Money for Nothing…: A Case Study of Financial Class Action Litigation

Abstract

The class action law suit Annie Adams et al - Southern New York, 12-cv-07461, claims that banks increased 6-months USD LIBOR rates on first business days of a month in order to take advantage of mortgage holders due to inflated reset rates on the mortgages. The claims do not seem to be supported by the data. While some point estimates are correct as claimed in the law suit, the claimants do not account for random fluctuation in the LIBOR rates. Standard statistical analysis suggests that the observed differences in means are well within typical fluctuations in the data. Moreover, as some people argue that banks were artificially lowering LIBOR rates in order to make them look financially stronger in the crisis of 2007/2008, that effect would actually help the claimants as it would lower their reset mortgage rates.

Keywords: mortgage, class action, econometrics, t-test

JEL Classification: C12, G12, G21