The California Public Employees’ Retirement System (CalPERS), the largest public pension in the country, is considering legal action against banks that fraudulently fixed the Libor rate. Quite a few other large, deep pocket firms, pension funds, brokerages, and municipalities are considering doing the same.

Libor is the central interest rate for the world financial system. Other interest rates, as well as mortgage rates, are based on Libor. The market in interest rate derivative contracts is an astonishing $550 trillion. Several large banks have already admitted to rigging the Libor rate with more certainly to come. This scandal is occurring at the heart of the financial system and its effects are felt everywhere. Given the scope and magnitude of the Libor rigging, it will take time for events to play out. But play out they will, and the effects will prove devastating to the banks involved.

“Once again, the financial services industry demonstrated that it cannot be trusted to make decisions in the long-term interests of investors,” said CalPERS Chief Investment Officer Joseph Dear.

This is a truly damning statement. The largest public pension in the country is saying it no longer trusts the big banks. Dear says it is not clear yet precisely just how CalPERS was affected. It may have benefited from rate fixing in some instances and been hurt in others. The rate fixing was sometimes 30 to 40 basis points or 0.3 to 0.4%. CalPERS probably has tens of billions parked in interest bearing accounts, so losing out on 0.3% interest could have cheated them out of substantial income. But conversely, some of their interest rate swaps might have done better than they should have, and for the same reason.

This will get complicated. Does an institution net out their gains and losses for the Libor rate fixing? Or do they simply sue for any amounts they should have gotten but didn’t? The problem then becomes determining what Libor should have been if it hadn’t been manipulated, so damages can be calculated.

CalPERS could use some extra money. It made a minuscule 1% return last fiscal year, way below the projected return of 7.5%. It has $233 billion in assets and currently pays benefits to 1.6 million Californians. But the fund is at least 50% underfunded. If CalPERS doesn't make their numbers in a given year they can, by law, tell municipalities and the state to make up the difference.

The Libor fixing has infuriated many,and rightfully so. The heart of the financial system is corrupt and gamed. If the financial services industry cannot be trusted then it needs to be replaced with one that can be.