Here Come The Libor Liability Estimates

Tyler Durden's picture

Just as we noted here, the analyst estimates for the potential impact of Libor (litigation and regulatory) liabilities have begun. Morgan Stanley sees up to a 17% hit to 2012 EPS (from $420 to $847 million per bank) in a worst case from just regulatory costs, and a further 6.8% potential hit to 2013 EPS if the top-down $400 million average per banks losses from litigation are taken on one year (considerably more if the bottom-up numbers of more than $1 billion are included). They see LIBOR risk in three parts: regulatory fines (we est median 7-12% hit to ‘12 EPS; litigation risk (7% EPS hit over 2 yrs); and less certainty on forward earnings. There are a plethora of assumptions - as one would expect - but the ranges of potential regulatory fine and litigation risk are very large though the MS analysts make the greater point that the LIBOR 'fixing' broadens investor support for more transparency in fixed income trading in addition to fixed income clearing leaving the threat of thinner margins as another investor concern.


We estimate LIBOR regulatory fines off of Barclays settlement. Our bull case: a 2-9% hit to 2012e EPS as banks settle with regulators for the same amount as Barclays. Our base case: a 4-13% hit to 2012e EPS as, apart from UBS, banks do not receive the discount that Barclays got for being early and cooperative. Our bear case, 5-17% hit to 2012e EPS: a 30% premium to base case fines to reflect the possibility that the UK Serious Fraud Office layers on new fines once its LIBOR investigation (started July 6) is completed.

LIBOR litigation risk is harder to quantify, but we take a stab. We assume every 1bp of LIBOR understatement every day for 4 years represents a $6 billion hit to the LIBOR panel of banks. If the 16 banks listed in the class action lawsuits shared equally, we estimate this would be a ~$400 million hit per bank.



We use a bottoms-up approach to assess impact on our EPS estimates that is proportional to each bank’s derivative book; we estimate the hit would range from $60 million to $1.1 billion. See page 4 inside for our long list of assumptions in arriving at this estimate. We run both estimated LIBOR fines and litigation charges through our US LC Bank EPS estimates.

Bottom-Up (1 Year EPS Impact):

Bottom-Up (2 Year Total Litigation expectations):


LIBOR setting changes, debate over industry structure and investor demands for more trade transparency all reduce certainty on forward estimates. Changing LIBOR could shift market share or drive one-off valuation adjustments. Renewed debate in the UK on Vickers/banking separation could resonate elsewhere. More trade transparency could thin margins and shift share further to efficient participants.


Additionally, the LIBOR fixing broadens investor support for more transparency in fixed income trading in addition to fixed income clearing. The threat of thinner margins is another investor concern. Counterparties with the most transparent trading and clearing platforms ultimately win, speaks to a need for strong electronic trading backbone in FICC, as well as size/scale.

So the big get bigger once again...


Source: Morgan Stanley

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Ahmeexnal's picture

JPigMoron filing for bankruptcy this week?

Unprepared's picture

It is more likely that Uncle Sam Inc. defaults first. JPMorgue would just move its headquarters to SingAPoor.

Comay Mierda's picture

banks writing their own liability estimates? ahahahahahahha

EscapeKey's picture

Value at Risk.

But obviously, the model can be modified and compiled repeatedly until you're happy with the result.

Thomas's picture

I am no longer calling for transparency; I want scalps. I want to see Barclays destroyed and liquidated. I want to see the upper management beaten like baby harp seals. I want the rest of the bankers to rush to court for prosecution just like the Germans rushed to surrender because the idea of giving themselves up to the Russian Army was less appealing. I want them to beg for a fair day in court as a best case scenario. These bastards are the ones who have decided the law doesn't matter. It is time for them to enjoy the sharp end of that sword. Shit, this stuff pisses me off.

Silver Bug's picture

The Shadow banking system is horribly rotten and corrupt. I wouldn't be surprised if they were all totally bankrupt.

smlbizman's picture

what is truly needed is to teach an advance course on the "wasendorf" solution....if mr. wasendorf would have taken our course he would have had much better results...but if he signs up within the next 48 hrs. we will waive 10% of the fees for his short term student loan...

sudzee's picture

The FED will whitewash LIEborgate tomorrow. Look for banks to soar.

EscapeKey's picture

In fact, the banks were the victims here, you hear. Victims.

Paul Atreides's picture

Morgan Stanley calling the kettle black, what a bunch of pompus bullshit.

No more slap on the wrist fines, we demand arrests and jail time for those responsible!!!!

Cognitive Dissonance's picture

Demand all you want. Unfortunately the corruption has become so pervasive that nearly everyone in power perceives/believes that their best interest lay in supporting the continuing corruption. This has been Tyler's ongoing theme, that only a total re-set can clear the corruption.

I tend to agree.

So your demands will mostly be ignored, other than some window dressing in order to fan the flames of false hope that somehow this can all be averted. Just remember that many in power also indulge in that same fantasy, that maybe, just maybe, if we kick the can down the road long enough we can pull our asses from the fire.

Not likely. The corruption is going exponential.

False hope chains us to the present day insanity. Time to let go and accept what needs to happen. Ultimately it is our false hope that supports the present corrupt control structure. As long as we hold out hope for someone to ride in and save us from ourselves we will (often unconsciously) continue to support the status quo.

Paul Atreides's picture

I agree with you 100% CD your posts are pretty much always on point but one must not remain silent or apathetic, we must unify and direct our anger at the people responsible for this mess. We must continue to express our demands (even if they fall on deaf ears) for justice and our distrust at the current system for if we just sit back and do or say nothing the solution to this hegelian dialect will be in our worst interest.

Apathy is our worst enemy, you've got to get mad!

slackrabbit's picture

If the governments are going to prosecute libor rates; are they going to prosocute reserve banks interest rates?

My guess, some lawyer will also bring that arguement / defence up.

DeadFred's picture

In other words if they can't keep cheating they won't make as much money.

EscapeKey's picture

Oh I'm sure they'll invent a new criminal scam. They are very very good at it:

HSBC money laundering
Drug trade
Timberwolf and equivalent

need I go on? 


Caggge's picture

Too Corrupt Not To Fail.

Thomas's picture

They are too corrupt to exist. 

LoneStarHog's picture

The JOHNS in Congress will pass legislation protecting the WHORE banks from litigation in the name of National Security, with the promise that they will NEVER do it again.

papicek's picture

I've the feeling that, as long as banks cooperate with investigators, the punitive regime will largely be restricted to disgorgement. Just a rough estmate based on the Barclays settlement, but if true, banks can prepare for it.

chunga's picture

One big difference between the LIBOR swindle and many of the others.

This can't be blamed on "reckless" and "irresponsible" muppets who gamed the "system".

This was all the fault of these bad actors and the retarded regulators. (no offense to regular retarded people)


agent default's picture

We have the FED doing Operation Twist here, and we think Libor is a big deal? Libor is peanuts.

eclectic syncretist's picture

Send lawyers, guns, and money,...the shit has hit the fan.


Silversem's picture

Derivatives are dangerous!! But so much fun to play with!!

Vincent Vega's picture

Yaaaaaawn! Same as with Fraudclosure, money laundering, auction rate securities, etc etc etc... No wrongdoing admitted with perhaps a relatively small fine and a congressional dog/pony show.

falak pema's picture

funny money and funnier legalese please; crony capitalism is all about making trillions into millions for your friends in downside risk, and vice versa in upside bonuses and corporate profits; all at the expense of the small guys. 

And to balance the act, devalue the downside by making funny money even more Monopoly money. 

When you have the FED spray gun you can't lose.

Bam_Man's picture

If more than a nuisance, it's simply "a cost of doing business"

same old story's picture

So where is all this going?  Why is all the laundry coming out now.  Is it just as simple as they can no longer hide it or is it to make way for their new solution.  I think it is the latter, and as the people get all giddy that the banks might finally be made to paid, I suspect the only ones who will be paying is us the people.  Of course it will be sold as a good thing and laws etc will be passed or activated to force it through.


Just as the Patriot Act was sitting on a shelf waiting for the right moment to brush the dust off, the same thing is happening now.  The reality is that those with the power always plan for these type of things, while the majority have none beyond wanting what is in place to be removed.  Hence, why history is just one long example of deck chairs being moved around.  

lucidwanderer's picture

good point.  let's get ready for another tax and miles of red tape the banks can all make money on.  they'll probably make up their paltry fines and additional liability within a couple of months.

Sofa King Confused's picture

same old

while the majority have none beyond wanting what is in place to be removed


Well.....there was this one time.......years ago.......when the people did do something 1773-1776

Westcoastliberal's picture

The fact that the "Patriot" act was ready and waiting should tell all of us much about what really happened on 911.

Jacque Itch's picture

"Don't worry boyz, we got yer back"


Benny and Timmay

Snakeeyes's picture

Does the Fed have to pay anything? They were the manipulators AND knew about it.

Standard Deviant's picture

Earnings season is upon us, do the reserve for it?   Would be quite an admission.

recidivist's picture

Clearly disciplinary action is bad for the economy: Not being able to count on gaming the system is going to put downward pressure on earnings estimates.  

cassandravert's picture

You laugh, but that is exactly the kind of propaganda Wall Street was putting out in its investor newsletters before the crash, saying the market won't like any attempts by the government to limit its operations and other such.

1's picture

"bottoms-up approach"

williambanzai7's picture

Does Dick Bove ever do any work? Nevermind...

farmerjohn2112's picture

Big numbers. Just. Wow.

aleph0's picture


"They see LIBOR risk in three parts"


I'd have thought that the damages incurred would be much more "far reaching" than just that. i.e. the "analysts" were quick to name numbers, for fear of someone else doing it ... is my guess.

The number of "what if" cases , had the rates not been manipulated must be countless ... just starting with IRSwaps
i.e. Every stock/bond/FX/MM trade that was placed because of the manipulated numbers.

Looks to me like they have put these numbers up to deflect further discussion/speculation on the real impact of what they've done.
i.e. they hope the market "buys" these numbers ... because the real impact means the SHsTF = Exodus .

But in fact, with the whitewashing to be expected , they'll probably "all" get away with it - as usual - if they stick to the same methodology.

Maybe I'm wrong ... but they make it far too simple IMO.

Sandmann's picture

Can't we forget Fines altogether and simply EXECUTE. It would be far cheaper for Banks and I think the thrill of Russian Roulette on Trading Floors and in Directors' Dens could add to the excitement of being a Banker

Unprepared's picture

That bank-apologist Bair explaining the reason for fraud.


Not a single mention that fraud in financial institutions is systemic and unavoidable thanks to the Fed policies.

Raymond K Hessel's picture

Is this ride ever going to fucking end?!?!?

I'm simply exhausted seeing Big Govt and Big Biz stick it to us over and over and over again.  

lucidwanderer's picture

The road goes on forever and the party never long as there are suckers to keep letting them do it.  Wish I had a deal like that....rob, steal and plunder and apologize and give some of it back when I get caught.

midgetrannyporn's picture

Nice of them to list the fraudsters for us.

ShorTed's picture

It's hard to make sense of the big picture...banks submitting phony libor levels and end up screwing their own asset and derivative positions?  Can somebody help me here? 


ParkAveFlasher's picture

Whatever supports / facilitates volume / the numerical incidence of trades, supports the number of opportunities to collect fees. 

j0nx's picture

I did the math on this LIBOR scam for my mortgage ARM reset and it came out to about  an extra $110 a month for 2+ years that I've been paying. With interest and fees I calculated that I am owed $3500 for this. Where do I go for my check?

ThisIsBob's picture

Well, at least kick them out of the SP 500, so we can have us an election year rally.

Sutton's picture

let's see....RICO.

TREBLE damages.

And what was the damage?