LONDON While banks appear to be brushing off record fines for rigging interbank interest rates, investors are starting to worry about a rising tide of civil lawsuits from disgruntled customers.
UBS UBSN.VX shares touched 18 month highs after U.S., Swiss and British regulators on Wednesday fined the bank a near record $1.5 billion for fiddling interest rates, the second regulatory fine for manipulating the London interbank offered rate (Libor) and its euro equivalent Euribor.
But the "big unknown" cost of repairing the damage caused by the fixing of rates used as a benchmark for pricing trillions of dollars worth of financial contracts is civil litigation, said Paras Anand, European equities head at Fidelity Worldwide Investment.
"That is one thing at the back of our minds that we have to be cognisant of," Anand said. Fidelity Worldwide holds around 1.2 percent of UBS stock.
An early indication of the possible cost to the banking industry came hours after UBS was fined when the U.S. federal watchdog estimated mortgage lenders Fannie Mae FNMA.OB and Freddie Mac FMCC.OB, which had to be bailed out during the 2007/08 financial crisis, could have lost more than $3 billion as a result of Libor manipulation.
The watchdog urged the regulator to consider whether the losses warranted a lawsuit against the banks that set Libor.
Since June, when the first fine for manipulation was levied on Britain's Barclays (BARC.L), there have been a series of U.S. Libor-related claims.
Claims have come from large investors, local governments like the city of Baltimore, home owners claiming rate rigging made their mortgages more expensive, and small U.S. banks that have filed lawsuits accusing their big cousins of collusion.
In August, New York lawyer Brian Murray filed a lawsuit on behalf of investors in Alaska - as well as investors in Wyoming, North Dakota and about 20 other states - accusing banks of rigging Libor.
In Britain, the Financial Services Authority (FSA) has said Libor fiddling could have caused "serious harm" to other market participants. Lawyers, who are starting to circulate guides to Libor litigation, say potential claims are trickling in.
"I think there are going to be a large number of claims - and, more importantly, a small number of those will be incredibly high-value claims," said Ali Akram, senior lawyer at UK firm Lex Law.
The manipulation of Libor casts doubt on every contract that has used it as a reference point, including commercial borrowers with loans linked to Libor, parties to interest rate derivatives such as swaps, investors holding portfolios of floating rate securities, guarantors of borrowing linked to Libor and savers being paid a rate of interest referencing Libor.
There are also potential claims by shareholders for any falls in stock prices as the scandal escalates.
Lawyers believe Libor manipulation has caused extensive losses to investors and borrowers worldwide. The scale of payouts could run into tens of billions of dollars, analysts estimate.
But as Libor rates are calculated by averaging out bank submissions and stripping out the highest and lowers outliers, calculating losses and proving individual bank conduct caused a loss can be complex.
"We're at the beginning of a long road," said Stephen Rosen, a lawyer for UK firm Collyer Bristow, which has a handful of clients eyeing Libor-related claims.
To date, just one case has been brought in Britain against Barclays by Guardian Care Homes, a residential care home operator. It is suing for up to 37 million pounds over the alleged mis-selling of interest rate hedging products that were based on Libor rates.
But the scandal is escalating.
Britain's RBS (RBS.L) is also expecting to be fined by next February, while more than a dozen banks such as Deutsche Bank (DBKGn.DE), Citigroup (C.N), J.P. Morgan (JPM.N) and HSBC (HSBA.L) remain under the spotlight as authorities in Europe, Japan and North America probe the Libor scandal.
Barclays, Citi, J.P. Morgan, Deutsche Bank, HSBC, Lloyds, Rabobank and RBS have all said in previous releases that they are subject to civil or private lawsuits filed in the United States over Libor.
Barclays said the first class action lawsuit filed was in April 2011, and the complaints are similar and seek an unspecified amount of damages.
Regulators and politicians are mindful of the impact of lawsuits on economic recovery and stability, some experts say, coming on top of the fines. While UBS was fined three times more than Barclays, fears of spiralling settlements could be overdone as authorities seek to balance the fallout.
"There will be a round of going through pain before politicians get scared and step in ... At some time politicians and regulators will wake up and see that it will hit the economy," said Chirantan Barua, a senior banks analyst at Bernstein Research.
Baruna estimated about 15-20 banks could be implicated in the Libor manipulation once global investigations are completed, which could give claimants plenty of fodder for lawsuits.
(Additional reporting by Sinead Cruise and Costas Pitas; Editing by Will Waterman)