Barclays and RBS in the Dock

by Mark Johnston

In a typically and somewhat predictable move, the bankrupt US lender; Thornburg Mortgages Inc and its trustees is suing Barclays, Royal Bank of Scotland and Goldman Sachs. These are just a few of the top banks being sued for close to $2.2 billion (£1.3 billion).

Joel Sher is pointing an accusing finger directly at the banks for the failure of mortgage lending during the credit crisis. Mr. Sher, the court appointed trustee and lawyer from Maryland, has filed four lawsuits against some of the biggest global banks.

What Mr. Sher is alleging is that “collusive” arrangement was made between JPMorgan, Citigroup, RBS, Credit Suisse and UBS that eventually drove the Thornburg organisation into bankruptcy. He says that the five banks consciously and purposefully acted together to put increasing pressure on Thornburg to the point where their control over the organisation drove them into bankruptcy. Mr Sher said that “market disruption as a justification to initiate a collusive scheme to take control of the debtors and eventually drive them into bankruptcy”.

He says that these banks willingly and knowingly extracted over $700 million of margin and interest payments from Thornburg and effectively hung them out to dry. Thornburg filed for a Chapter 11 bankruptcy and waited for the administrators to arrive, the lawsuit hopes to recover $2 billion in what they claim were fraudulent conveyances and transfers.

Barclays are up for a suit covering $94 million for the alleged improper seizing of mortgage bonds, apparently carried out by the undervaluing of securities by margin calls. There is a suit against Goldman Sachs for $71 million, for their apparent improper attempt or plot to seize hundreds of million of dollars worth of investment grade mortgage bonds. If there is any truth in any of these accusations, there appears to be some quite ruthless businesses operating during the height of the credit crisis.

Citigroup have come back and have classed the accusations against them as merit less while Credit Suisse, UBS, Barclays and Goldman Sach have all declined to comment. Reuters have reported that JPMorgan have called the accusations merit less too.

It emerged earlier this year that Barclays was under investigation as US and UK regulatory bodies probe suspected improper conduct in an alleged rigging of the benchmarking of the interbank lending rate. This rate, the LIBOR, is used as a reference point for $350,000 billion in financial products.

The London Inter Bank Offer Rate (LIBOR) has a direct impact on some mortgage rates applied to borrowers. The LIBOR is an interest rate, used on a daily basis, at which banks borrow unsecured funds from one another in the wholesale money market in London. Another way of looking at this can be to imagine that this rate is the interest rate that the banks offer to pay each other for the loans they borrow from each other for various different time periods and in various different currencies.

Prior to the credit crisis, which reduced the general availability of loans (or credit), over the last few years some mortgage lenders had been offering tracker rates linked directly to the LIBOR. An odd notion but one that benefited the borrowers significantly when this was lower than the Bank of England base rate at the time. So, the allegation that Barclays colluded with other lenders and banks to fix this rate, is quite serious for borrowers.

The alleged misconduct was apparently carried out between 2006 and 2008 and centres around the violation of the “Chinese wall” rules which prohibits and should prevent information being shared between different parts of the bank, in this case between the traders and the banks treasury arm.

Barclays are not alone under this joint Atlantic coalition investigation; Citigroup, UBS and Bank of America have also received subpoenas. Bank of America is no stranger, these days, for investigations into unprofessional conduct.

A Federal District Court judge in the USA has recently endorsed the continued prosecution of the Bank of America by the German Deutsche Bank AG and the French mortgage lender BNP Paribas SA. Their issues are broadly relating to the losses that they incurred through the collapse of Taylor Bean and Whittaker Mortgage Corporation.

This probe, believes that the banks involved knowingly understated the LIBOR rates thereby reducing borrowing costs and capping investor panic. When artificial LIBOR is entered into the market, this inevitably leaves lenders and investors out of pocket but this is good news for borrowers, interbank and via LIBOR mortgage rates which track these.

Lawsuits continue.

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