Titanic Banks Hit LIBOR Iceberg: Will Lawsuits Sink the Ship?
Antitrust violations, wire fraud, bid-rigging, and price-fixing
By Ellen Brown
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Global Research, July 20, 2012
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URL of this article: www.globalresearch.ca/index.php?context=va&aid=31994
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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.
In an article in the July 3rd Guardian titled
“Private Banks Have Failed – We Need a Public Solution”, Seumas Milne
writes of the LIBOR rate-rigging scandal admitted to by Barclays Bank:
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:
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.
Ellen Brown is an attorney and president of the Public Banking Institute, http://PublicBankingInstitute.org.
In Web of Debt, her latest of eleven books, she shows how a private
cartel has usurped the power to create money from the people themselves,
and how we the people can get it back. Her websites are http://WebofDebt.com and http://EllenBrown.com
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