Experts tackle piece of the Libor puzzle

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Paula Ramada, who has a doctorate in economics from the Massachusetts Institute of Technology, says she can calculate how much investors lost from banks' alleged rigging of benchmark interest rates. Now all she needs is funding, a team of analysts and weeks to run the numbers.

Ms. Ramada is among a growing number of mathematicians, analysts and researchers trying to tackle one of the toughest questions to emerge from the Libor scandal: If banks manipulated rates tied to $300 trillion in instruments such as mortgages and student loans, how much did it cost investors?

Investors suing banks to recover losses must quantify those damages, which some analysts have estimated will total billions of dollars. While regulators have uncovered emails between employees trying to rig the London interbank offered rate, the benchmark for more than $300 trillion of securities worldwide, it has been harder to show that investors actually lost money.

"The facts are pretty clear on the plaintiffs' side, but it's still an issue of proving damages," said Samuel Buell, a professor at Duke University School of Law in Durham, N.C., and a former lead prosecutor for the Justice Department's Enron Task Force.

As regulators in the U.S., Europe and Asia probe an expanding list of benchmark rates -- underpinning loans, currencies and even some oil products -- the difficulties individual investors face in calculating losses show why many may never be compensated.

"You have to manually prepare the data and run it through a program," said Ms. Ramada, 45, who leads a team of researchers at London Economics, a U.K. consulting firm in talks with lawyers representing investors.

Ms. Ramada and teams working for at least two other consulting firms tackled the Libor puzzle as banks began settling regulators' accusations that the rate was being rigged.

For decades, a panel of global banks helped set the daily rate by estimating the premium they would pay to borrow from other firms. Watchdogs are examining whether bank employees gamed submissions to boost trading profits or downplay mounting funding costs during the 2008 financial crisis.

A year ago today, Barclays Plc became the first bank to resolve regulators' complaints that employees abused the system, saying it would pay 290 million pounds ($445 million). Zurich-based UBS AG and Royal Bank of Scotland Group Plc in Edinburgh later agreed to penalties totaling $2.1 billion.

The settlements provide evidence of attempted manipulation with emails and banks' internal records. At least a dozen more financial firms are still facing probes.

In a research note last July, Morgan Stanley said legal costs for individual banks may range from $59 million to more than $1 billion. In a separate report that month, Macquarie Group Ltd. said investors may have lost as much as $176 billion.

Ms. Ramada has a two-step approach to the Libor puzzle.

First, she would reference other benchmarks to estimate what daily Libor rates would have been without rigging. If manipulation occurred, Libor would have diverged from benchmarks that track the cost of unsecured funding to banks, such as the Federal Reserve's Eurodollar deposit rate, as well as instruments linked to the firms' credit risks, such as credit-default swaps.

"Divergences from key benchmarks have been identified by several researchers and attributed to Libor manipulation," said Marc Vellrath, chief executive officer of economic consulting firm Finance Scholars Group Inc., based in Orinda, Calif.

His company also is developing a method for estimating Libor losses and, like Ms. Ramada's, is talking with plaintiffs' lawyers looking to quantify damages.

The second step is to recalculate payments on specific contracts. For that, investors will need documents from their trades.

Last year, government watchdogs proposed a simpler approach that hasn't gained momentum. The Federal Housing Finance Agency's inspector general estimated that Fannie Mae and Freddie Mac, the U.S.-controlled mortgage-finance firms, lost a combined $3 billion. That analysis relied mainly on divergences from the Fed's Eurodollar deposit rate.

In March, Freddie Mac sued 15 banks including London-based Barclays and Citigroup Inc., without specifying what damages it suffered. The case was filed in federal court in Alexandria, Va., and later consolidated with others before U.S. District Judge Naomi Reice Buchwald in Manhattan.

More than a dozen lawyers representing banks in Libor cases either didn't respond to messages seeking comment or declined to discuss the case.

Other plaintiffs are pursuing fraud claims. Earlier this week, the Regents of the University of California filed an antitrust complaint in federal court in San Francisco against more than a dozen firms, including Barclays and Bank of America Corp., accusing them of fraud, deceit and unjust enrichment.

There's another complication: Not every investment was hurt by Libor manipulation. Plaintiffs who show financial losses on one part of their portfolios also may have benefited on other positions, reducing total losses, said C. Bailey King Jr., a lawyer at Smith Moore Leatherwood LLP in Charlotte, N.C., who isn't representing Libor plaintiffs.

"This could be used as a defense tactic for the defendant banks," Mr. King said.

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