Baltimore has not given estimates of its potential losses. “Our basic approach about it is that the question [of damages] is likely to be the subject of discovery in the litigation,” says Baltimore City Solicitor George Nilson.
However, other would-be plaintiffs have given ballpark estimates. According to one report, New York’s Nassau County estimates that it is out $13 million from swaps related to $600 million in outstanding bonds. By comparison, Baltimore reportedly held $550 million in bonds based on Libor interest rates in 2008.
The Libor rate is set daily by a panel of banks coalesced as the British Bankers’ Association. Libor is theoretically the interest rate that a bank would charge to lend money to another bank for three months (though such loans almost never occur nowadays).
It affects cities like Baltimore when they issue bonds to raise money for infrastructure projects. Investors are offered a floating interest rate — the Libor rate and an additional percentage.
To protect themselves from the sometimes radical ups and downs of market fluctuations, though, tightly budgeted municipalities contract with banks, agreeing to pay a fixed rate in exchange for which the bank pays the floating rate to the city’s investors. That’s an interest rate swap.
If the interest rate fluctuates upward, the city makes a profit. If it fluctuates downward, the city begins to lose money. In the case involving Baltimore and the banks from which it bought interest swaps, the rate was allegedly manipulated downward by bank rate setters.
“They [the city] are not getting the interest they bargained for,” says William Carmody, a lead outside attorney representing the plaintiffs. “If they’re getting a certain number that’s tied to Libor and Libor is understated, they’re not getting all the money they should.” He says that such rate manipulation is a violation of the Sherman Anti-Trust Act.