Whether or not regulators sanction the major banks in the Libor rate-rigging scandal, plenty of stakeholders plan to sue the banks for restitution. This will be a bit difficult to figure out. Sometimes rates were fixed up, sometimes down. Certain Libor rates, like the 1-month or 3-month rates, were tampered with more than others, like the 6-month rate (it’s unclear whether this one was fixed at all). Certain financial products were tied toward some Libor rates and not others.

But as I’ve mentioned before, local governments seem like a definitive victim here.

As unemployment climbed and tax revenue fell, the city of Baltimore laid off employees and cut services in the midst of the financial crisis. Its leaders now say the city’s troubles were aggravated by bankers’ manipulation of a key interest rate linked to hundreds of millions of dollars the city had borrowed.

Baltimore has been leading a battle in Manhattan federal court against the banks that determine the interest rate, the London interbank offered rate, or Libor, which serves as a benchmark for global borrowing and stands at the center of the latest banking scandal. Now cities, states and municipal agencies nationwide, including Massachusetts, Nassau County on Long Island, and California’s public pension system, are looking at whether they suffered similar losses and are weighing legal action.

Dozens of lawsuits filed by municipalities, pension funds and hedge funds have been consolidated into a few related cases against more than a dozen banks that are involved in setting Libor each day, including Bank of America, JPMorgan Chase, Deutsche Bank and Barclays [...] American municipalities have been among the first to claim losses from the supposed rate-rigging, because many of them borrow money through investment vehicles that directly derive their value from Libor. Peter Shapiro, who advises Baltimore and other cities on their use of these investments, said that “about 75 percent of major cities have contracts linked to this.”

This just looks open and shut. Interest rate-swap deals in particular involved local governments getting fixed rates and hedging against higher ones. If Barclays and other banks artificially set those interest rates lower, municipalities simply paid more under those deals than they should have (or to be technical, they got smaller variable payouts from the banks with whom they entered into the deals). And during the financial crisis, it’s fairly unambiguous that banks pushed the rates down, as opposed to the favors done for derivative traders, which varied depending on the circumstance.

I think we’ll see enough perceived exposure on the part of the banks for them to settle with the munis for a lot of money. And that will be some measure of justice for these local governments who were basically duped into these interest rate-swap deals and ripped off by Wall Street banks. Libor was just a manifestation of this ripoff, which cost cities as much as $3 million for every $1 billion in bonds. And cities will absolutely jump on this, which amounts to hundreds of billions in bond value.

The banks can probably absorb these losses. What they may no longer be able to absorb is the sense they are hopelessly corrupted, reflecting a total loss of trust in this bedrock set of institutions.