Analysis: Funds may have won and lost in Libor scandal

Tue Jul 17, 2012 2:39pm EDT
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By Ross Kerber

BOSTON (Reuters) - The investment chief of Calpers, the largest U.S. public pension fund, threatened a lawsuit if the fund was harmed by banks' manipulations of the London InterBank Offered Rate, or Libor.

But he left himself some wiggle room.

"Sometimes we were advantaged and sometimes disadvantaged," Joe Dear, who oversees Calpers $233 billion in assets, said on Monday. The fund is still reviewing the impact, he added. "We'll make a judgment as to whether to seek damages."

To legal observers, Dear's comments sum up the challenge for large investment funds weighing litigation over the growing scandal around Libor, which serves as a benchmark for all manner of loans, bonds and derivatives. Leading asset managers including State Street Corp (STT.N: Quote) and BlackRock (BLK.N: Quote) have also said they are reviewing the Libor situation.

All could have been exposed to Libor manipulations if they collected interest at Libor-linked rates on floating rate bonds or other securities. They also might have paid interest at Libor-linked rates on derivatives contracts or other forms of borrowing or hedging,

But the mix would vary widely and some firms might have protected themselves with hedging strategies, said Thomas Lee Hazen, a University of North Carolina law professor.

"There are so many variables on the types of claims that people and funds could make," Hazen said. "If they hedged themselves, there might not be any provable loss."

Justin Marlowe, a University of Washington finance professor, said some companies might find themselves balancing both gains and losses. "For a well-hedged operation, as most of them are, it's fair to say the Libor scandal will create winning and losing positions on both sides of their ledgers," he said.   Continued...

Joseph Dear, Chief Investment Officer of California Public Employees' Retirement System (CalPERS) speaks at the Milken Institute Global Conference in Beverly Hills, California April 30, 2012. REUTERS/Fred Prouser