Titanic Banks Hit LIBOR Iceberg: Will Lawsuits Sink the Ship?
By Ellen Brown
Original here
At one time, calling the large
multinational banks a “cartel” branded you as a conspiracy theorist.
Today the banking giants are being called that and worse, not just in
the major media but in court documents intended to prove the allegations
as facts.
Charges include racketeering
(organized crime under the U.S. Racketeer Influenced and Corrupt
Organizations Act or RICO), antitrust violations, wire fraud,
bid-rigging, and price-fixing. Damning charges have already been
proven, and major damages and penalties assessed. Conspiracy theory has
become established fact.
It’s
already clear that the rate rigging, which depends on collusion, goes
far beyond Barclays, and indeed the City of London. This is one of
multiple scams that have become endemic in a disastrously deregulated
system with inbuilt incentives for cartels to manipulate the core price
of finance.
. . . It could of course
have happened only in a private-dominated financial sector, and makes a
nonsense of the bankrupt free-market ideology that still holds sway in
public life.
. . . A crucial part of
the explanation is the unmuzzled political and economic power of the
City. . . . Finance has usurped democracy.
Bid-rigging and Rate-rigging
Bid-rigging was the subject of U.S. v. Carollo, Goldberg and Grimm,
a ten-year suit in which the U.S. Department of Justice obtained a
judgment on May 11 against three GE Capital employees. Billions of
dollars were skimmed from cities all across America by colluding to rig
the public bids on municipal bonds, a business worth $3.7 trillion.
Other banks involved in the bidding scheme included Bank of America,
JPMorgan Chase, Wells Fargo and UBS. These banks have already paid a
total of $673 million in restitution after agreeing to cooperate in the
government’s case.
Hot on the heels of the Carollo decision came
the LIBOR scandal, involving collusion to rig the inter-bank interest
rate that affects $500 trillion worth of contracts, financial
instruments, mortgages and loans.
Barclays Bank admitted to
regulators in June that it tried to manipulate LIBOR before and during
the financial crisis in 2008. It said that other banks were doing the
same. Barclays paid $450 million to settle the charges.
The U. S. Commodities Futures Trading Commission said in
a press release that Barclays Bank “pervasively” reported fictitious
rates rather than actual rates; that it asked other big banks to assist,
and helped them to assist; and that Barclays did so “to benefit the
Bank’s derivatives trading positions” and “to protect Barclays’
reputation from negative market and media perceptions concerning
Barclays’ financial condition.”
After resigning, top executives at Barclays
promptly implicated both
the Bank of England and the Federal Reserve. The upshot is that the
biggest banks and their protector central banks engaged in conspiracies
to manipulate the most important market interest rates globally, along
with the exchange rates propping up the U.S. dollar.
CFTC did not
charge Barclays with a crime or require restitution to victims. But
Barclays’ activities with the other banks appear to be criminal
racketeering under federal RICO statutes, which authorize victims to
recover treble damages; and class action RICO suits by victims are
expected.
The blow to the banking defendants could be crippling. RICO laws, which carry treble damages,
have taken down the Gambino crime family, the Genovese crime family, Hell’s Angels, and the Latin Kings.
The Payoff: Not in Interest But on Interest Rate Swaps
Bank
defenders say no one was hurt. Banks make their money from interest on
loans, and the rigged rates were actually LOWER than the real rates,
REDUCING bank profits.
That may be true for smaller local banks, which do make most of their
money from local lending; but these local banks were not among
the 16 mega-banks setting LIBOR rates.
Only three of the rate-setting banks were U.S.banks—JPMorgan, Citibank
and Bank of America—and they slashed their local lending after the 2008
crisis. In the following three years, the four largest U.S. banks—BOA,
Citi, JPM and Wells Fargo—
cut back on small business lending by a full 53 percent. The two largest—BOA and Citi—cut back on local lending by 94 percent and 64 percent, respectively.
Their profits now come largely from derivatives. Today, 96% of derivatives are
held by just four banks—JPM, Citi, BOA and Goldman Sachs—and the LIBOR scam significantly boosted their profits on these bets.
Interest-rate swaps compose fully 82 percent of the derivatives trade. The Bank for International Settlements
reports a
notional amount outstanding as of June 2009 of $342 trillion. JPM—the
king of the derivatives game—revealed in February 2012 that it had
cleared $1.4 billion in revenue trading interest-rate swaps in 2011,
making them one of the bank’s biggest sources of profit.
The
losers have been local governments, hospitals, universities and other
nonprofits. For more than a decade, banks and insurance companies
convinced them that interest-rate swaps would lower interest rates on
bonds sold for public projects such as roads, bridges and schools.
The
swaps are complicated and come in various forms; but in the most common
form, counterparty A (a city, hospital, etc.) pays a fixed interest
rate to counterparty B (the bank), while receiving a floating rate
indexed to LIBOR or another reference rate. The swaps were entered into
to insure against a rise in interest rates; but instead, interest
rates fell to historically low levels.
Defenders say “a
deal is a deal;” the victims are just suffering from buyer’s remorse.
But while that might be a good defense if interest rates had risen or
fallen naturally in response to demand, this was a deliberate,
manipulated move by the Fed acting to save the banks from their own
folly; and the rate-setting banks colluded in that move. The victims
bet against the house, and the house rigged the game.
Lawsuits Brewing
State
and local officials across the country are now meeting to determine
their damages from interest rate swaps, which are held by about
three-fourths of America’s major cities. Damages from LIBOR
rate-rigging are being investigated by Massachusetts Attorney General
Martha Coakley, New York Attorney General Eric Schneiderman, officers at
CalPERS (California’s public pension fund, the nation’s largest), and
hundreds of hospitals.
One victim that is fighting back is the city of Oakland, California.
On July 3, the Oakland City Council unanimously passed a motion to
negotiate a termination without fees or penalties of its interest rate
swap with Goldman Sachs. If Goldman refuses, Oakland will boycott doing
future business with the investment bank. Jane Brunner, who introduced
the motion, says ending the agreement could save Oakland $4 million a
year, up to a total of $15.57 million—money that could be used for
additional city services and school programs. Thousands of cities and
other public agencies hold similar toxic interest rate swaps, so
following Oakland’s lead could save taxpayers billions of dollars.
What
about suing Goldman directly for damages? One problem is that Goldman
was not one of the 16 banks setting LIBOR rates. But victims could have
a claim for unjust enrichment and restitution, even without proving
specific intent:
Unjust enrichment is
a legal term denoting a particular type of causative event in which one
party is unjustly enriched at the expense of another, and an obligation
to make restitution arises,
regardless of liability for wrongdoing.
. . . [It is a] general equitable principle that a person should not
profit at another’s expense and therefore should make restitution for
the reasonable value of any property, services, or other benefits that
have been unfairly received and retained.
Goldman was clearly
unjustly enriched by the collusion of its banking colleagues and the
Fed, and restitution is equitable and proper.
RICO Claims on Behalf of Local Banks
Not
just local governments but local banks are seeking to recover damages
for the LIBOR scam. In May 2012, the Community Bank & Trust of
Sheboygan, Wisconsin, filed
a RICO lawsuit involving mega-bank manipulation of interest rates,
naming Bank of America, JPMorgan Chase, Citigroup, and others. The
suit was filed as a class action to encourage other local, independent
banks to join in. On July 12, the suit was consolidated with three
other LIBOR class action suits charging violation of the anti-trust
laws.
The Sheboygan bank claims that the LIBOR rigging cost the
bank $64,000 in interest income on $8 million in floating-rate loans in
2008. Multiplied by 7,000 U.S. community banks over 4 years, the
damages could be nearly $2 billion just for the community banks.
Trebling that under RICO would be $6 billion.
RICO Suits Against Banking Partners of MERS
Then there are the MERS lawsuits. In the State of Louisiana, 30 judges representing 30 parishes are
suing 17 colluding banks under RICO,
stating that the Mortgage Electronic Registration System (MERS) is a
scheme set up to illegally defraud the government of transfer fees, and
that mortgages transferred through MERS are illegal. A number of courts
have held that separating the promissory note from the mortgage—which
the MERS scheme does—breaks the chain of title and voids the transfer.
Several
states have already sued MERS and their bank partners, claiming
millions of dollars in unpaid recording fees and other damages. These
claims have been supported by numerous studies, including one asserting
that MERS has irreparably damaged title records nationwide and is at the
core of the housing crisis. What distinguishes Louisiana’s lawsuit is
that it is being brought under RICO, alleging wire and mail fraud and a
scheme to defraud the parishes of their recording fees.
Readying the Lifeboats: The Public Bank Solution
Trebling the damages in all these suits could sink the banking Titanic.
As Seumas Milne notes in The Guardian:
Tougher
regulation or even a full separation of retail from investment banking
will not be enough to shift the City into productive investment, or even
prevent the kind of corrupt collusion that has now been exposed between
Barclays and other banks. . . .
Only
if the largest banks are broken up, the part-nationalised outfits turned
into genuine public investment banks, and new socially owned and
regional banks encouraged can finance be made to work for society,
rather than the other way round. Private sector banking has
spectacularly failed – and we need a democratic public solution.
If the last quarter century of U.S.
banking history proves anything, it is that our private banking system
turns malignant and feeds off the public when it is deregulated. It
also shows that a parasitic private banking system will NOT be tamed by
regulation, as the banks’ control over the money power always allows
them to circumvent the rules. We the People must transparently own and
run the nation’s central and regional banks for the good of the nation,
or the system will be abused and run for private power and profit as it
so clearly is today, bringing our nation to crisis again and again while
enriching the few.
Posted: Friday, 20 July 2012
