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Freddie accuses big banks of rigging lending rate

Freddie Mac has sued 15 big international banks, including JPMorgan Chase, Bank of America and Citigroup, accusing them of rigging a key interest rate and causing huge losses for the government-controlled mortgage giant.

Freddie filed the lawsuit recently in federal court in Alexandria, Va. It names the banks that set the London interbank offered rate, known as LIBOR, which provides the basis for trillions of dollars in contracts around the world, including mortgages, bonds and consumer loans.

In a growing scandal, two big British banks and Switzerland’s largest have been fined hundreds of millions of dollars for manipulating LIBOR by U.S. and British regulators.

A U.S. watchdog has found that Freddie and its larger sibling Fannie Mae together may have lost more than $3 billion on their investments from banks’ rate-rigging.

The banks schemed together daily to manipulate and hold down the value of LIBOR from August 2007 through at least May 2010, Freddie alleges in its suit. They “acted collectively to suppress . . . LIBOR, both to hide their institutions’ financial problems and to boost their profits,” the suit says.

The staff of the inspector general for the Federal Housing Finance Agency, which oversees Freddie and Fannie, gave the estimate of the losses late last year. The staff’s memo said that Freddie and Fannie sustained the losses on $1 trillion in mortgage securities and other investments linked to the LIBOR.

Taxpayers so far have paid about $170 billion to rescue Freddie and Fannie, which suffered huge losses from risky mortgages and were bailed out by the government in September 2008 at the onset of the financial crisis. The two companies together own or guarantee about half of all U.S. mortgages, or nearly 31 million home loans.

Fannie Mae spokesman Andrew Wilson said yesterday the company is weighing a possible suit of its own.

Spokesmen for JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. declined to comment on Freddie’s suit.

The legal action by Freddie adds to a flurry of lawsuits filed by cities and municipal agencies in the U.S. against some of the banks that set the LIBOR. The cities and agencies are seeking damages for losses they say they suffered as a result of an artificially low rate, because they hold bonds and other investments whose value is pegged to LIBOR.

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