
The company also bought the swaps from a number of banks that participated in setting Libor. That has led the firm to include claims for breach of contract, as Freddie asserts that any manipulation violated the terms of the agreements to receive payments.
In addition, Freddie Mac held a large portfolio of mortgage-backed securities with floating interest rates. The lower the rate, the less it received in interest. Homeowners may have benefited from the manipulation in Libor by paying less interest on their mortgages, but Freddie Mac received less income on these financial instruments.
It seems most of Freddie Mac’s allegations in its complaint come straight from the mounds of documents obtained by US regulatory agencies that led to multi-billion dollar settlements by Barclays, UBS and the Royal Bank of Scotland, many of them emails detailing the collusion. The emails demonstrate the banks caused the LIBOR rate to fall in order to improve the Banks own trading positions and give the false appearance of financial health at a time when the Banks were in fact undercapitalized and overly invested in highly risky derivatives.
Freddie Mac is following through on the advice given by the Inspector General of the Federal Housing Finance Agency which stated that both Freddie and Fannie Mae should sue the banks for losses estimated to exceed $3 Billion. Naturally the Banks are claiming Freddie Mac has no right to sue. Stay tuned.
