A multistate probe of alleged manipulation of interest rates threatens to leave banks liable for billions of dollars in estimated state and local losses, even as they settle with national regulators.
New York Attorney General Eric Schneiderman is helping to lead an inquiry into claims that banks rigged global benchmarks for borrowing, adding to investigations by other authorities, including the Justice Department.
Royal Bank of Scotland Group PLC agreed last Wednesday to pay about $612 million to U.K. and U.S. regulators to resolve their claims.
“The damage to public entities is a matter of great concern to state and local governments,” Mr. Schneiderman said.
More than a dozen states are participating, according to a person familiar with the matter who asked not to be identified because he isn't authorized to speak publicly.
States have joined forces as banks reach settlements to resolve liability tied to the London interbank offered rate. In June, Barclays PLC agreed to pay 290 million pounds ($454 million), and in December, UBS AG agreed to pay 1.4 billion Swiss francs ($1.5 billion).
By acting together, the attorneys general can amass potentially large claims against banks and gain leverage in any settlement negotiations, said Stephen Houck, an attorney at Menaker & Herrmann LLP and a former chief of the New York attorney general's antitrust bureau.
Antitrust law allows states to seek triple damages.
“It certainly gives them more clout,” Mr. Houck said about states working with one another.
Global authorities have been investigating allegations that more than a dozen banks altered submissions used to set benchmarks such as Libor to profit from bets on interest rate derivatives or make the lenders' finances appear healthier.
Libor, a benchmark for financial products worldwide, is created from a survey of banks conducted each day on behalf of the British Bankers Association. Lenders are asked how much it would cost them to borrow from one another for different periods in various currencies.
Manipulation that kept the benchmark artificially low cost states and local governments about $6 billion on interest rate swaps, according to an estimate by Peter Shapiro, a managing director at Swap Financial Group LLC.
Those swaps are used to hedge interest rate risk, with governments paying a fixed rate in exchange for variable payments based on Libor.
Any investments in floating rate securities tied to Libor also would have paid less in interest if the rate were suppressed.
Mr. Shapiro said that he doesn't have an estimate for those damages.
“One of the challenges going forward is not necessarily whether the index was manipulated but to determine the degree,” said Nat Singer, a managing director at Swap Financial.
Last year, 49 states and federal agencies reached a $25 billion settlement with five U.S. banks after attorneys general began investigating claims of fraudulent foreclosure practices by mortgage servicers.
Besides New York, states in-volved in the Libor investigation include California, Colorado, Connecticut, Florida and Massachusetts.
Subpoenas have been issued to more than a dozen banks, including Deutsche Bank AG, HSBC Holdings PLC, JPMorgan Chase & Co., and Société Générale SA, a person familiar with the probe said last year.
Ed Canaday, a spokesman for RBS, and Michael O'Looney, a spokesman for Barclays, declined to comment about the investigation.
Karina Byrne, a UBS spokeswoman, wrote in an e-mail that the bank has disclosed that states are investigating.
Jaclyn Falkowski, a spokeswoman for Connecticut Attorney General George Jepsen, said in October that attorneys general throughout the U.S. had organized “a large, well-coordinated multistate investigation” into whether state and municipal issuers had been harmed.
Banks have already been sued by municipal governments, including Baltimore and San Diego County.
Banks will want to settle with a “critical mass” of states so they can avoid the potential cost of litigating in many jurisdictions, said Peter Henning, a professor at Wayne State University Law School and a former federal prosecutor.