The fallout from the massive Libor scandal last year continues as Freddie Mac sues over a dozen financial firms including Bank of America, Citigroup and JPMorgan Chase over losses tied to the benchmark rate.
Freddie Mac (Photo credit: Wikipedia)
The government-controlled agency alleges in its lawsuit that banks colluded to the manipulate the Libor rate causing it to lose money on products such as mortgage bonds and swaps tied to the rate. Freddie did not say how much it was suing for but an internal report by a federal watchdog last year said losses tied to Libor at Freddie and Fannie Mae totaled more than $3 billion.
"Freddie Mac engaged in thousands of pay-fixed swaps and held billions of dollars in [mortgage backed securities] that paid monthly coupons tied directly to Libor," the suit says.
The Freddie Mac suit is significant because it's one of the first major U.S. entities to sue banks over Libor losses. Much of the Libor fallout has occurred in Europe where UBS, Barclays and Royal Bank of Scotland Group were fined $2.6 billion for their role in the scandal. JPM, Citi, and BofA and other U.S. banks are also part of the group that submits Libor rates they have yet to face any fines as many are still in talks with regulators.
Freddie is also suing the British Bankers’ Association which is the lobby group that was responsible for asking banks to estimate how much it would cost to borrow from each other. It would then take the average average figure, minus the top and bottom rates, to come up with the Libor rate.
This isn't the first time troubled Freddie has gone after banks en masse. In 2011, the Federal Housing Finance Agency (regulator of Freddie and Fannie) sued 17 financial firms for misrepresenting the quality of mortgage backed securities sold to Fannie Mae and Freddie Mac. That suit said firms including Bank of America, JPMorgan Chase, Goldman Sachs and Citigroup and subsidiaries of General Electric misrepresented the quality of loans they sold causing losses on more than $200 billion in mortgage-backed securities. That case is ongoing though GE is said to have reached a settlement agreement with the FHFA.
Fannie and Freddie are under the conservatorship of the U.S. since 2008 after it was determined the agencies did not have enough capital to continue operating . The rescue has cost taxpayers some $150 billion.
