Alabamans suffer storms, oil spills and Libor - FT.

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October 15, 2012 3:12 pm

Alabamans suffer storms, oil spills and Libor

By Caroline Binham

Dog River, Alabama, is a sliver of a Deep South bayou, population 154,708, where homeowners work hard and save to make downpayments on their mortgage. Dennis Fobes, a 59-year-old salesman of janitorial supplies, bought his waterside home in Mobile County in 2005, as a property to ease himself into retirement. Over the past seven years, Mr Fobes house, perched on a bay that eventually flows into the Gulf of Mexico, has weathered several crises. Like everything else its value has dropped, Mr Fobes sighs. Weve suffered hurricanes, weve suffered oil spills. Weve pretty much suffered every calamity. However, he says nothing quite prepared him for Libor. In 2006, Mr Fobes refinanced his property to make some renovations, taking out a $360,000 mortgage pegged to Libor. That same year, thousands of miles away in London, traders were emailing each other in messages that have now become infamous, offering a bottle of Bollinger champagne as apparent thanks for changing the London interbank offered rate. The hand of God Mr Fobes is resigned to accept. But the hand of bankers he most certainly is not. Mr Fobes and his wife are two of five lead plaintiffs at the centre of what could be one of the most politically charged lawsuits to stem from the Libor scandal. They allege that 12 of the worlds biggest banks colluded to manipulate Libor to a higher rate on certain dates on which mortgage repayments were reset, causing plaintiffs to lose tens of thousands of dollars over nearly a decade. Unlike other litigants in the chorus of class actions that has already been filed alleging loss from Libor manipulation, the Alabama plaintiffs claim damage was wrought by Libor ticking up rather than down.

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Most importantly, unlike other litigants, the Alabama lawsuit is the first filed by homeowners, rather than investors, in the wake of the Libor scandal bringing home an issue that hitherto has been the preserve of high finance. The class of plaintiffs that they lead could potentially number 100,000, according to their attorney, John Sharbrough. Their mortgages were pooled by the banks then securitised using collateralised debt obligations. In the case of the Fobes, this meant their adjustable-rate mortgage known as a Libor Plus home loan, where the interest on the loan is tied to a Libor index plus a margin was collateralised and eventually used as an asset pinning securities underwritten by Deutsche Bank, one of the named defendant banks. Deutsche has admitted it is under investigation from authorities around the world into whether it manipulated Libor. The bank said: We are taking it very seriously and are co-operating with authorities, and have our own ongoing internal investigation. As many as 20 financial institutions are under review by as many as 10 authorities across three continents. Only Barclays has been fined for its part so far, paying 290m in June to settle allegations that it sought to manipulate Libor, in part to benefit its own trading book. Barclays declined to comment. The Financial Times revealed in July that investigators were probing links between a Barclays trader and a counterpart at Deutsche. Prosecutors and regulators have seized upon potential Libor manipulation because of the massive systemic effect it could have. It is a key benchmark borrowing rate between banks, and underpins $350tn of financial products worldwide, from derivatives to mortgages such as the Fobes. If Libor rises by a fraction of a per cent, this means that repayments on loans pegged to Libor also go up. On a $500,000 adjustable-rate loan, a rise of thirty basis points could increase monthly repayments by about $100. The basis-point moves alleged in the lawsuit are even smaller: on the first day of the month when mortgage rates were reset, Mr Sharbrough alleges that the rates consistently moved by as much as seven basis points. But if the class of plaintiffs is large enough, given that their mortgages were collateralised, their losses and the banks potential gain is magnified.

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The Fobes problems began when they took out a mortgage originator, which no longer exists, that used tactics that have become all-too familiar since the onset of the worst financial crisis in a generation: the closing costs were excessively high, the interest rate was above the odds, which the originator promised would be a temporary arrangement until the renovations were complete. Mr Fobes now pays about $3,900 a month in repayments on the loan, which was tied to six-month US dollar Libor. His mortgage repayments were based on an interest-rate margin of 4.99 per cent plus the Libor rate. He claims to have overpaid by thousands of dollars since refinancing his home, which has been recently revalued at $275,000. The Alabama action has high hurdles to surmount: it is not certified, and Mr Sharbrough must try to get the class action included in the multi-disciplinary litigation that all the Libor class actions have been grouped into, and which is now stayed until arguments are heard in a motion brought by the banks to dismiss the claims. I wont be retiring now, I will now be working until the day I die but is that the American dream? says Mr Fobes. This litigation is a last resort. But the bankers, they control the game, and they fix the game.

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