US pension funds are still trying to understand the impact of the LIBOR scandal on their assets to assess whether they should launch a class action against the banks involved in the case. The matter is highly complex and could lead to tens of billions of dollars in claims, not just from pension funds but also from cities, states, lenders, insurers and other investors who say they were hurt by the allegedly manipulated rates.

The estimates on the potential legal liabilities vary considerably according to various sources.  Macquarie Research calculates that they amount to $176bn (€138bn), assuming that LIBOR was “understated” by 0.4 percentage points in 2008 and 2009.
Analysts at Keefe, Bruyette & Woods believe banks could agree on settlements of about $47.5bn, or 10% of all damages claimed in lawsuits so far. Those facing the biggest potential payouts, according to analysts at Morgan Stanley, include Deutsche Bank, Royal Bank of Scotland, Barclays, Bank of America and JP Morgan. This is an assessment based on the financial business they undertake rather than any proven participation in the scandal.

The number of lawsuits is growing, because LIBOR is used as a benchmark for hundreds of trillions of dollars in loans and financial contracts around the world.

The problem for pension funds is that although they may have suffered losses, they may also have profited from the allegedly manipulated rates. The manipulation was indeed in both directions, according to admissions by Barclays, the only bank so far to settle with US and UK regulators over allegations that it manipulated LIBOR. On the one hand it declared lower rates (paid for overnight loans from other banks) in order to appear healthier during the financial crisis; on the other hand, it pushed rates artificially higher when it was useful for particular deals. Barclays paid $450m to settle the charges.

The California Public Employees’ Retirement System (CalPERS), the largest US public pension fund with $239bn in assets, is weighing the balance of the effects. Like other investors that hold bonds paying interest at a certain rate above LIBOR, Calpers may have suffered losses from artificially lower rates, if - and this is a huge caveat for a large and sophisticated institutional investor - the fund did not protect itself using hedging strategies. At the same time, CalPERS may have paid lower rates for a number of other financial contracts linked to LIBOR that it regularly uses, such as interest rate swaps and swaptions.

While CalPERS is taking its time, other pension fund managers are in a hurry to act. Take for example Janet Cowell, North Carolina’s elected treasurer, who oversees the state’s public pension plan. She is a 44-year-old Democrat and former business consultant who is running for another four-year term, riding the anti-Wall Street sentiment. A legal case against ‘big banks’ would be a good PR coup for her campaign. She is reportedly looking at two areas of the state’s finances: the $76bn pension fund and the interest rate swaps the state used to issue bonds at a floating interest rate and protect itself from future rate swings. Cowell has already discovered that the losses suffered by the pension fund on its investments tied to LIBOR were pretty small, so is more focused on interest rate swaps.

The states of Maryland, Massachusetts, New York and Connecticut are evaluating their exposure to the LIBOR scandal. And some large asset managers including State Street Global Advisors, BlackRock, Vanguard Group and Federated Investors have said they are reviewing the situation.

Fund manager Charles Schwab filed a lawsuit last year claiming it deserves damages related to billions of dollars in fixed-rate investments held by its funds, as well as investments with returns pegged directly to LIBOR. Although the scandal erupted this year, it started to surface in 2008 and may go back several years.

For smaller and less complex institutions it is easier to assess the damage - particularly the community banks that lend money to small businesses that may have lost money because of artificially low rates. Total losses for this financial sector are more than $1bn, according to estimates by the lawyers of Community Bank & Trust of Sheboygan, Wisconsin, which has 11 branches and $554m in assets. It has already filed a lawsuit seeking class-action status so other small banks can join in.