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restrictions on U.S. products investigates whether banks tried to manipulate the Libor rate

By Joseph Palazzolo, Jean Eaglesham and Carrick Mollenkamp

U.S. researchers are evaluating whether some of the world's largest banks agreed to illegally manipulate a key interest rate before and during the financial crisis, which would have affected billions of dollars in loans and derivatives, said people familiar with the situation.

During the past year, court officials banks have been investigating whether the United States and Europe understated their borrowing costs, which are used to calculate the London interbank offered rate, or Libor, according to the acronym. The researchers are now examining whether banks actually created a worldwide cartel and agreed on how to report the cost of borrowing between 2006 and 2008.

The Libor is set each day in London, using information submitted by a panel of banks reporting the rate they are paying to borrow.

The research, led by the Department of Justice and the Securities and Exchange Commission of the United States seeks to determine whether said banks' borrowing costs lower than actual. At that time, banks were struggling with troubled assets on their balance sheets with questions on liquidity. A bank which borrowed at higher rates than their peers may have given evidence that their problems could be worse than publicly admitted.

Approximately $ 10 billion in loans and $ 350 trillion in derivatives are linked to Libor, which affects the costs of various types of securities, ranging from corporate bonds to loans for cars. If the rate is kept artificially low, borrowers may not have been harmed, although the lenders may claim that the rates charged on loans were too low. The prices of derivative contracts could be wrong as a result of any manipulation of the Libor.

According to people with knowledge of the investigation, which has lasted a year, U.S. regulators are focusing their efforts on Bank of America Corp., Citigroup Inc. and UBS, among others, and have sent subpoenas to the banks. The three banks declined comment.

An investigation of The Wall Street Journal in 2008 on borrowing costs declared by the banks showed that, at times, banks reported strikingly similar costs despite the fact that banks faced different levels of financial pressure. In the first four months of 2008, for example, debt ratios to three months reported by 16 banks remained, on average, in a range of only 0.06 percentage points. That compares with the average dollar Libor of 3.18% at that time.

In 2008, economists at the Bank of International Settlements, which acts as a central bank for central bankers expressed concern about whether banks were reporting incorrect information on rates.

-David Enrich contributed to this article.