Sunday, January 8, 2012

Sociopathic Banks and Predatory Interest Rate Swaps

Today the Washington Post has an article about how an Italian town is being destroyed by debt it was tricked into acquiring:

Battle-scarred Italian town now defeated by debt

[Excerpted] "While the New York-based bank led by chief executive Jamie Dimon has no retail branches in Italy, it didn’t hesitate to sell complex swaps to municipalities over the past decade. In Milan, J.P. Morgan and its employees are on trial, along with Frankfurt-based Deutsche Bank, Germany’s Depfa Bank and Switzerland’s UBS, for allegedly tricking the city into buying the contracts in 2005. The banks deny any wrongdoing...."

Majia here: Matt Taibbi of the Rolling Stone Magazine broke the story of how interest-rate swaps were foisted upon entire communities, and even the nation of Greece, by predatory banks, particularly JP Morgan, through the complicity of their greedy, corrupt and/or inept public officials.

Interest rate swaps essentially enriched JP Morgan and other predatory "banks" (e.g., Goldman Sachs) through fees attached to the re-packaging of municipal debt and through amplification of interest owed by communities. Taibbi's reporting is unmatched on this story. See links below.

What I do not understand is why these contracts are allowed to stand given that the US federal government rescued these banks through bailouts, guarantees, and through the government's ongoing payment of derivative contracts issued by AIG?

As a condition of these bailouts and guarantees, it seems that these predatory lenders' contractual agreements with government agencies (cities, counties, and countries) could have been re-negotiated.

Instead, the US government backstopped the predatory lenders by close to 7 trillion and paid out AIG's derivative contracts at 100%

These derivative contracts may actually have been used by the predatory lenders as instruments of warfare aimed at causing debt default by government agencies, thereby enabling the predatory lenders to receive payouts through the defaults AND come in and pick up assets in government fire-sales

here are some links to Taibbi's excellent analyses:

"Looting Main Street"–Matt Taibbi on How the Nation’s Biggest Banks Are Ripping Off American Cities with Predatory Deals
[excerpted] MATT TAIBBI: "Well, basically, it’s a very long story, but what happened was the — Birmingham, the city of Birmingham in Jefferson County, they were sued by the EPA back in the early ’90s. They had a faulty sewer system. They were forced to build a new sewer system, and so they borrowed a ton of money to build this new sewer system. All the local politicians used about $3 billion of this money. They funneled it to all their buddies who were contractors. And then, when the rent came due on all of this, when they had to start paying for this, they didn’t want to do it, because raising rates would have been politically unpopular. So they went to Wall Street, and they basically refinanced their debt. And that’s what this is all about. 

And these deals for refinancing the debt were so lucrative that the banks basically fought over who would get these contracts. And the method for getting the contracts was to funnel millions of dollars to buddies of the county commissioners, who would then, in turn, follow the county commissioner around with charge cards and paid for their Ferragamo suits and Rolex watches. And that’s how Jefferson County ended up getting into a situation where they had $5 billion in debt on a $250 million sewer project.

Also see

Wall Street's War: Congress looked serious about finance reform – until America's biggest banks unleashed an army of 2,000 paid lobbyistsby: Matt Taibbi

A good summary of Taibbi's account of what happened to Greece can be found here: Goldman-brokered interest-rate swaps proved instrumental in the debt meltdown of the Greek economy by Lelhmann



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