http://www.nationofchange.org/global-banking-game-rigged-and-fdic-suing-1397485271?key=
The Global Banking Game is Rigged and FDIC is suing.
by: ELLEN BROWN
WEB OF DEBT Op-Ed
The Global Banking Game is Rigged and FDIC is suing.
by: ELLEN BROWN
WEB OF DEBT Op-Ed
Published: Monday 14 April 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 US banks (JPMorgan Chase, Bank of
America, and Citigroup), the three largest UK banks, 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.
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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 owesboth the interest onits 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 the California, 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 Buchwalddismissed 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 38 US banking 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 in US history. 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 California in more detail. Stay tuned.
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ABOUT
Ellen Brown
Ellen is an attorney, author, and president of the Public Banking
Institute. In Web of Debt, her latest of eleven books, she shows how the power
to create money has been usurped from the people, and how we can get it back.
Her websites are http://webofdebt.com and http://ellenbrown.com.
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