Mission & Name
US Foreign Policy (Dr. El-Najjar's Articles)
Titanic Banks Hit LIBOR Iceberg:
Will Lawsuits Sink the Ship?
By Ellen Brown
Al-Jazeerah, CCUN, July 23, 2012
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:
already clear that the rate rigging, which depends on collusion, goes far
beyond Barclays, and indeed the City of London. This is one of multiple
scams that have become endemic in a disastrously deregulated system with
inbuilt incentives for cartels to manipulate the core price of finance.
. . . It could of course have happened only in a
private-dominated financial sector, and makes a nonsense of the bankrupt
free-market ideology that still holds sway in public life.
. . . A
crucial part of the explanation is the unmuzzled political and economic
power of the City. . . . Finance has usurped democracy.
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
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
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
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
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
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.
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:
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
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
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.
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:
Tougher regulation or
even a full separation of retail from investment banking will not be
enough to shift the City into productive investment, or even prevent the
kind of corrupt collusion that has now been exposed between Barclays and
other banks. . . .
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
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