Reuters reported yesterday that UBS of Switzerland had agreed to pay over $450,000,000 for their participation in the rate rigging of the London Interbank Exchange or LIBOR over the past few years. Now why is this significant? The LIBOR is used as a rate index for an estimated 30 trillion dollars worth of contracts, including adjustable rate mortgages and home equity loans in California. The rate rigging in the LIBOR is a major issue, given that banks will be setting their loan rates soon for 2013. Many of the loan agreements provide that if the LIBOR ceases to be a reliable index, then the bank chooses another index, but none of these indexes is immune from rate rigging, so what to do?
Agreements that become unenforceable or include unlawful provisions have to be reformed under California law. Banks which participated in the rate rigging could also be liable for various other breaches of contract and fraud, if they did not disclose the past rate rigging in the LIBOR. The estimate is that the rate rigging has caused in excess of $14 Billion in unwarranted money being paid by bank customers.
Of course the banks have not been forthcoming in making adjustments to the rate rigging scandal. The Reuters report indicates that several European Banks will be paying up to a half of billion dollars each for their roles in this scandal. The next bank is the Royal Bank of Scotland. How long before we see American banks involved in this international scandal? How long before the our local banks admit to the rate rigging and reduce rates on ARM's and HELOC's? If you are on an adjustable rate loan, it is time to confront your bank about what they are going to do with the LIBOR. Odds are you will have to contact someone beyond your local branch, but the banks are in trouble on this one. The Wall Street Journal reported back in November, 2011 that the LIBOR was unreliable, yet banks continue to misuse this index.
We all thought that the Recession and overstating of home loans was a threat to the nation's banking system, yet now we have a Trillion dollar issue with millions of home loans. Again, the LIBOR is no longer a reliable index, so will the banks step up and reform their loans? Not a reliable chance without the consumer pressing the issue.