Wall Street's Biggest Heist Yet? How the High Wizards of Finance Gutted Our Schools and Cities

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The banks that cheated on Libor were also perpetrating a public fraud in terms of how the market perceived their risk.  The Libor rate they each reported every morning to compile the index was based on the rate they would pay to borrow from other banks, thus the name London Interbank Offered Rate or Libor.  So, for example, even though Citibank’s credit default swap prices were rising dramatically during the 2008 crisis, suggesting it was in trouble, it was reporting low borrowing costs to the Libor index.

Because interest rates impact the price movement of stocks, the rigged lowering of the Libor rate put a false prop under the stock market as well as inflated individual bank stocks.  There is also a  very strong suggestion that there was insider trading on futures or swaps markets based on the spread between the one month and three month Libor rates. One trader’s email to the Libor submitter reads: “We need a 4.17 fix in 1m (low fix) We need a 4.41 fix in 3m (high fix).” 

In simple terms, Wall Street and its colleagues in the global banking cartel have left us clueless as a nation about the validity of our markets, how much hidden debt liability our local and state governments really have, and where the stock market would actually be if interest rates had not been rigged.

Let’s explore the almost incomprehensible rip off of our now struggling communities. Here’s how the swap deals typically worked, although there were Byzantine variations called constant maturity swaps (CMS), swaptions, and snowballs.  These complex machinations pitted the brains of county treasurers or school boards against the deceptive wizards of Wall Street.

Municipalities typically entered into an interest rate swap because Wall Street’s fast talking salesmen showed up with incomprehensible power point slides wearing $3,000 suits and assured municipal officials it would lower their overall borrowing costs on their municipal bond issues.  A typical deal involved the municipality issuing variable rate municipal bonds and simultaneously signing a contract (interest rate swap) with a Wall Street bank that locked it into paying the bank a fixed rate while it received from the bank a floating interest rate tied to one of two indices. One index, Libor, was operated by an international bankers’ trade group, the British Bankers Association.  The other index, SIFMA, was operated by a Wall Street trade association.  Neither was an independent monitor for the public interest.

When the two sets of cash flows are calculated, the side that generates the larger payments receives the difference between the sums. In many cases, continuing to this day, the municipality ended up receiving a fraction of one percent, while contractually bound to pay Wall Street firms as much as 3 to 6 percent in a fixed rate for twenty years or longer.  If the local or state governments or school boards wanted out of the deal, a multi-million dollar penalty fee could be charged based on the rate structure and notional (face amount) of the swap.

We learned late last month that the Libor rate the municipalities were receiving was manipulated downward from at least 2007 to 2010 by a global banking cartel. The U.S. dollar Libor panel included U.S. banks JPMorgan Chase, Citibank (whose parent is the former ward of the taxpayer, Citigroup), and Bank of America. Canadian prosecutors have implicated JPMorgan and Citibank in a criminal probe, as well as other banks.  A whistleblower has provided the names of traders that are alleged to have taken part in the scheme and turned over emails, according to affidavits filed with the Ontario Superior Court.

At least 12 global banks are being investigated by U.S., British and European authorities. Barclays admitted in June that its employees rigged Libor rates. It paid $453 million in fines to U.S. and British authorities and turned over emails showing its traders and those at other, as yet unnamed, banks gave instructions on how the rates were to be rigged on specific dates.