With all the noise being generated throughout the business press about LIBOR-gate (the fraudulent manipulation by many of the world’s largest banks of the London Interbank Offered Rate and the LIBOR-OIS spread), it’s nice to see folks finally getting down to brass tacks and discussing just how much money in damages will be sought out by those adversely affected by the scandal on this side of the pond. And, that just happens to be the subject Naked Capitalism Publisher Yves Smith covered in a post on her blog, last night, entitled: " Libor Investigation Extended to US Mortgages, but What About TALF Loans?"
In the opening part of her post, Yves covered mortgages, and she reached the conclusion that potential damages due U.S. mortgageholders as a result of the too-big-to-fail banks’ fraudulent manipulation of LIBOR, starting in 2005, were relatively nominal.
Next, Yves discussed derivatives, which (along with many others in the blogosphere and the financial press) is where she states is where “the real action was.”
But, before we continue along with the primary topic of this post, I want to point out that--as was the case on so many other matters where fraud was uncovered elsewhere in a myriad of Wall Street transactions—when it came to Wall Street’s dealings with U.S. municipalities and pension funds during this time period (2005 through 2010) it is already a matter of public record that firms such as JP Morgan Chase and Goldman-Sachs were found to have acted fraudulently due to rigging commission bids for municipal bonds that were packaged with these credit swaps deals, too.
(NOTE: I have posted numerous diaries at Daily Kos on this Wall Street bid-rigging scam over the past few years, with examples of those posts being found HERE and HERE. See links at the bottom of this post for more on this.)
So, in essence, what we have with LIBOR-gate is yet another, massive instance of fraudulent/conspiratorial collaboration (think: RICO Act) amongst Wall Street players to bilk U.S. municipalities and taxpayers out of billions of dollars in these same transactions due to LIBOR manipulation (too).
In other words, banks were skimming basis points off of each transaction via commission-rate-fixing on a contract-by-contract basis, directly — these are facts that were previously uncovered in earlier litigation settlements, and that was after LIBOR had been fraudulently “fixed,” as we’re just now learning about it, to keep downside credit swaps payouts favorable to the banks that sold these contracts to U.S. municipalities and pension funds, etc., in the first place — so, what we’re talking about is MULTIPLE LAYERS OF WALL STREET FRAUD within these same transactions.
And, as Yves tells us tonight, according to an article in the April edition of The Economist, this second, egregious Wall Street transgression against U.S. taxpayers could translate into as much as an additional $40 billion in damages due from the vampire squids to cities, towns and pension funds throughout the United States. So, here’s Yves on the case, in her own words, from earlier tonight…
Libor Investigation Extended to US Mortgages, but What About TALF Loans?
Thursday, July 12, 2012 2:11AM
…By contrast, as we’ve indicated, the real action was in the derivatives, and the damages are likely to get much higher there. And municipalities were often on the wrong side of bank fancy footwork. These cases all relate to when Libor was understated in the crisis, and then the manipulation was believed to be much larger than in the pre-crisis period (10 basis points would be a big number from the earlier period; reader comments during the crisis indicate 30 or even 40 basis points would not be unusual)…
Yves then directs her audience to this quote from the April edition of The Economist…
…Civil cases brought by banks’ customers in America suggest who might have suffered if the rate was being gamed.
These cases can be grouped into four types, according to Bill Butterfield and Anthony Maton of Hausfeld, a law firm. First, there are large individual investment firms seeking damages on their own. The other three types of case are brought by customers acting as groups. One group includes traders who were on the wrong side of LIBOR bets. A second group includes investors in large companies’ LIBOR-linked debt who may have lost out on interest payments if LIBOR was set too low.
The final group is made up of customers that bought interest-rate swaps from banks. This group includes the city of Baltimore, which is represented by Hausfeld and whose case is especially revealing…
Baltimore entered into over $100m in interest-rate swaps, according to case documents. Lower LIBOR-linked payments to the city would have meant less money to cover the outgoing fixed-rate payments. If LIBOR was artificially suppressed, the city would have been losing millions annually.
If the case is upheld, damages could be big. The American cases are being pursued under “class action” litigation. This means that if Baltimore’s case is upheld other cities sold the same products will also be able to claim damages. Across America 40 states allow municipalities to enter into swap agreements. The total estimated amount in 2010 was $250 billion-500 billion, according to an IMF paper. What’s more, cases are being brought under the Sherman Act, America’s antitrust law, which allows for triple damages. Assume the worst and damages for American cities alone could go as high as $40 billion.
…But even though the size of the market alone is bound to engender discussion of who was hurt and how much, in some ways, that misses the point. When people go to conduct business, they expect (or at least once did) to be treated fairly by vendors. And it wasn’t that long ago that regulators would come down hard on firms that broke the rules, not based on any computation of damages, but on the idea that certain types of behavior were not tolerated. For instance, in 1991, the CEO of Salomon and three other top executives resigned because the firm had waited weeks before informing the Fed of how a senior trader was submitting fake customer bids at Treasury auctions so he could buy more than the maximum allowed to a single firm. Mind you, the ire of the Fed was not over the violation per se but the casualness (which they saw as intransigence) of Salomon in reporting and dealing with it. Even with the magnitude of the Libor scandal, the posture of the OCC suggests that regulators will focus on ferreting out who was hurt. That’s a part of the process, but far more important is trying to restore integrity of the system. Yet we don’t see the sort of stern talk that says they recognize that this is part of their job.
Yes, as history will record it, with the uncovering of the LIBOR-gate scam, we now know that Wall Street was bilking municipalities and pension funds across America both coming and going; at first with their fraudulent commission-rate-fixing efforts, and underneath it all, with the fixing of LIBOR, to limit their payouts to American taxpayers on the downside of these transactions, too.
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As promised, above, here are links to a couple of third-party articles as well as some of my earlier posts at Daily Kos on the municipal bond commission-rate-fixing scam that was uncovered and prosecuted via our government’s civil litigation against many of these exact, same players with regard to these exact, same transactions, just a couple of years ago…
“ DOJ: Banks Colluded with Municipal “Advisers” to Rig Bids on GICs” Yves Smith, Naked Capitalism, 5/18/2010
" America’s Municipal Debt Racket” Steve Malanga, WSJ Online, 6/14/2010
“ Too Close For Comfort” 4/13/2011