With Libor suit, Baltimore reinforces role as banking watchdog

City is lead plaintiff in class action that 'goes to the heart of our financial system'

  • Police wait for protestors to appear at a branch of Barclays Bank in Westminster, central London.
Police wait for protestors to appear at a branch of Barclays… (Olivia Harris, Reuters )
July 14, 2012|By Steve Kilar, The Baltimore Sun

Two huge civil cases led by Baltimore — one that ended last week as the other gained momentum — spotlight City Hall's emerging role as an aggressive watchdog against the misdeeds of multinational banks.

On Thursday, Wells Fargo settled a nationwide suit launched by the city four years ago that alleged the bank discriminated against black and Latino mortgage borrowers.

Baltimore is also the lead plaintiff in a class action suit against a group of financial firms worldwide it accused of conspiring to keep a key interest rate benchmark low — and thereby siphon off money from the city treasury. The case, pending in a New York federal court, drew fresh attention when the British megabank Barclays recently agreed to a related $450 million settlement with regulators.

A succession of Baltimore leaders have brought several class action suits against banks, alleging a range of financial improprieties that ultimately cost taxpayers and residents, making it one of the more activist municipalities in the country.

"They've taken an active approach to policing the public markets," said Bill Carmody, a lead outside attorney on the interest rate case. A lot of municipal plaintiffs want the money but don't want the responsibility of taking control of a case, he said. "They've stepped up to the plate."

Fear of retribution from banks has not scared off Baltimore's leaders, said City Solicitor George A. Nilson.

"It's to the credit of our two mayors that they didn't back off on Wells Fargo and these other suits," said Nilson, applauding Mayor Stephanie Rawlings-Blake and her immediate predecessor Sheila Dixon.

Wells Fargo settled the Baltimore suit and a related one filed by the U.S. Justice Department for $175 million, most of which goes to borrowers allegedly discriminated against. The city was allocated $7.5 million, money that Rawlings-Blake says will be used to assist Baltimore homebuyers.

"It all started here in Baltimore City," said Thomas E. Perez, the U.S. assistant attorney general who heads the Justice Department's civil rights division. He appeared at City Hall with Rawlings-Blake on Thursday to announce the settlement and credited Baltimore for sparking recognition of the role race played in the subprime mortgage scandal.

Though the Wells Fargo settlement was big, the nation — and world — may have a much larger financial stake in Baltimore's interest rate suit, experts say.

"It could be billions. Or tens of billions. Or maybe even more," said Phillip Swagel, professor in international economic policy at the University of Maryland School of Public Policy and a former assistant secretary for economic policy at the U.S. Treasury Department.

Baltimore's share could range from hundreds of thousands of dollars into the millions, Nilson said.

The suit alleges that banks purposefully suppressed the London interbank offered rate — Libor, for short — during the late 2000s.

Libor is a daily average of the interest rates that banks around the world say they use when they're lending to one another. The rate is meant to reflect market conditions, Swagel said.

Set by the British Bankers Association, a trade group the banks report rates to, Libor is tied to the interest rates on trillions of dollars worth of debt, such as home loans and municipal bonds.

In its settlement with British and U.S. regulators, Barclays admitted that it underreported its rate because it made the bank appear more stable.

Baltimore and more than a dozen other plaintiffs, including public and private entities, believe other large banks did the same thing.

The city sued in August because of Libor's relationship to some of Baltimore's bonds, naming banks on the Libor-setting panel, including Bank of America, Barclays and Citibank.

In the early 2000s, during Martin O'Malley's tenure as mayor, Baltimore issued bonds tied to Libor to raise money for parking infrastructure, water utilities and other projects. To entice investors, the bonds paid a floating interest rate — Libor plus an additional percentage. Such floating rates insulate investors from interest rate swings and inflation.

But they can present problems for municipalities with tight budgets. If interest rates shoot up, a municipality would need to find money by either raising revenue or cutting costs to pay more to the bond investors.

"A typical city just cannot afford that uncertainty. That would be deadly. They just cannot take that risk because they live on a thin margin," said Yuval Bar-Or, an adjunct professor at the Johns Hopkins University's Carey Business School.

In order to protect itself, Baltimore executed a contract with a bank that transferred that uncertainty. The city agreed to pay the bank a fixed interest rate and, in return, the bank agreed to pay the amount the city owed investors on the floating-rate bond.

It's called an interest rate swap. In such an arrangement, if the benchmark rate goes up, the city is protected because the bank foots the bill.

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