The LIBOR Scandal: Not An Antitrust Issue

Legal precedent is a funny thing. It can create odd juxtapositions, as a result of which bowling centers can come to be conjoined with High Finance as practiced in Canary Wharf. In an opinion handed down by Naomi Rice Buchwald, the U.S. district court judge for Manhattan who ruled on the LIBOR litigation on Good Friday, the sport of fictional Jeff Lebowski plays just such an unexpected role.

Still, I can’t shake the feeling that the outcome should have been fairly obvious, to everyone except perhaps plaintiffs’ attorneys. The LIBOR scandal, is not a case for the application of antitrust law. Even accepting “as true all well-pleaded factual allegations” of the wide range of plaintiffs before her, Judge Buchwald dismissed the antitrust counts of the complaint (other counts remain).

Free-Range Poultry
The short version of the argument: since the LIBOR setting process was never meant to be competitive, the nature of the injury that may be done by subverting that process, isn’t on its face anti-competitive. An adventurous sort of lawyer might have made the argument that the LIBOR setting process itself was a violation of the antitrust laws. But the plaintiffs before Buchwald didn’t do that. They were and are suing over the subversion of that process, over efforts to set LIBOR at artificial levels.

They alleged, for example, that plaintiffs who traded in LIBOR-based instruments “during the Class Period were trading at artificially determined prices that were made artificial as a result of Defendants’ unlawful conduct.” Artificial suggests something like a preference for free-range poultry. It is “artificial” to keep the interest rates penned up, when they might be allowed to wander free. The problem, though (raised by the court), is that if anything set by something other than a non-competitive process is deemed artificial, then the LIBOR process itself was artificial, even when working exactly as intended.

The Brunswick Case Recalled
The court cites a 36 year old decision by the U.S. Supreme Court, Brunswick v. Pueblo Bowl-O-Mat.

Brunswick was a major supplier of bowling equipment, and was also operating a chain of bowling lanes. This put it in the position of competing against the independent bowling lanes who were also its customers. It had allegedly bought out bowling centers that had defaulted on the payments they owed to it as a supplier.

The action that came to the attention of the U.S. Supreme Court in 1977. Suit was brought by the proprietors of competing bowling lanes still in business. How could they prove injury?
They made the point that if Brunswick hadn’t bought out their former competitors, they (firms such as Pueblo) would have benefited from those insolvencies. The former customers of a bowling lane down the street would have ended up going to Pueblo Bowl-a-Mat. Instead, the “dudes” who formerly patronized the place down the street can still go to the place down the street, which now has a “Brunswick” sign in front of it.

The Supreme Court, in a unanimous decision and an opinion by Justice Thurgood Marshall, decisively rejected this theory. The injury that the other bowling alleys complained of was injury from competition, not injury to competition. As Marshall wrote, “it is inimical to the purposes of these laws to award damages for the type of injury claimed here.”

Of the LIBOR lawsuit, Buchwald stated that the plaintiffs who claimed various sorts of injury arising from the manipulation of LIBOR fail to make the connection between the sort of harm they suffered and the goals of antitrust policy.

Specifically, the plaintiffs place great emphasis upon the collusion of the defendant banks in making the case for an antitrust violation. But “just as the bowling center operators in Brunswick could have suffered the same injury had the failing bowling centers remained open for legitimate reasons … the plaintiffs here could have suffered the same injury [from too-low interest rates] had each bank decided independently to submit an artificially low LIBOR quote.”

So those claims are gutter balls.