Taxpayers are paying billions of dollars for a swindle pulled off by the world’s biggest banks, using a form of derivative called interest-rate swaps; and the Federal Deposit Insurance Corporation has now joined a chorus of litigants suing over it. According to an SEIU report:
Derivatives . . . have turned into a windfall for banks and a nightmare for taxpayers. . . . While banks are still collecting fixed rates of 3 to 6 percent, they are now regularly paying public entities as little as a tenth of one percent on the outstanding bonds, with rates expected to remain low in the future. Over the life of the deals, banks are now projected to collect billions more than they pay state and local governments – an outcome which amounts to a second bailout for banks, this one paid directly out of state and local budgets.
It is not just that local governments, universities and pension funds made a bad bet on these swaps. The game itself was rigged, as explained below. The FDIC is now suing in civil court for damages and punitive damages, a lead that other injured local governments and agencies would be well-advised to follow. But they need to hurry, because time on the statute of limitations is running out.
The Largest Cartel in World History
On March 14, 2014, the FDIC filed suit for LIBOR-rigging against sixteen of the world’s largest banks – including the three largest US banks (JPMorgan Chase, Bank of America, and Citigroup), the three largest UK banks, the largest German bank, the largest Japanese bank, and several of the largest Swiss banks. Bill Black, professor of law and economics and a former bank fraud investigator, calls them “the largest cartel in world history, by at least three and probably four orders of magnitude.”
LIBOR (the London Interbank Offering Rate) is the benchmark rate by which banks themselves can borrow. It is a crucial rate involved in hundreds of trillions of dollars in derivative trades, and it is set by these sixteen megabanks privately and in secret.
Interest rate swaps are now a $426 trillion business. That’s trillion with a “t” – about seven times the gross domestic product of all the countries in the world combined. According to the Office of the Comptroller of the Currency, in 2012 US banks held $183.7 trillion in interest-rate contracts, with only four firms representing 93% of total derivative holdings; and three of the four were JPMorgan Chase, Citigroup, and Bank of America, the US banks being sued by the FDIC over manipulation of LIBOR.
Lawsuits over LIBOR-rigging have been in the works for years, and regulators have scored some very impressive regulatory settlements. But so far, civil actions for damages have been unproductive for the plaintiffs. The FDIC is therefore pursuing another tack.
But before getting into all that, we need to look at how interest-rate swaps work. It has been argued that the counterparties stung by these swaps got what they bargained for – a fixed interest rate. But that is not actually what they got. The game was rigged from the start.
The Sting
Interest-rate swaps are sold to parties who have taken out loans at variable interest rates, as insurance against rising rates. The most common swap is one where counterparty A (a university, municipal government, etc.) pays a fixed rate to counterparty B (the bank), while receiving from B a floating rate indexed to a reference rate such as LIBOR. If interest rates go up, the municipality gets paid more on the swap contract, offsetting its rising borrowing costs. If interest rates go down, the municipality owes money to the bank on the swap, but that extra charge is offset by the falling interest rate on its variable rate loan. The result is to fix borrowing costs at the lower variable rate.
At least, that is how it’s supposed to work. The catch is that the swap is a separate financial agreement – essentially an ongoing bet on interest rates. The borrower owes both the interest onits variable rate loan and what it must pay out on this separate swap deal. And the benchmarks for the two rates don’t necessarily track each other. As explained by Stephen Gandel on CNN Money:
The rates on the debt were based on something called the Sifma municipal bond index, which is named after the industry group that maintains the index and tracks muni bonds. And that’s what municipalities should have bought swaps based on.
Instead, Wall Street sold municipalities Libor swaps, which were easier to trade and [were] quickly becoming a gravy train for the banks.
Historically, Sifma and LIBOR moved together. But that was before the greatest-ever global banking cartel got into the game of manipulating LIBOR. Gandel writes:
In 2008 and 2009, Libor rates, in general, fell much faster than the Sifma rate. At times, the rates even went in different directions. During the height of the financial crisis, Sifma rates spiked. Libor rates, though, continued to drop. The result was that the cost of the swaps that municipalities had taken out jumped in price at the same time that their borrowing costs went up, which was exactly the opposite of how the swaps were supposed to work.
The two rates had decoupled, and it was chiefly due to manipulation. As noted in the SEUI report:
[T]here is . . . mounting evidence that it is no accident that these deals have gone so badly, so quickly for state and local governments. Ongoing investigations by the U.S. Department of Justice and the California, Florida, and Connecticut Attorneys General implicate nearly every major bank in a nationwide conspiracy to rig bids and drive up the fixed rates state and local governments pay on their derivative contracts.
Changing the Focus to Fraud
Suits to recover damages for collusion, antitrust violations and racketeering (RICO), however, have so far failed. In March 2013, SDNY Judge Naomi Reece Buchwald dismissed antitrust and RICO claims brought by investors and traders in actions consolidated in her court, on the ground that the plaintiffs lacked standing to bring the claims. She held that the rate-setting banks’ actions did not affect competition, because those banks were not in competition with one another with respect to LIBOR rate-setting; and that “the alleged collusion occurred in an arena in which defendants never did and never were intended to compete.”
Okay, the defendants weren’t competing with each other. They were colluding with each other, in order to unfairly compete with the rest of the financial world – local banks, credit unions, and the state and local governments they lured into being counterparties to their rigged swaps. The SDNY ruling is on appeal to the Second Circuit.
In the meantime, the FDIC is taking another approach. Its 24-count complaint does include antitrust claims, but the emphasis is on damages for fraud and conspiring to keep the LIBOR rate low to enrich the banks. The FDIC is not the first to bring such claims, but its massive suit adds considerable weight to the approach.
Why would keeping interest rates low enrich the rate-setting banks? Don’t they make more money if interest rates are high?
The answer is no. Unlike most banks, they make most of their money not from ordinary commercial loans but from interest rate swaps. The FDIC suit seeks to recover losses caused to 38 US banking institutions that did make their profits from ordinary business and consumer loans – banks that failed during the financial crisis and were taken over by the FDIC. They include Washington Mutual, the largest bank failure in US history. Since the FDIC had to cover the deposits of these failed banks, it clearly has standing to recover damages, and maybe punitive damages, if intentional fraud is proved.
The Key Role of the Federal Reserve
The rate-rigging banks have been caught red-handed, but the greater manipulation of interest rates was done by the Federal Reserve itself. The Fed aggressively drove down interest rates to save the big banks and spur economic recovery after the financial collapse. In the fall of 2008, it dropped the prime rate (the rate at which banks borrow from each other) nearly to zero.
This gross manipulation of interest rates was a giant windfall for the major derivative banks. Indeed, the Fed has been called a tool of the global banking cartel. It is composed of 12 branches, all of which are 100% owned by the private banks in their districts; and the Federal Reserve Bank of New York has always been the most important by far of these regional Fed banks. New York, of course is where Wall Street is located.
LIBOR is set in London; but as Simon Johnson observed in a New York Times article titled The Federal Reserve and the LIBOR Scandal, the Fed has jurisdiction whenever the “safety and soundness” of the US financial system is at stake. The scandal, he writes, “involves egregious, flagrant criminal conduct, with traders caught red-handed in e-mails and on tape.” He concludes:
This could even become a “tobacco moment,” in which an industry is forced to acknowledge its practices have been harmful – and enters into a long-term agreement that changes those practices and provides continuing financial compensation.
Bill Black concurs, stating, “Our system is completely rotten. All of the largest banks are involved—eagerly engaged in this fraud for years, covering it up.” The system needs a complete overhaul.
In the meantime, if the FDIC can bring a civil action for breach of contract and fraud, so can state and local governments, universities, and pension funds. The possibilities this opens up for California (where I’m currently running for State Treasurer) are huge. Fraud is grounds for rescission (terminating the contract) without paying penalties, potentially saving taxpayers enormous sums in fees for swap deals that are crippling cities, universities and other public entities across the state. Fraud is also grounds for punitive damages, something an outraged jury might be inclined to impose. My next post will explore the possibilities for California in more detail. Stay tuned.
______
Ellen Brown is an attorney, founder of the Public Banking Institute, and a candidate for California State Treasurer running on a state bank platform. She is the author of twelve books, including the best-selling Web of Debt and her latest book, The Public Bank Solution, which explores successful public banking models historically and globally.
Filed under: Ellen Brown Articles/Commentary | Tagged: FDIC, interest rate swaps, JPMorganChase, LIBOR manipulation |
WEB OF DEBT BLOG 
“This could even become a “tobacco moment,” in which an industry is forced to acknowledge its practices have been harmful – and enters into a long-term agreement that changes those practices and provides continuing financial compensation.”
Please,please Ellen ask anyone and everyone:
Was the true cause of the 2008-9 crisis a result of the fraud created by the banks that is ‘their selling of the future income (interest) to be generated from fraudulent AAA rated loans by way of a devised security called a “MBS” ?
I’d say that’s true. Will write on it, time permitting!
Ben Bernanke, You got to right. The ability of man to innovate has been and will always be mankind’s greatest achievement.SO where have we failed for surely you are aware that since 1976,that the top10% have gained all the increased income while the other 90% actually had a decrease of income.
Why have we had such inequality during some of the most innovative time in the history of mankind? Why have we missed the bubbles, the dot coms and housing and perhaps the yet to be pricked stock market?
Ben Bernanke ,why not connect the dots.Innovation is mans greatest gift, but what is man capable of ?
Maybe the top 10% were a little more innovative since 1976 than the rest of us. Maybe they understood that gaining double even triple profits on the money they printed (legally as an agent of the Fed), they the Private For Profit Banks (PFPB) could actually tax (charge interest) on that issuance; thereby gaining all the money that the Feds created over a period of time. IF they made loans for $5 trillion at an average of 6% over that 36 year period, isn’t it a fact that they would have been able to cancel their “printing ” of the $5 trillion while at the same time usurp from the 90% an additional $35 trillion(gross interest income) a legal taxation which they call “profits”.
May I dare ask, How does the 90% compete , how does the 90% earn a profit from nothing that gives a return of $35 trillion over 36 years?
Ben Bernanke, why not connect the dots. Innovation is mans greatest gift,but what is mans innovative greed capable of?
When the PFPB discovered that they could make $35 trillion by issuing and taxing (read:lending newly created money with a compound interest charge), they decided “Let’s do something innovative. Let’s print “an incomprehensible amount of money” put it out there with loans at an average of 6% for 30 years, BUT do it in such a way that we can ‘take an immediate gain the first year and not worry about the ‘Rule of 72″. This innovation will allow PFPB to make trillions in profits before the end of the first year, before the “printing” is even paid or for that matter before profit is collected, the PFPB get profits to share before they are earned. Create a security that is can be sold today like an “option on future interest income” use the mortgages fantastic future income, call them Mortgage Backed Securities. Separate the future income from the assets so as to be able to keep the asset 100% whole. And since the amount of money is so great, there need be no concern because the Feds would have to make it good for they must prevent “systemic failure”.
Ben Bernanke, why not connect the dots. Your innovation could produce a Noble.
Read : http://bit.ly/MlQWNs ;
http://www.businessinsider.com/ben-bernanke-commencement-speech-2013-5
Bernanke laments, he wishes he could have done more for the “people”.
Geithner laments, he had to save the banks first in order to help the “people”
Help, please anyone, challenge or endorse:
“Why ? To prevent ‘systemic failure” they could not help the people (the victims), while at the same time help the banks (the perpetrators).
Why ? Could they have as a solution simply purchased ALL residential mortgages for full face value, yes, full face value of about $12 trillion in 2007, or in the beginning of 2008.
Refinanced all $12 trillion with new 30 year assumable loans payable to Freddie and Frannie acting as a collector of revenue raised for the US Treasury.Payments could be reset at $556 per month per $100,000. The loan itself establishes “credit worthiness” as it will immediately firm and establish a solid bases of value for homes and put an immediate end to the ‘housing crisis.
This would also establish “for the people” a revenue gain of $12 trillion over the 30 year period.
Note, no inflation. No new money is needed; the money that was issued to make the loans
is money that belongs to the Fed and is only borrowed. This is a simple bank transfer:
$12 trillion of bank loans from Fed are cancelled by the purchase by the Fed of the $12 trillion in loan assets.
SO WHY NOT HELP the people and raise $12 trillion for Congressional appropriation?
BECAUSE, the massive loss was not because of the mortgage fraud. Between those who were paying and the recovery by foreclosure over time these loans would still show a profit.
SO WHAT went wrong with a perfect money making system?
SO WHAT went wrong with a perfect money making system?
The banks discovered a way that they could make TRILLIONS today on these loans while having no change on their balance sheet. In other words the Feds have $12 trillion owed to them and will wait for payment as it comes in while the Big Private For Profit Banks make a profit of $4 trillion.
They sold to the pension funds and big investors the future income of $12 trillion (the interest payments) for a cash payment today for $4 trillion.The hell with the Rule of 72, use it to convince the buyers that their $4 trillion will be paid back by the $12 trillion INTEREST INCOME. A real AAA win-win. Who would not want an investment that would TRIPLE.
So sure; the banks “guaranteed ” the investment. With no money from the banks needed to secure the asset and no money needed by the investor to secure the asset, it was a simple deal : How much money do you wish to invest, or should I say, “wish to triple”?
We, the banks have created a security that you can purchase; MBSs, that is a Mortgage Backed Security. You purchase the security which distributes the interest payments to you-there is no asset purchase.
The Fed could not purchase the Mortgages without revealing the banks sold the future income. Besides it would not solve the problem of “systemic failure’ because it would really cause it; namely, showing that the banks were insolvent and could not pay back the trillions of real money from the funds they spent. So much that the insurers the banks paid to “help control risk” also didn’t have enough money to pay.
IF the banks can not pay their losses and the insurers can not pay their losses?, Who would you trust? That is what causes a “systemic failure”, a total collapse of the monetary system.
Thanks, Ellen. We have it posted: http://www.laprogressive.com/?p=90584
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I wonder if, when this goes to court, and if the Banks are found guilty of rigging interest rate dirivatives as seems likely, will any CEO of any Bank, or even the Chairman(at the time) of the FED will do Jail time?
Or will they just pay a fine, and get back to making more profit (ie business as usual) for this Cartel?
There are three women that would make a better president than Hillary Clinton. They have stood up to the banks, advocated for the American consumer, and been beaten down by Wall Street Democrat henchmen like Rubin and Summers, without a peep from Bill Clinton or Obama. They are Brooksley Born, Sheila Bair, and Elizabeth Warren. They fought for derivative regulation, making big banks pay for their mistakes, and protecting consumers from the Wall Street vultures. And they never have gotten any credit for it from the people they worked for.
[…] Ellen Brown Writer, Dandelion Salad The Web of Debt Blog April 13, […]
Reblogged this on Taking Sides.
[…] The Global Banking Game Is Rigged, and the FDIC Is Suing – Ellen Brown […]
[…] https://ellenbrown.com/2014/04/13/the-global-banking-game-is-rigged-and-the-fdic-is-suing/ […]
[…] First a great one from Ellen Brown, regarding interest-rate swaps, which were sold to investors (such as the county where I live–Riverside County) on the idea that by buying these swaps, the investors could get cheaper loans with variable interest rates and the swaps would have the effect of making the variable interest rates behave as more or less fixed interest rates thereby supposedly giving the investor the best of both worlds. Brown explains: […]
[…] The Global Banking Game Is Rigged, and the FDIC Is Suing […]
[…] 16 Großbanken, darunter JPMorgan Chase, Bank of America und Citigroup, als auch zahlreiche europäische Großbanken, sind in diesen neuen Skandal verwickelt, welche die Zins-Derivate handelten. Im Privaten und Geheimen, wie die Finanzwissenschaftlerin Ellen Brown auf ihrem Blog berichtet. […]
hmm…where do the local and state governments, universities, pension funds get the funds they put in these investments? http://www.cafrman.com, http://www.cafr1.com. the cafr(comprehensive annual financial report) is the numerical representation of all the financial accounts, including the proverbial budget. these monies are public moneys. the public banking option means a government -owned bank will hold these funds, not a private cartel of banks for their personal profit(ala rate fixing, sleight of hand……….or lawful uses). note that the funds cafrman presents are not needed for any government maintenance/use/necessary expenditure. they are strictly surplus. as mr klatt , the cafrman , rightly expresses, for a government to hold-and invest- surpluses is theft…how much of this sort of stuff is just blinked at? and, how much just completely in visible to most civil workers, and us citizens? perhaps we need to wake up to the whole egg?
Agreed.
[…] 16 Großbanken, darunter JPMorgan Chase, Bank of America und Citigroup, als auch zahlreiche europäische Großbanken, sind in diesen neuen Skandal verwickelt, welche die Zins-Derivate handelten. Im Privaten und Geheimen, wie die Finanzwissenschaftlerin Ellen Brown auf ihrem Blog berichtet. […]
[…] READ MORE HERE […]
Hello Ellen,
One of our clients sent me a link to to your website. I work with http://www.butlerlibertylaw.com, a law firm in Minnesota defending homeowners in Foreclosure. I am not a lawyer but know more than most when it comes to securitized loans and the massive fraud that is going on in the financial sector. This firm has been sanctioned over 350k in fines for continuing to bring Quiet Title suits challenging legal standing to foreclose by bailout banks.
The issue we are facing is a corrupt or perhaps just fearful court system. The cases we are presenting are 2 Plus 2 equal 4 void. You obviously are aware of the Glaski decision. Bill Butler has been yelling from the roof tops for 5 years that 62 million loans are hopelessly void. The Courts in Minnesota are dismissing on a rule 12. Bailout banks are coming in and just coasting through the Federal Court system.
The laws are there and our complaints are well plead. In a Quiet Title, the burden of proof is on the Bailout bank. This issue has never once been addressed. We have some of the best expert witnesses in the country on securitized loans with attached affidavits. We have affidavits of bogus robo signers assigning all rights and interest of the Notes and Mortgages. We have clear breaches of the chain of title to the trusts claiming ownership under New York State Trust law. We have the OCC and the department of Thrift Supervision audit these banks and found them guilty of conducting fraudulent actions consistent with our complaints. I could go on and on. Federal Courts in Minnesota are dismissing these cases with prejudice for failure to state a claim.
These cases have been Appealed to the Eighth Circuit Court of Appeals and have been Affirmed. Declined to be heard at the Minnesota Supreme Court and the US Supreme Court. We have over 300 clients and counting. I have personally been through the system from the start and have spoken to well over a 1000 homeowners in Minnesota. The modification of these bad loans where designed to fail from the beginning. The similarities in actions among all the bailout banks is orchestrated. I agree with your recent article that we need a major overhaul. The Courts are the gate keepers of truth. If they would allow due process and be fair, most of these foreclosures would be gone. If this happened the truth would be exposed and all the crooks running this ponzi scheme will dry up.
This Law Firm has personally seen and been through the devastating affects that these wicked criminals have designed. We will not give up until justice is served. We all sense in our Hearts that we are doing the right thing and change is coming. I ask everyone to dig down and do your part as Americans to save this country.
God have mercy on the rest of them.
Matt.
612-630-5177
Perhaps, not necessarily so,”The importance of fiscal expansion and the impotence of conventional monetary policy measures in a liquidity trap have profound implications for the conduct of central banks. This is because in a liquidity trap, the fat tail risk of inflation is replaced by the fat tail risk of deflation. ”
And perhaps we can learn from the 2002 “poison”,“…as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”
What if…The Central Bank of the USA were to use a proven method to break the ‘liquidity trap’ , that would neither cause inflation nor deflation ? The Fed needs only to purchase all residential and commercial real estate loans and modify those loans with longer terms and lower interest rates.
NO NEW money needed since this would merely be a transfer of assets from the balance sheets of the banks to the balance sheet of the Fed. The asset is already ‘only temporary
money’ that is owed to be returned to the Fed. This would automatically “de-leverage” the banks. Inflation and deflation being a non issue.
BUT, what about the borrower ? This would also automatically “de-leverage” the borrowers
because of the dramatic reduction of the amount of the monthly payments.
If $80 trillion is now @6%,@30 years, it requires over $5 trillion/year as payments.
The modified new loans would be $80trillion @2% @40 years, that would reduce the payments to under $3trillion/year.
How’s that for a fat cat with a thin tail.
And now the good news! (As stated on ” 60 minutes” (12/11/11)”
President Obama said,”You can’t raise revenues by lowering taxes unless you get the money from somewhere else.” ?
Of the $3trillion in payments each and every year there is a “revenue income of $1 trillion
that should be turned over to the US Treas. to be used by Congress.
***** “Believe nothing merely because you have been told it…But whatsoever, after due examination and analysis,you find to be kind, conducive to the good, the benefit,the welfare of all beings – that doctrine believe and cling to,and take it as your guide.”- Buddha[Gautama Siddharta] (563 – 483 BC), Hindu Prince, founder of Buddhism
Bet you do not know WHY BEN BERNANKE couldn’t “help the people’ by doing this ?
Because he was forced to work for the best interest of the private for profit banks, not the people who were slightly helped. Also because it would have revealed that by buying the “Ms” of the “MBSs” he would have exposed that the banks sold the future income from those notes. In the $80 trillion example that means they would have had to pay back part of the $1trillion (income gain) each year to the hedge funds.
Oh,how I await any profound reply.
@Matt, Has anyone tried to “Class Action” The ONE thing all have in common: The banks by intimidation, bribery, and extortion forced appraisers to certify the higher price regardless of its real value?
I understand 1,000s of appraisers have testified to this fact.
AND THERE IS NO LOAN OUT THERE THAT DID NOT HAVE THE CONDITION ATTACHED: Appraisal must be done by bank approved appraiser.
Thanks, Ellen for another clear explanation. You are into shedding light, while most financial ‘journalists’ are into spreading obscurity.
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[…] understand why, it is necessary to understand how swaps work. As explained in my last article here, interest-rate swaps are sold to parties who have taken out loans at variable interest rates, as […]
[…] understand why, it is necessary to understand how swaps work. As explained in my last article here, interest-rate swaps are sold to parties who have taken out loans at variable interest rates, as […]
[…] understand why, it is necessary to understand how swaps work. As explained in my last article here, interest-rate swaps are sold to parties who have taken out loans at variable interest rates, as […]
[…] understand why, it is necessary to understand how swaps work. As explained in my last article here, interest-rate swaps are sold to parties who have taken out loans at variable interest rates, as […]
[…] understand why, it is necessary to understand how swaps work. As explained in my last article here, interest-rate swaps are sold to parties who have taken out loans at variable interest rates, as […]
[…] understand why, it is necessary to understand how swaps work. As explained in my last article here, interest-rate swaps are sold to parties who have taken out loans at variable interest rates, as […]
[…] understand why, it is necessary to understand how swaps work. As explained in my last article here, interest-rate swaps are sold to parties who have taken out loans at variable interest rates, as […]
How is it possible to have $426 trillion in anything?
Thank you,
bob
[…] To understand why, it is necessary to understand how swaps work. As explained in my last article here, interest-rate swaps are sold to parties who have taken out loans at variable interest rates, as […]