The LIBOR Robbery of the Cities and States
by Paul Gallagher & Tony Papert on 18 Jul 2012 4 Comments

According to combined public reports, 14-16 of the largest “universal banks” in the world are now under investigation by US and European authorities for rigging the LIBOR interest rates to their profit and the world's economies’ loss. These are Barclays, Lloyds, HSBC, RBS, Credit Suisse, UBS, Deutschebank, Rabobank, Dexiabank, Citigroup, JPMorgan Chase, Bank of America, Goldman Sachs, Royal Bank of Canada, and Mitsubishi Bank. The number may grow to 40, according to the Wall Street Journal reporters who have exposed the rigging in occasional articles since 2008. Amid the welter of underfunded civil probes, 12 US Senators issued a demand July 12 that the investigations be criminal, and potentially include investigations of regulators [Treasury Secretary Tim Geithner is notable] who abetted this immense, years-long series of crimes.


Through the mid-1980s, long-term interest rates – like those on state or municipal bonds – were based on prime rates set by central banks. After LIBOR was launched and took off from the British “big bang” financial deregulation of the mid-1980s, the importance of prime rates withered away, supplanted by the untraceable, daily variable, bank-riggable LIBORs. By 2000 the Fed and other central banks had started to ritually pronounce that they had “no control or influence over long-term rates.” Issuers of long-term bonds were at the mercy of the megabanks’ LIBOR, and the ratings agencies’ dicta on how much “above LIBOR” they would have to pay to borrow.


With Alan Greenspan running the Federal Reserve, even the Fed's ultrashort-term discount rate fluctuated dramatically, rising through the 1990s to over 5%, then being plunged downward in 2000-01 to 1%, then from early 2003 rising rapidly again to about 4% in 2007, by which time Helicopter Ben Bernanke had taken over. US states and cities and public authorities the world over were buying interest-rate swaps and related derivatives from the megabanks, for “protection” from the wildly fluctuating LIBORs which threatened to take their bond-interest costs sky-high. They had virtually no choice. But the swaps were based on LIBOR rates, in bet-counterbet schemes and formulas so complicated that public treasurers could not understand them, and were lied to about them by the salesman-banks. These swaps then became the instruments of the municipalities’ destruction when instead, Bernanke from 2007 plunged short-term rates to virtually zero, and the LIBOR was pushed dramatically downward by what is now exposed as criminal rigging of the rates by the banks – in order to get themselves bailed out from the 2007-08 crash.


The interest-rate swaps contracts required the municipalities to issue bonds with monthly – or even weekly-varying interest rates. The banks bought them, but then “swapped” their interest rates with those of other securities, so that the municipality wound up paying a relatively fixed “one low rate” to the bank, typically 4-6%, based on a pre-arranged scheme; while the bank paid “interest payments” to the municipality based on another rate, which varied with LIBOR – downward. This got much worse when these swaps markets “froze” in the 2007-08 crash, and states and munis suddenly were told they had to issue new bonds with rates as high as 8-9%, or default.


By 2010, according to one expose, “states and local governments are paying about 50 times [the rate of interest] the banks are paying.” New York Times reporter Gretchen Morgenson, in a June 9, 2012 report, estimated that cities and states are still paying the banks 12 times and up, what the banks are paying them in the “swap”. And the governments had – and still have – no way to get out of these derivatives deals without huge fee payments which would gouge their employees and services. The New York Times reported urban consultant Peter Shapiro's estimate that “about 75% of major cities have [swaps] contracts linked to this [LIBOR].”


In 2010, according to researcher Michael McDonald and Morgenson, munis paid over $4 billion to escape “swaps” deals, after paying monster interest rates until they did. North Carolina paid $60 million that August to Dexiabank, equal to 1,400 full-time employees’ salaries. California Water Resources spent $305 million to escape the clutches of Morgan Stanley “swaps”. Reading, Pennsylvania paid $21 million to JPMorgan Chase, equal to a year's real-estate tax revenue, and fell into state receivership. Oakland, California is being destroyed by Goldman-Sachs “swaps”. More recently New York State has bled to Wall Street $243 million – which it had to borrow on Wall Street – to escape them.


Research by the Refund Transit Coalition found that a sample of 1,100 current “swaps” deals at more than 100 government agencies, together are robbing taxpayers of $2.5 billion/year. Now – after the same banks which rigged the LIBOR rates have been bailed out with perhaps $6 trillion in purchases and $25-30 trillion in liquidity loans by US and European governments and central banks – these banks can borrow at virtually zero rates. But the states and municipalities trapped in their “swaps” can {not} refinance their bonds, and continue to pay 6-8% interest or monster criminal “penalties” to get out.

-- by Paul Gallagher


Zombie Bank Dexia Takes Billions from Italy, France, Belgium


The Belgian-French banking giant Dexia has been the one big banks to fail in the 2011-12 Eurozone collapse so far. It has been bailed out twice in three years, to the tune of nearly 80 billion euros, and is now, as a zombie bank, demanding more bailouts. When striding the Earth as the world's largest municipal lender, Dexia was costing cities in Italy, France, and the United States billions with interest-rate “swaps” based on the LIBOR frauds. Now as a zombie, it is looking to take down whole national budgets with its bailout demands.


Dexia's remnant bank still holds state and city loans and interest-rate swaps based on rigged LIBOR rates all over Europe and the US. It is demanding that Belgian-French-Luxembourg guarantees for its bailout be increased from 55 billion euros to 100 billion immediately. But at the same time, in June it cut off its bond-lending lines to more than 100 cities all over France, putting the cities in a severe squeeze. The national Banque Postale is trying to enter the municipal market with 4 billion euros to compensate for Dexia's suddenly calling in bonds.


In Italy, where 400 local administrations bought interest-rate “swaps” totalling 66 billion euros, Dexia's zombie is looting more than 10% of that. Its subsidiary Dexia-Crediop has sold “swaps” derivatives to 36 municipalities, with a value of 3.9 billion euros. In a revolt in the courts, some cities have cancelled these looting contracts as illegal, including Florence, Pisa, and now Prato.


But the dead bank still demands more taxpayers’ bailout money. Bernhard Ardaen, a former Dexia banker who has authored a book on Dexia's collapse entitled {Time Bomb}, says that Dexia's bailout, beyond the immediate increase being demanded, could eventually cost France another 75 billion euros, and Belgium an incredible 150 billion euros (1.5 times its GDP). Of the impact on Belgium, Ardaen says, “Interest rates would explode, and the country would immediately head into a negative spiral. Then a Greek scenario for Belgium would no longer be unthinkable.”

-- by Paul Gallagher


Geithner Pulled into LIBOR Scandal


New York Federal Reserve documents from 2007 and 2008 concerning LIBOR rates were released on July 12 pursuant to a letter from House Financial Services Oversight Subcommittee chairman Rep. Randy Neugebauer (R-TX).  The document release is trouble for Treasury Secretary Tim Geithner, who was then head of the New York Fed.


The documents prove that Barclays’ disgraced CEO Robert Diamond's House of Commons testimony was correct on one point: He and other Barclays executives did, in fact, tell Geithner's New York Fed repeatedly, that not only Barclays, but the other BBA banks as well, were cheating on their LIBOR submissions.  Geithner knew this as early as the late Summer of 2007, and was aware of its continuing through the period when he participated in bailing these same banks out with trillions, both as head of the New York Fed and then as Obama's pick for Treasury Secretary.


One sample conversation with a Barclays executive talking to a New York Fed officer, occurring in March 2008, is typical of many: “Libor's going to come in at.. .. three-month libor is going to come in at 3.53.... It's a touch lower than yesterday's but please don't believe it.  It's absolute rubbish. I'm ... putting my libor at 4%....  I think the problem is that the market so desperately wants libors down, it's actually putting wrong rates in.” On another call the same Barclay's executive said, “When libor was fixing at 3.55[%]... just to give you a clue, I got paid 4.30 in threes [three-month loans] by my Tokyo, via the yen.” Here Barclay's was lending three-month money, not borrowing it, and the rigging of LIBOR had deviated the rate downward by almost one-fifth, even from market “reality.”


The New York Fed made much today [13 July], in releasing the documents, of Geither's having reacted, with some suggestions to the Bank of England for improving the LIBOR in Spring 2008. The documents themselves show this is horse-feathers. First, a Geithner PowerPoint on what Barclays had admitted, said, “These claims are difficult to evaluate”[!].  Second, the recommendations themselves were merely of the “please use best practices” type; change the time of day of the fixing; and a particularly great one: Add Wachovia Bank to the LIBOR-fixing panel!


The salient fact is that Geithner enthusiastically bailed these banks out, knowing that they had lied and cheated on the “mother of all interest rates” for their own profit, and the taxpayers’ loss.


Earlier, on Thursday [12 July], a dozen Senate Democrats sent a letter asking Attorney General Eric Holder to fully investigate how banks were fixing the LIBOR. “This scandal calls into further question the integrity of many Wall Street banks and whether our prosecutors and regulators are up to the task of regulating them,” they wrote, asking for full CRIMINAL prosecution and civil action against any banks and their employees that are found to have broken the law.


They also demanded justice against regulators, which means Geithner.  “Just like the banks and executives they oversee, regulators who were involved should be held to account for any failures to stop wrongdoing that they knew, or should have known about,” they wrote.


Those signing the letter include: Sens. Jack Reed (D-R.I.), Carl Levin (D-Mich.), Dianne Feinstein (D-Calif.), Tom Harkin (D-Iowa), Patrick Leahy (D-Vt.), Robert Menendez (D-N.J.) Sherrod Brown (D-Ohio), Jeff Merkley (D-Ore.), Sheldon Whitehouse (D-RI), Frank Lautenberg (D-NJ), Daniel Akaka (D-Hawaii), and Jeanne Shaheen (D-N.H.). 

-- by Paul Gallagher and Tony Papert


Courtesy Executive Intelligence Review 

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