(CN) – Citibank will pay $100 million in a multistate action to settle claims it manipulated a key interest rate during the global financial crisis that resulted in massive losses to investors, California Attorney General Xavier Becerra announced Friday.
California, one of 42 states to sue Citibank for manipulating the London Interbank Offered Rate (LIBOR) – the rate at which banks lend money to one another and the rate used to determine interest rates for financing products – will get $12 million of the settlement funds.
The funds will go to government agencies and nonprofits in the state that lost money due to Citibank’s conduct.
“As a result of this settlement, Californians will have more money for hospitals, water districts, local transit and other public services – money that would have otherwise lined undeserving pockets,” Becerra said in a statement.
During the financial crisis in 2008, large international banks manipulated LIBOR to bolster their finances and dodge bad publicity.
They did so by lowering the LIBOR rates they submitted each day to Thomson Reuters, which calculated the daily LIBOR for each currency based on the middle 50 percent of submissions. The daily LIBORs were used to determine interest rates for financing products around the world, including government and corporate bonds.
Mortgages, credit cards, student loans and other consumer lending products often use LIBOR as a reference rate.
Instead of submitting rates reflecting Citibank’s true borrowing cost, Citibank repeatedly submitted lower LIBOR scores “to be seen, but not heard anywhere at all in the market,” according to an internal Citibank communication quoted in Friday’s settlement agreement.
“I know it’s difficult but just try to avoid being highest, no need to be lowest,” an unnamed New York-based Citibank manager wrote in a 2008 instant message to a LIBOR submitter, according to the agreement.
A month later, the LIBOR submitter wrote to a Citibank employee: “The main issue we’ve got is the huge fear factor of anybody posting high LIBORs … What sort of things that were published to the world would be construed as, you know, Citibank were in trouble … so there is a little bit of internal political pressures for us to be seen, but not heard anywhere at all in the market,” according to the agreement.
“Today’s settlement represents another significant step for Citi in resolving its legacy interbank offered rate litigation,” Citibank said in a statement. “Citi has adopted industry-wide reforms related to participation in interbank offered rates and other benchmark rates and made substantial investments in its systems, controls and monitoring processes to better guard against inappropriate behavior. Our greatest priority remains ensuring that we conduct business in keeping with the highest ethical standards.”
California serves on the executive committee of the LIBOR multistate action, which began investigating LIBOR misconduct in 2012. The states have also settled with Barclays for $100 million and Deutsche Bank for $220 million, for a total of $420 million.
“California is prepared to hold accountable any financial institution that plays fast and loose with the law,” Becerra said in his statement. “Fraudulent and manipulative conduct will not be tolerated.”
About $350 trillion of notional swaps and $10 trillion of loans were indexed to LIBOR as of 2012, according to the British Bankers’ Association. LIBOR is also used to settle interest rate futures and options contracts on many of the world’s major futures and options exchanges.
Citibank Deputy General Counsel and Senior Vice President Adam Meshel represented Citibank in the settlement.