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

The complex machinations that pitted county treasurers against the deceptive wizards of Wall Street.

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The city is still paying the high fixed rate but it’s receiving a miniscule rate of less than one percent.  According to local officials, the city has paid Goldman roughly $32 million more than it has received and could be out another $20 million if it has to hold the swap until 2021.  A group called the  Oakland Coalition to Stop Goldman Sachs succeeded in getting the City Council to vote on July 3 of this year to stop doing business with Goldman Sachs if it doesn’t allow Oakland to terminate the swap without penalty.  It called the vote “a huge victory for both the city of Oakland and for the people throughout the world living under the boot of interest rate swaps.”

The Mayor of Baltimore, the Baltimore City Council, the City of New Britain Firefighters’ and Police Benefit Fund of Connecticut have filed a class action lawsuit in Federal Court in New York over the rigging of Libor. The plaintiffs state that the City of Baltimore purchased hundreds of millions of dollars of derivatives tied to Libor while the New Britain Firefighters and Police Benefit Fund purchased tens of millions. They are suing the banks involved in submitting the  Libor rates.

Wall Street’s boot on interest rate swaps dates back at least 17 years.  In February 1995, Smith Barney  (now co-owned by Citigroup and Morgan Stanley) fired Michael Lissack as a managing director in the firm's public finance department after he publicly accused the firm of cheating Dade County, Florida out of millions on an interest rate swap.  Lissack went on to become the scourge of Wall Street by expertly detailing how counties and states were being ripped off by Wall Street.  He even set up this  amusing web site to do battle with the firm.  The case became known as the “yield burning case,” an esoteric term that the public could hardly fathom, much like the Libor scandal today.

In 2000, the Securities and Exchange Commission settled the yield burning matter with 21 firms and imposed fines of $172 million, a minor slap on the wrist given the profits of the firms.  Arthur Levitt was Chairman of the SEC at the time and came from the ranks of Wall Street.

Which brings us full circle.  If you’ve ever wondered where all of those revolving doors between Wall Street and Washington would eventually lead us, we’ve just found out.  It leads to the regulators becoming just as jaded and compromised as Wall Street.  While Wall Street banks and their global counterparts were grabbing the loot, their regulator was watching carefully behind the wheel of the getaway car for at least four years.

This past Friday, the Federal Reserve Bank of New York turned over emails and documents showing that Timothy Geithner, the sitting U.S. Treasury Secretary of the United States, knew at least as early as 2008 that Libor was being rigged.  At the time, Geithner was the President and CEO of the Federal Reserve Bank of New York – the top regulator of Wall Street’s largest banks.  As far as we know currently, Geithner did nothing more to stop the practice than send an email with recommendations to Mervyn King, Governor of the Bank of England.  Libor rigging continued through at least 2010.

As the U.S. grapples with intractable wealth disparity and the related ills of unemployment and recession, we need to understand that this was not merely a few rascals rigging some esoteric index in London.  This was an institutionalized wealth transfer system on an almost unimaginable scale.

Pam Martens worked on Wall Street for 21 years. She is the editor of Wall Street On Parade .

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