Monday, July 16, 2012

Good News: "States Step Into Libor Probe"

The Wall Street Journal July 16, 2012 By J. Eaglesham, R. Albergotti, & M. Corkery p. C1, C2.

[Excepted] "Prosecutors in New York and Connecticut are investigating whether their states incurred losses as a result of interest-rate manipulation by banks, a probe that could lead to a wider multi-state enforcement action...

Libor also has an impact on the cost of financial contracts, called interest-rate swaps, that many municipalities and state agencies buy as insurance policies to help manage their debt costs. In that way, the alleged manipulation could have had a direct impact on state finances..."

Majia Here: I've posted previously on the LIBOR scandal

I'm going to briefly re-explain the scandal and then address why the state investigative action is so necessary.

The scandal concerns the London interbank offered rate, which according to The Wall Street Journal is "the benchmark for interest rates on trillions of dollars of loans to individuals and businesses around the world" (Enrich & Munoz, A1).

15 big banks submit records of the inter-bank interest rates they pay and the Libor rate is supposed to be averaged from these records of the 15 big banks.

However, the banks colluded in emails to submit falsified records in order to manipulate the Libor rate, and to profit from that manipulation.

Barclays got caught red handed and agreed to pay $453 million "to settle US and British authorities' allegations that the British bank tried to manipulate the London interbank offered rate..." (Enrich & Munoz, A1).

The scandal widened when documents revealed that the British Labor Government may have condoned the conspiracy and fraud involved in manipulating rates (see Taibbi "Libor Banking").

Now, here is why the scandal has relevance for taxpayers.

The big banks help governments at all levels structure and re-structure their debts.

In the US, the big banks often sold interest rate swaps to municipalities when helping them structure debt.

An interest rate swap essentially fixed the interest that the cities/counties would have to pay on their debt by arranging a swap with the bank. So, X City might agree to a swap with JP Morgan that would fix their interest rates at 4%.

The problem was that these fixed interest rate swaps were at rates higher than the market rate because the Federal Reserve drove down interest rates so significantly.

Consequently, X City had to pay more interest to JP Morgan (hypothetically) than they would have to pay if their interest on debt floated at market rates.

Matt Taibbi wrote a great essay on how this was creating financial havoc for municipal entities:

"Looting Main Street"–Matt Taibbi on How the Nation’s Biggest Banks Are Ripping Off American Cities with Predatory Deals"

The interest rates paid by municipal entities are ultimately payed by the taxpayers.

Now, let us think a minute about the significance of the manipulation of the Libor rate.

The banks were essentially capable of MANIPULATING THE INTEREST LIBOR RATE and the documents reveal that they manipulated it down.

So, the banks essentially conspired to bring down Libor-linked interest rates lower than the rates they had sold in their interest rate swaps to cities.

This is criminal fraud.

Those who were involved in the LIBOR scandal perpetuated crimes against tax payers in every government entity that has lost money because of the swaps.

The WSJ article states that approximately $200 billion in municipal interest rate swaps are tied to Libor.

There may be other ways that the manipulation of the LIBOR rate affects tax payers.

The WSJ article states that the Mass State treasurer observes that "a significant portion of his office's $9.5 billion cash portfolio is tied directly or indirectly to the performance of Libor."

One report produced by transit-worker unions and community groups contends that Libor manipulation may have $92 million a month for 13 transit agencies.


Enrich, D., & Munoz, S. S. (2012, July 5). Rate Scandal Set to Spread. The Wall Street Journal, p. A1, A5.

Taibbi: LIBOR Banking Scandal Deepens; Barclays Releases Damning Email, Implicates British Government. Rolling Stone July 4, 2012
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1 comment:

  1. Well, for one thing, we know that manipulating any price is never a good thing for a free market. But that’s exactly what banks including Barclays are being accused of; others like JPMorgan Chase, Bank of America and Citi are being investigated as well. To know more about Interest Rate Swap Mis Selling Click here.


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