The dogma. In his article, ‘The Scam Wall Street Learned from the Mafia’ (Rolling Stone, June 21, 2012), Matt Taibbi details the case of United States of America v. Carollo, Goldberg and Grimm. The case was over ten years in the making and concerns the rigging of public bids on municipal bonds, a market worth $3.7 trillion. The article reflects the liberal dogma, which Taibbi succinctly summarizes toward the end of his piece:I thank Jonathan for sending me this short comment as it illustrates yet another example of how banksters profit by rigging markets. Remember, in banking, a few basis points add up to billions in profits.That, ultimately, is what this case was about. Capitalism is a system for determining objective value. What these Wall Street criminals have created is an opposite system of value by fiat. Prices are not objectively determined by collisions of price information from all over the market, but instead are collectively negotiated in secret, then dictated from above (emphases added).Translation. The market is natural and therefore objective and just (everyone is Pareto-Clark thankful for getting exactly what they deserve). Collusion is artificial and therefore subjective and unjust (the municipalities get less than they deserve, the banks get more, and the economy gets ‘distorted’). From the viewpoint of capital as power, this claim makes no sense. There is no such thing as objective value. All value is value by fiat. And all value by fiat is value ‘from above’ – i.e., a reflection of a matrix of power (the capitalist nomos). In this sense, all the machinations on trial here sum up to one aspect of a much larger architecture of power and sabotage. The basic interest rate on which the fraud is superimposed is already a distillation of all the differential power processes in the world – which, together, form the normal rate of return. Indeed, the interest rate that emerges from the fraud is itself fed into that very normal rate of return. . . .
How does the scam work? According to Taibbi, the big banks (providers) collude with the auctioneers to divvy up the business between them and rip off the issuers (towns and cities). To illustrate: A municipality borrows money for a public project, say $10 million. The project is to last five years, and in the meantime the municipality wants to invest the money that is yet to be spent. The law requires the municipality to get competitive bids from at least three banks and choose the bank that offers the highest interest. The banks, however, collude to limit the competitive bidding. Every bank secretly retains its own set of auctioneers to whom it pays money (directly through bribes or indirectly through unrelated fees, other business,etc.). The auctioneer shows his retainer the highest offer he got from the other banks (allowing the bank to have the ‘last look’). Knowing its competitors’ bids, the bank in question ups its own offer by a few basis points (cents) above the highest bid, thus winning the auction. Everyone in the business participates in this game, as do the politicians who are bribed to look the other way.
This business reputedly started in the late 1990s. According to Taibbi, it is very much a case of Wall Street imitating the public-contract rigging practices of the Mafia (which in turn originated when the Mafia imitated the rigging practices of Rockefeller and his legions of acolytes). Nobody thinks much of this rigging. It is the way of doing business (as the Saudi oil minister Ali Al-Naimi once put it, ‘the price is determined by the market, what we try to do is to make the market balanced . . . to get the market to the normal equilibrium and the price will take care of itself’). The defence’s argument in the case was very much along those lines. This is a complicated business – certainly more complicated than fixing a car or a fridge – it argued; and just as we don’t grill a good mechanic on every cent on his bill, there is no reason to do so with good bankers.
How big is the ‘scam’? The most interesting question, though, remains unanswered: how much money has been scooped this way? Taibbi doesn’t dare to estimate. But we can try to ballpark the annual numbers by multiplying the ‘normal rig’ – say 5 basis points, or 0.0005 – times the value of outstanding municipal bond – roughly $3.7 trillion in 2011. This multiplication yields about $1.85 billion in annual rigging profit on new and existing bonds. Now, according to Datastream, net banking profit in 2011 was $43 billion. Assuming an effective corporate tax rate of 20% implies about $54 billion in pretax profit. And since all profit is rigging of a sort – ‘profit by fiat’, to paraphrase Taibbi’s terminology – we can estimate that, in 2011, municipal rigging amounted to about 3.4% of total bank rigging.
On the same subject, Ellen Brown, attorney and president of the Public Banking Institute, asks Titanic Banks Hit LIBOR Iceberg: Will Lawsuits Sink the Ship?:
Tom Naylor, professor of economics at McGill University, a leading expert on underground economics, sent me the article above along with his thoughts:
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:
It’s 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 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.
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:
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.
The article is fairly interesting but contains an important omission - central banks are not suddenly conspirators in rigging financial markets in favor of commercial and investment banks, they have always done that, that is their job.I agree with Tom, these latest calls for 'radical changes' to the banking industry will go nowhere, which is why I remain bullish on big banks run by banksters. When all is said and done, mega banks will pay some nominal fine and move on to the next rigging scam. This is the history of banking and there is no reason to delude ourselves into thinking this time is different.
It seems to be conveniently forgotten from the collective memory that almost all central banks were originally set up BY the commercial and investment banks, which owned and controlled them, precisely to privately "regulate" financial markets to increase private profit.
While many countries in the 20th Century nationalized their central banks (in Canada the Bank of Canada was set up by the private banks in 1934 and nationalized the next year) in reality they were almost always insulated from the control of the government of the day - on the rationalization that the Great Unwashed, working through democratic institutions that gave them control or at least a strong influence in government, would inflate the money supply and push down interest rates, therefore undercutting the profitability of private finance in favor of maintaining economic growth along with a (somewhat) more equitable distribution of income.
The exceptions - and there were some in Latin America, for example, were knocked out during the debt crisis of the early 1980s when one of the demands of the Bank for International Settlements, the IMF and the US Treasury for financial aid was precisely the bolstering of the political independence of the central bank.
Note the parallels to what is being demanded of European countries in (contrived) financial difficulty now - the "Crisis" will end, not only with their national banking systems drawn into a pan-European banking cartel controlled via the ECB.
Note, too, the problem is not just the US repeal of Glass Steagal, or the equivalent moves elsewhere. It is the institutional evolution of banking that PRECEDED legislative initiatives that were bought and paid for by the banks to rationalize and perpetuated a situation that already existed, all cheered on by academic economists.
Her (Ellen Brown) call for breaking up the banks etc. is an excellent one but a complete nonstarter. I recall in 1982 giving testimony to the Canadian House of Commons Banking Committee, then holding phony "hearings" into a banking profits scandal and saying "Canada needs a system of banks so small we could franchise them like hamburger stands and put one on every corner." Well, that made headlines for a day....and was immediately forgotten. Expect these new calls to have the same profound effect.
Below, watch a Democracy Now interview with Matt Taibbi, contributing editor for Rolling Stone, on LIBOR and more. Also embedded a couple of interviews from Capital Account. First, one with Paul Craig Roberts who along with Nomi Prins wrote an excellent article on the real LIBOR scandal. Second, an interview with Charles Ferguson, author of Predator Nation and producer and director of Inside Job. All interviews are well worth watching.