Will It Take Popular Pressure to Get Municipalities to Go After Libor Gaming Costs?

This Real News Network video provides an update on the Libor scandal. Tom Ferguson flags an issue that may come as a surprise to some readers. Even though states and municipalities are under extreme budget stress, which means one would think that getting restitution for extra Libor related costs due to price fixing would be a high priority, lax campaign finance rules at the state level may undermine these efforts.

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  1. Aquifer

    States’ Attorney Generals are getting together to look into this? Hmmmm, now where have I heard that one before ….

    Ok Schneiderman, here’s your chance to redeem yourself ….. (as if …)

    1. F Libertarians!

      This will probably end in another “settlement” in which every single taxpayer receives $1.00 of restitution.

      The executives and bank employees who conspired to commit this fraud should be prosecuted under the RICO laws. As an aside, it was nice to see Holder in Wisconsin today giving a speech at the memorial for the shooting victims. Until today, I was under the impression that the Office of the US Attorney General had been left vacant seeing as how the banks are currently NOT being prosecuted by the US DOJ for any of the clear securities and accounting fraud violations that they have all committed recently. Until today, I was tempted to call 911, report Holder as a missing person, and request the police put an APB on Eric Holder. Where the fuck has Holder been?

    2. Up the Ante

      “Ok Schneiderman, here’s your chance to redeem yourself ….. ”

      He could also give Deloitte a good working over, too, to good effect ..

      Perhaps Jessica Silver-Greenberg really had Schneiderman in mind when she believed she was describing Lawsky,

      ” .. suggests to some industry hands that he is still finding his footing as a regulator after being a prosecutor. ”


  2. Bruce Krasting

    It will be interesting to see how these suits work through the legal system. There will be a ton of disclosure. Banks, brokers, borrowers, lenders, Munis, Treasury officials (past and present) and at least two Fed Governors will all be deposed. I think they should just ask Volker. He knew Libor was a flawed index 30 years ago. I did:


    I think some of the issues that will be resolved by the courts include:

    1) There was very little (if any) manipulation of the 3 month Libor. This is important as most of the existing contracts are based on the 3 month. The mispricing was more prevalent in the “off-the run” months (7 or 8 months).

    2) To the extent that Libor manipulation is proven, it will show that in the vast majority of instances the Libor “fixing” rate was lower than the actual rate for interbank loans. Should that be the case, then any of those consumer loans will get tossed out. There was no damage to them. Chuck out the “Widows and Orphans” suits.

    3) Then you have the Munis. If Libor fixing rates were consistently lower than actual market rates, then Munis lost out on their huge book of Libor based Fixed-Floater swaps. Some points on this:

    a) I can’t wait to have the (then) Treasurer of a big Muni go on the stand and swear to god that he/she had no idea at all that Libor was a gamed rate, and that it was gamed lower.

    Two possibilities here. Either the person doing the “swearing” is an idiot, who should never have been in a position of responsibility, or they are lying. I can’t think of a third….

    b) The Munis want to exit the swaps that are killing them because the Fed has established ZIRP, not because of a few (at most) Basis Points in the daily Libor quotes. The mutual reliance on the Libor index is not going to reverse the underlying contracts. The big losses from ZIRP will still belong to the Munis.

    c) The Munis borrowed at floating rates and then CHOSE to swap a portion of that debt to a fixed cost through the swaps. Much of the borrowing was Libor based, so there is no potential for gain/loss. The floating debt that was not Libor based (and the swap was) is the area for potential real loss.

    If you look at the relationship of Libor to 3m Tbills, you see that they correlated very well (99+%) over an extended period. This tends to negate the cry of “foul”.

    There is one recent period where we know there was a clear distortion. That was in 2008. Both Bernanke and Geithner have now made it known they were aware that Libor was being “low-balled”. So everyone in a position of responsibility knew it was ginned during that critical period, and no one did anything about it. How does this figure into these suits?

    4) The good professor waxes on about manipulation, price fixing and such. I think he has never been near the financial system. I suggest he do a study on the last 30 minutes of trading on the NYSE for the past five years.

    There is a disproportionate number of days where prices close higher in late trading. Why? Market at Close orders (MAC), are telegraphed to the markets. Algos “see” the demand and buy EFTs. The result is that small investors pay the price and robots make money.

    I must admit that it would be (darkly) humorous if Liborgate is what ends up bringing down the financial system. The history books will say that we shot ourselves in the foot.

    1. James Cole

      Bruce, you are spot-on. I believe the key element of what “went wrong” from the muni’s point of view is your point 3(c). Most of the uses of swaps involved borrowing at variable rates and entering into a floating (LIBOR)-to-fixed rate swap. The variable rate bonds that the munis issued had their rates reset periodically by market mechanisms (either auction rate bonds or “variable rate demand obligations” (VRDOs)), *not* explicitly tied to LIBOR in either case. The swaps were LIBOR-based, so, as you note, there was latent basis risk at the time the deals were entered into. Zoom ahead to 2007, when, in both the auction-rate and the VRDO markets, the interest rate on the bonds blew out by many dozens of basis points, while LIBOR (after an initial spike) quickly reverted to the low low rates we see today, and the basis risk the munis experienced on their swap-bond combo deals is suddenly realized, manifested as the gap between the rate the muni pays on the bonds and the rate it receives on the swap. The reason the bond rates blew out in the auction and VRDO markets differ only in technical details; as it turned out, both markets were heavily supported by bank liquidity and, also, in many cases, by monoline credit support (and those were, in my view, the primary vectors of contagion between mortgage world and muni world, at least on the debt side). In any event, the basis risk in these scenarios is an order of magnitude bigger than the cost of the rigged LIBOR rate suppression.

    2. Up the Ante


      Didn’t you really mean to say the interesting thing is the Central Banker and Geithner initiated the “bloodletting” attempt ? Seeing as it’s unlikely you haven’t seen the response to Lawsky from the Feds, isn’t their actions on LIBOR equivalent to Lawsky’s, as in “rogue” for if you think the CFTC would begin an inquiry without their approval ..

      “The only thing interesting about this story is that it’s 30++ years old. People have been sandbagging Libor quotes since the concept of Libor was originated. ”

      Isn’t your statement below what gave Lawsky the go-ahead to make his decision ?,

      “The world has been looking for an excuse to hang some bankers (and a few regulators). .. I’m convinced that this is the wrong issue to bring out the nooses. ”

      Re-assigned identities to “rogue traders” and “rogue” regulators ?

      So now, Bernanke, Geithner, Gensler and the head of the FSA are all “rogue” for having the ‘impertinence’ of initiating inquiries into fraud .. that involve British banks, perhaps ??

      Somehow, a not-unpredictable eventor.

      “The CFTC started investigating in May 2008. It was contacted by a whistleblower, and by spring 2010 it had enlisted the UK Financial Services Authority with strong evidence of attempted manipulation. ”


  3. Blissex

    «Even though states and municipalities are under extreme budget stress, which means one would think that getting restitution for extra Libor related costs due to price fixing would be a high priority»

    BUT this sounds mad because LIBOR at least in several crucial moments was UNDERREPORTED, so those who borrowed on a LIBOR basis got a discount.

    I doubt very much that states and municipalities were LENDING at below market rates to huge banks…

    The reasons why banks usually underreported LIBOR are:

    * Most banks are net borrowers in LIBOR; they borrow a lot at LIBOR and lend out at much higher personal, business, and credit card loan rates.

    * Most banks in the past several years were trying to hide being effectively insolvent, and having to borrow from other in-the-know banks at high interest rates, and thus wanted to report a cost of funds lower than the one that indicated their insolvency.

    Because LIBOR is in theory the rates at which banks can *borrow*.

    The people who have been damaged by the UNDERREPORTING of banks’ borrowing costs have been non-financial sector lenders, that is largely businesses (which in the USA have enormous cash reserves) and sovereign wealth funds.

    States and municipalities who are huge borrowers arguably have been benefiting from lower interest rates tied to an UNDERREPORTED benchmark like LIBOR.

  4. Up the Ante

    Translation: ‘States and cities will shortly be publicly seen to be shooting themselves in the foot for as little gain as possible, giving new meaning at ‘the local level’ to ‘corporations as psychopaths’, ‘corporation counsels’ rising up to claim title to ‘inmates in charge of the asylum’ as they refuse, en masse, to refuse to sue for restitution. ‘

    “Even though states and municipalities are under extreme budget stress, which means one would think that getting restitution for extra Libor related costs due to price fixing would be a high priority, lax campaign finance rules at the state level may undermine these efforts. “

    1. readerOfTeaLeaves

      I happen to live in a region where a nondescript PUBLIC power utility, which has an elected board of 3 members, helped bring Enron to its knees.

      Around 2002, two new members were finally elected to the utility commission, thereby changing the policy direction. They had been elected — at the local, county level — in response to public fury over rising power bills. They didn’t have to raise millions of dollars for their campaigns; a lot of it was word-of-mouth. And they did what they were elected to do: investigate manipulated energy prices.

      Well, this little itsy-bitsy ‘nonentity’ public utility, with its 3 publicly elected utility commissioners, had to navigate FERC’s enabling the scam perpetrated by Enron. (FERC being the Federal Energy Regulatory Commission, which turned out to be about as completely lacking in credibility as the SEC or Treasury are to those of us watching this financial mess play out.)

      The 3 utility commissioners in Everett, WA put about $150,000 or so into a fund to pay people to sit and listen, day in and day out, to phone tapes of energy traders. And then, one day, came the phone tape of the Enron trader laughing about how ‘Grandma Millie’ was going to expire in the heat in California because she couldn’t pay her energy bill (hahahahaha…).

      Where is Enron today?

      In a few years, these banks are going to be “Enronized”.
      I’m going long on local government, short on federal government.

      Meanwhile, every city employee, budget analyst, mayor, and city council member has to ask themselves whether they are going to continue cutting cops and city employees, while reading about bank crime and bankers bonuses. City employees see the damage wrought by city budget cuts: they are not going to be able to explain to their neighbors that they have to cut local cops, while remaining helpless to hold bankers accountable.
      No matter what the AGs do, and no matter what the feds do, this horse is now out of the barn.

      Never forget that the people who got the goods on Enron were (from a NYC-DC perspective) a bunch of ‘nobodies’ . They were people who preferred coaching Little League in Everett, WA to making headlines and mega-deals in NYC or DC. Have some faith in the folks who prefer coaching their kids sports teams and going to the local burger joint for an ice cream after practice. Have a bit more faith in the people who spend untold hours at council meetings, pouring over budgets and doing their damnedest on behalf of their communities.

      It may take awhile, but IMVHO the banks are in a similar situation today to where Enron was in about 1999 or 2000.


      1. Up the Ante

        Those are good sentiments, and Bill Black would probably have some refinements for it. They appear to have a very exacting faith in what those people you describe could do to them, and that’s why it’s not happening.

        Black knows what’s required, and reading between his lines you may as well be expecting the ‘lizard men’ with the ‘V’ sign to surrender their loot, lol.

        But an exceptional point you have made. Lawsky may end up divulging ALL the Standard Chartered emails. Would DoJ do a similar thing ? Ha !
        The SEC ? …

        [the vacuum has taken me, lol]

  5. Justicia

    Thanks for posting this video. The closing line should become the motto for a tax payer rebellion: “Why should we pay the cost of financial crime?”

  6. brian

    geez i’m a retired deal junkie not a gator but does this strike anyone as a case for class action certification that could be taken on a contingency basis??

  7. Jack M. Hoff

    Now why would anyone in Clubtheft want to rock the boat? Hell, they can just pass their operating costs onto property taxes. That’s exactly whats been happening and will continue to happen. And yes most all of your so called civic leaders are members of Clubtheft. Don’t think for one minute they would do whats right by the people.

  8. DidierF

    My answer to your title is :

    Yes and I wonder whether it will be sufficient. Any plausible argument again popular pressure will suffice to negate it.

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