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Regulators have begun a global investigation into the manipulation of interest rates by big banks. The investigation has led a bank from Wisconsin to file a lawsuit that accuses JPMorgan Chase & Co, Bank of America Corp, Citigroup Inc and other big banks of colluding to set the rates at low prices. The bank, the Community Bank & Trust of Sheboygan, claims that the London interbank offered rate has been manipulated to remain low. The rate is commonly known as Libor. The world’s largest banks determine the Libor in London. It is used to set the interest rates on credit cards, student loans, mortgages and much more.
The lawsuit was filed late in May by Charles Tompkins of the Boston law firm Shapiro Haber & Urmy on behalf of the bank, which has 11 branches and assets of $554 million. The lawsuit is seeking the status of class action so other community banks can join in the litigation. Tompkins’ firm has handled antitrust, consumer and securities lawsuits. Tompkins said that community banks in the United States might have lost over $1 billion over the past four years from loans to small businesses because of artificially low rates. The banks are accused of violated the RICO Act, which is short for Racketeer Influenced Corrupt Organizations, by rigging the rates.
Community Bank & Trust said in its complaint that if the Libor was underestimated by 80 basis points in 2008, it would have lost $64,000 in interest income on the $8 million of floating rate loans. The lawsuit defines the 7,000 U.S. community banks as having assets of $1 billion or less. The lawsuit is asking for damages of $448 million in damages for 2008 alone.
“If the allegation of Libor manipulation by the largest banks is found to be true,” small banks need to consider “legal and all other means available,” said Daryll Lund, president of the Community Bankers of Wisconsin.
The president of Pacific Premier Bank of Costa Mesa, California, Steve Gardner, said that he wants to learn more regarding the impact of rate manipulation on his bank before deciding if his bank should join the lawsuit. Gardner said that his bank used the Libor to set rates for loans issued to accountants, bakeries and manufacturers.
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Michael Kubacki, the chief executive officer for Lake City Bank in Warsaw, Indiana, said that “it’s not going to cause any heartburn” if some customers borrowed at lower rates. Anthony Jovanovich, the CEO of Community Bank & Trust, was surprised that the law firm used his company as the head plaintiff in the lawsuit but did say that he supported the lawsuit.
