Libor Filings are Just a Way to Make Small Law Firms Look Busy, Claims Lawyer

A Labaton Sucharow partner has warned pension funds seeking damages in court for Libor losses that the effort it takes often outweighs the possible settlements.

(July 29, 2013) — Pension funds should think twice before embarking on London interbank offer rate (Libor) damages class actions, as many of the cases will cost far more money to put together than you’ll receive in damages.

That’s the message from Dominic Auld, a partner at law firm Labaton Sucharow, speaking in the aftermath of Houston, Texas and Sacramento County joining the host of cities taking banks to court in an effort to obtain Libor settlements.

 “One of the biggest challenges in bringing a Libor case is determining damages. Large, complex investors who are exposed to a wide variety of trades and securities pegged in some way to the benchmark are faced with a gargantuan task,” he told aiCIO.

“They would need to parse out the potential negative and positive effects the artificially supressed (or inflated) rates may have had on every single position they are in, on a daily basis, for a period of several years against 17 potential counterparties. In many cases, the effort simply isn’t worth it.”

Want the latest institutional investment industry
news and insights? Sign up for CIO newsletters.

While some might think this is a case of sour grapes from a lawyer who is not himself leading any such cases, Auld insists the challenges of putting together a good case are simply too big for it to be efficient for investors.

“The best cases seem to be direct actions involving smaller and more simplistic institutional investors who invested in a single class of assets that consistently fell on the same side of Libor, and purchased them from a bank shown to have engaged in culpable conduct,” he continued.

Auld pointed to the relatively small law firms who are currently making headlines by representing the likes of Sacramento County.

“In what appears to be a cyclical lull in the filing of large meritorious securities fraud cases, the smaller US firms in this space are under considerable pressure to stay busy,” he began.

“It appears that, at least for some, filing Libor-related actions may be filling the void. The facts are certainly on their side, the question is whether they have the clients able to show the direct damages from specific lines of investment with guilty banks.”

On July 24, aiCIO reported that the City of Houston had sued 17 major banks in the Texas federal court, alleging their manipulation of Libor had artificially suppressed its returns on $1.1 billion in interest rate swap agreements.

The Texas city is seeking unspecified damages for both receiving artificially low interest and paying artificially high rates on investments dating back six years.

Sacramento County, which filed its suit on the same day as Houston, accused Bank of America, Barclays, JPMorgan Chase, and others of profiting at the county’s expense by influencing interest rates.

Sacramento became the 15th government agency in California alone to file over Libor claims this year.

Baltimore, Los Angeles, and San Diego County have also filed suits in recent months.

And there are several class action lawsuits based in the Southern District of New York on appeal, after a judge ruled that the federal anti-trust law did not apply to these cases and dismissed the original filing.

Related Content: Houston, We Have a Libor Problem and Judge Throws Libor Claims Out of Court 

The Smart Beta Trade-Off

Low volatility, broad diversification, low tracking error, and high liquidity: A Lyxor paper takes on investors’ indexing wish lists.

(July 26, 2013) – Smart beta strategies are all about offering a lot at a low price—or so say the marketing materials—but they still entail trade-offs.

Risk-based indexes, for example, have been designed to capture equity risk premia more effectively than traditional cap-weighed indexes. But, as Lyxor Asset Management’s latest white paper has pointed out, they do so by sacrificing liquidity.  

Minimum variance products have been a main driver of assets into smart beta, according to authors Zélia Cazalet, Pierre Grinson, and Thierry Roncalli. The three quantitative researchers focused on this class of indexing, as well as low-volatility strategies more broadly, in their paper, “The Smart Beta Indexing Puzzle.”  

A 10% reduction in price volatility for a modeled equities index entailed a 3% to 4% rise in tracking error volatility, the authors found. These findings were based on a data set of S&P 500 performance from 1990 through 2012.

Want the latest institutional investment industry
news and insights? Sign up for CIO newsletters.

Similarly, reduced volatility brings with it greater diversification, but reduced liquidity and dampened performance during bull markets, according to Cazalet, Grinson, and Roncalli.

For this last reason, allocating to an indexed low-volatility strategy would be making a bet on market performance: it hedges downside risk, and hinders upside potential.

Smart beta strategies also tend to have higher price tags, several consultants pointed out to aiCIO recently.

“It’s not a lot, but if the reason you’re investing passively is to keep the costs down it might be enough of a reason not to,” Cardano’s Client Director Phil Page said.

“It comes down to if you think you’d be better off paying the extra few basis points in return for a better return,” he said. “Advocates would also argue that it produces a more stable return profile as it avoids price excesses and potentially defaults.” 

Zélia Cazalet, Pierre Grinson, and Thierry Roncalli’s entire paper for Lyxor—”The Smart Beta Indexing Puzzle”—is available here

Related Article:Alternative Indices Strategies Rise, But Are Investors Buying it?

«