Wall Street investors in dark on liability of Libor probes

July 5 (Bloomberg) -- Barclays Plc investors, blindsided by the bank’s $451.4 million regulatory fine for trying to rig benchmark rates, saw the stock drop 16 percent a day later. Other bank shareholders may be just as surprised.

Barclays, like other lenders that help set key rates for $360 trillion in securities, has given investors scant guidance on the liability they face for alleged market manipulation. More than a dozen banks are being probed by U.S., Asian and European regulators for collusion in setting interbank lending rates. The others have mirrored Barclays on minimal disclosure.

“The automatic reaction from investors is: ‘Who’s next?’” said Todd Hagerman, a New York-based analyst at Sterne Agee & Leach Inc. who recommends investors remain “cautious” on the biggest U.S. banks. “It’s fair to assume that legal and related professional fees and associated reserves are going to continue to remain elevated, if not increase.”

Bank of America Corp., Citigroup Inc., Royal Bank of Scotland Group Plc and UBS AG are among the lenders whose participation in setting the London and Europe interbank offered rates, known as Libor and Euribor, are under investigation. None of the banks would say if they set aside reserves to cope with potential liabilities and, if so, how much.

“I believe that Barclays had previously reserved for only about one-third of their ultimate liability” in regulatory fines, Charles Peabody, a banking analyst at New York-based Portales Partners LLC, said in an e-mail. Other banks’ reserves “will probably prove inadequate.”

Biggest Banks

Barclays’s fines were the first in a two-year, inter-continental investigation into manipulation of Libor and Euribor, benchmarks used globally for setting borrowing rates. Among the 18 lenders on the U.S. dollar panel are the three biggest American banks, JPMorgan Chase & Co., Bank of America and Citigroup, as well as Barclays and Zurich-based UBS. The 16-member British pound panel includes Barclays, UBS, JPMorgan and Frankfurt-based Deutsche Bank AG.

“The two-year investigation into banks rigging Libor, which has taken a toll on Barclays, has the potential to hurt Citigroup, JPMorgan and Bank of America,” Mike Mayo, an analyst at CLSA Ltd. in New York, wrote in a July 2 research note. The banks face risks of fines, lawsuits, negative news and new regulations, according to Mayo.

“While there is no evidence that the three U.S. money-center banks did anything wrong, there is a heightened possibility of scrutiny after recent events at Barclays,” Mayo said.

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