We have a thoroughly unregulated
conspiracy to rig rates with a fig leaf of market cover applied to the next
tier of the American financial system and actively sold to them as a covered
risk when it actually opened the door for selective rate setting and undue
enrichment.
I have posted extensively about
the profoundly gamed US financial system which continues to operate out of
control to the extent that the financial system itself is operating almost
outside the US economy like some gargantuan Ponzi that is running out of
tricks.
All that cash is not anywhere it
can do much good either because it is simply too hard to really place it in the
scale needed. That is why the Chinese
are buying massively overpriced ghost cities.
The Global Banking Game Is Rigged, and the FDIC Is Suing
By Ellen Brown
Global Research, April
13, 2014
Taxpayers are paying billions of dollars for a swindle pulled
off by the world’s biggest banks, using a form of derivative called interest-rate
swaps; and the Federal Deposit Insurance Corporation has now joined a chorus of
litigants suing over it. According to an SEIU
report:
Derivatives . . . have
turned into a windfall for banks and a nightmare for taxpayers. . . . While
banks are still collecting fixed rates of 3 to 6 percent, they are now
regularly paying public entities as little as a tenth of one percent on the
outstanding bonds, with rates expected to remain low in the future. Over the
life of the deals, banks are now projected to collect billions more than they
pay state and local governments – an outcome which amounts to a second bailout
for banks, this one paid directly out of state and local budgets.
It is not just that local
governments, universities and pension funds made a bad bet on these swaps. The
game itself was rigged, as explained below. The FDIC is now suing in civil
court for damages and punitive damages, a lead that other injured local
governments and agencies would be well-advised to follow. But they need to
hurry, because time on the statute of limitations is running out.
The Largest Cartel in World History
On March 14, 2014, the FDIC filed suit for LIBOR-rigging
against sixteen of the world’s largest banks – including the three largest
USbanks (JPMorgan Chase, Bank of America, and Citigroup), the three largest
UKbanks, the largest German bank, the largest Japanese bank, and several of the
largest Swiss banks. Bill Black, professor of law and economics and a former
bank fraud investigator, calls them “the largest cartel in world
history, by at least three and
probably four orders of magnitude.”
LIBOR (the London
Interbank Offering Rate) is the benchmark rate by which banks themselves can
borrow. It is a crucial rate involved in hundreds of trillions of dollars in
derivative trades, and it is set by these sixteen megabanks privately and in
secret.
Interest rate swaps are now a $426 trillion business. That’s trillion with a “t” – about seven times the gross
domestic product of all the countries in the world combined. According to the
Office of the Comptroller of the Currency, in 2012 US banks held $183.7
trillion in interest-rate contracts, with only four firms representing 93% of
total derivative holdings; and three of the four were JPMorgan Chase,
Citigroup, and Bank of America, the US banks being sued by the FDIC over
manipulation of LIBOR.
Lawsuits over LIBOR-rigging have been in the works for years,
and regulators have scored some very impressive regulatory settlements. But so
far, civil actions for damages have been unproductive for the plaintiffs. The FDIC is
therefore pursuing another tack.
But before getting into
all that, we need to look at how interest-rate swaps work. It has been argued
that the counterparties stung by these swaps got what they bargained for – a
fixed interest rate. But that is not actually what they got. The game
was rigged from the start.
The Sting
Interest-rate swaps are
sold to parties who have taken out loans at variable interest rates, as
insurance against rising rates. The most common swap is one where counterparty
A (a university, municipal government, etc.) pays a fixed rate to counterparty
B (the bank), while receiving from B a floating rate indexed to a reference
rate such as LIBOR. If interest rates go up, the municipality gets paid more on
the swap contract, offsetting its rising borrowing costs. If interest rates go
down, the municipality owes money to the bank on the swap, but that extra
charge is offset by the falling interest rate on its variable rate loan. The
result is to fix borrowing costs at the lower variable rate.
At least, that is how it’s supposed to work. The catch is that
the swap is a separate financial agreement – essentially an ongoing bet on
interest rates. The borrower owes both the
interest on its variable rate loan and what it must pay out on
this separate swap deal. And the benchmarks for the two rates don’t
necessarily track each other. As explained by Stephen
Gandel on CNN Money:
The rates on the debt
were based on something called the Sifma municipal bond index, which is named
after the industry group that maintains the index and tracks muni bonds. And
that’s what municipalities should have bought swaps based on.
Instead, Wall Street sold
municipalities Libor swaps, which were easier to trade and [were] quickly
becoming a gravy train for the banks.
Historically, Sifma and
LIBOR moved together. But that was before the greatest-ever global banking
cartel got into the game of manipulating LIBOR. Gandel writes:
In 2008 and 2009, Libor
rates, in general, fell much faster than the Sifma rate. At times, the rates
even went in different directions. During the height of the financial crisis,
Sifma rates spiked. Libor rates, though, continued to drop. The result was that
the cost of the swaps that municipalities had taken out jumped in price at the
same time that their borrowing costs went up, which was exactly the opposite of
how the swaps were supposed to work.
The two rates had
decoupled, and it was chiefly due to manipulation. As noted in the SEUI report:
[T]here is . . . mounting
evidence that it is no accident that these deals have gone so badly, so quickly
for state and local governments. Ongoing investigations by the U.S. Department
of Justice and theCalifornia,Florida, and Connecticut Attorneys General
implicate nearly every major bank in a nationwide conspiracy to rig bids and
drive up the fixed rates state and local governments pay on their derivative
contracts.
Changing the Focus to Fraud
Suits to recover damages for collusion, antitrust violations and
racketeering (RICO), however, have so far failed. In March 2013, SDNY Judge
Naomi Reece Buchwald dismissed antitrust and
RICO claims brought by
investors and traders in actions consolidated in her court, on the ground that
the plaintiffs lacked standing to bring the claims. She held that the
rate-setting banks’ actions did not affect competition, because those
banks were not in competition
with one another with respect to
LIBOR rate-setting; and that “the alleged collusion occurred in an arena in
which defendants never did and never were intended to compete.”
Okay, the defendants weren’t competing with each other. They
were colluding with each other,
in order to unfairly compete with the rest of the financial world – local
banks, credit unions, and the state and local governments they lured into being
counterparties to their rigged swaps. The SDNY ruling is on appeal to the
Second Circuit.
In the meantime, the FDIC
is taking another approach. Its 24-count complaint does include antitrust
claims, but the emphasis is on damages for fraud and conspiring to keep the
LIBOR rate low to enrich the banks. The FDIC is not the first to bring such
claims, but its massive suit adds considerable weight to the approach.
Why would keeping
interest rates low enrich the rate-setting banks? Don’t they make more money if
interest rates are high?
The answer is no. Unlike
most banks, they make most of their money not from ordinary commercial loans
but from interest rate swaps. The FDIC suit seeks to recover losses caused to
38USbanking institutions that did make their profits from ordinary business and
consumer loans – banks that failed during the financial crisis and were taken
over by the FDIC. They include Washington Mutual, the largest bank failure
inUShistory. Since the FDIC had to cover the deposits of these failed banks, it
clearly has standing to recover damages, and maybe punitive damages, if
intentional fraud is proved.
The Key Role of the Federal Reserve
The rate-rigging banks have been caught red-handed, but the greater manipulation of interest rates was done by
the Federal Reserve itself. The Fed aggressively drove down interest rates to
save the big banks and spur economic recovery after the financial collapse.
In the fall of 2008, it dropped the prime rate (the rate at which banks borrow
from each other) nearly to zero.
This gross manipulation of interest rates was a giant windfall
for the major derivative banks. Indeed, the Fed has been called a tool of the global
banking cartel. It is composed of 12 branches, all of which are 100% owned by
the private banks in their districts; and the Federal Reserve Bank of New York has
always been the most important by far of these regional Fed banks. New York, of course is where
Wall Street is located.
LIBOR is set in London; but as Simon Johnson observed in a New
York Times article titled The Federal Reserve and the LIBOR Scandal, the Fed has jurisdiction whenever the “safety and soundness”
of the US financial system is at stake. The scandal, he writes, “involves
egregious, flagrant criminal conduct, with traders caught red-handed in e-mails
and on tape.” He concludes:
This could even become a
“tobacco moment,” in which an industry is forced to acknowledge its practices
have been harmful – and enters into a long-term agreement that changes those
practices and provides continuing financial compensation.
Bill Black concurs,
stating, “Our system is completely rotten. All of the largest banks are
involved—eagerly engaged in this fraud for years, covering it up.” The system
needs a complete overhaul.
In the meantime, if the
FDIC can bring a civil action for breach of contract and fraud, so can state
and local governments, universities, and pension funds. The possibilities this
opens up for California(where I’m currently running for State Treasurer) are
huge. Fraud is grounds for rescission (terminating the contract) without
paying penalties, potentially saving taxpayers enormous sums in fees for swap
deals that are crippling cities, universities and other public entities across
the state. Fraud is also grounds for punitive damages, something an outraged
jury might be inclined to impose. My next post will explore the
possibilities for Californiain more detail. Stay tuned.
Ellen Brown is an attorney, founder of the Public Banking Institute, and a candidate for California
State Treasurer running on a state bank platform. She is the author of
twelve books, including the best-selling Web of Debt and her latest
book, The Public Bank Solut
No comments:
Post a Comment