Is Libor a ‘tobacco moment’ for banking?

Back in July, when the scandal over banks rigging the London interbank offered rate was spreading, an unnamed chief executive of a bank told the Economist, “This is the banking industry's tobacco moment.” As the Libor scandal grinds ahead – the British Bankers’ Association just voted to give up the responsibility for Libor – is it really a tobacco moment?

So far Barclays (BCS) has been fined $436 million by the Commodity Futures Trading Commission, the U.S. Department of Justice and Britain’s Financial Services Authority. But Royal Bank of Scotland (RBS) seems to be in deep, as well. Some instant messages that appear to show traders chatting about fixing Libor surfaced in a court case filed by RBS’ former head of delta trading for Asia. The messages – including “Our six-month fixing moved the entire fixing, hahahah” – were recently sealed in court.

Citigroup (C), Deutsche Bank (DB), HSBC (HBC), JPMorgan Chase (JPM) and UBS (UBS) have all reportedly been investigated or questioned.

BCS Chart

BCS data by YCharts

But bankers needn’t be very worried. The Tobacco Master Settlement Agreement (MSA) from 1998 -- which involved R.J. Reynolds (RAI), Brown & Williamson, Lorillard (LO) and Altria (MO), formerly Philip Morris, –- was expensive. The companies agreed to pay at least $206 billion over 25 years. But in 2004, some researchers looked at the impact of the settlement on the tobacco industry. They studied shareholder returns, operating performance, exports, market share, and advertising expenses.Their conclusion: “The experience during the post-MSA period demonstrates that the MSA did no major harm to the companies. Some features of the MSA appear to have increased company value and profitability.”

PM Chart

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If this is a tobacco moment, banks may have little to worry about.

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