The LIBOR Robbery of the Cities and States
July 14, 2012 • 9:12AM

According to combined public reports, 14-16 of the largest "universal banks" in the world are now under investigation by U.S. and European authorities for rigging the LIBOR interest rates to their profit and the world's economies' loss. These are Barclays, Lloyds, HSBC, RBS, Credit Suisse, UBS, Deutschebank, Rabobank, Dexiabank, Citigroup, JPMorgan Chase, Bank of America, Goldman Sachs, Royal Bank of Canada, and Mitsubishi Bank. The number may grow to 40, according to the Wall Street Journal reporters who have exposed the rigging in occasional articles since 2008. Amid the welter of underfunded civil probes, 12 U.S. Senators issued a demand July 12 that the investigations be criminal, and potentially include investigations of regulators [Treasury Secretary Tim Geithner is notable] who abetted this immense, years-long series of crimes.

Through the mid-1980s, long-term interest rates — like those on state or municipal bonds — were based on prime rates set by central banks. After LIBOR was launched and took off from the British "big bang" financial deregulation of the mid-1980s, the importance of prime rates withered away, supplanted by the untraceable, daily variable, bank-riggable LIBORs. By 2000 the Fed and other central banks had started to ritually pronounce that they had "no control or influence over long-term rates." Issuers of long-term bonds were at the mercy of the megabanks' LIBOR, and the ratings agencies' dicta on how much "above LIBOR" they would have to pay to borrow.

With Alan Greenspan running the Federal Reserve, even the Fed's ultrashort-term discount rate fluctuated dramatically, rising through the 1990s to over 5%, then being plunged downward in 2000-01 to 1%, then from early 2003 rising rapidly again to about 4% in 2007, by which time Helicopter Ben Bernanke had taken over. U.S. states and cities and public authorities the world over were buying interest-rate swaps and related derivatives from the megabanks, for "protection" from the wildly fluctuating LIBORs which threatened to take their bond-interest costs sky-high. They had virtually no choice. But the swaps were based on LIBOR rates, in bet-counterbet schemes and formulas so complicated that public treasurers could not understand them, and were lied to about them by the salesman-banks. These swaps then became the instruments of the municipalities' destruction when instead, Bernanke from 2007 plunged short-term rates to virtually zero, and the LIBOR was pushed dramatically downward by what is now exposed as criminal rigging of the rates by the banks — in order to get themselves bailed out from the 2007-08 crash.

The interest-rate swaps contracts required the municipalities to issue bonds with monthly- or even weekly-varying interest rates. The banks bought them, but then "swapped" their interest rates with those of other securities, so that the municipality wound up paying a relatively fixed "one low rate" to the bank, typically 4-6%, based on a pre-arranged scheme; while the bank paid "interest payments" to the municipality based on another rate, which varied with LIBOR — downward. This got much worse when these swaps markets "froze" in the 2007-08 crash, and states and munis suddenly were told they had to issue new bonds with rates as high as 8-9%, or default.

By 2010, according to one expose, "states and local governments are paying about 50 times [the rate of interest] the banks are paying." New York Times reporter Gretchen Morgenson, in a June 9, 2012 report, estimated that cities and states are still paying the banks 12 times and up, what the banks are paying them in the "swap". And the governments had — and still have — no way to get out of these derivatives deals without huge fee payments which would gouge their employees and services.

The New York Times reported urban consultant Peter Shapiro's estimate that "about 75% of major cities have [swaps] contracts linked to this [LIBOR]."

In 2010, according to researcher Michael McDonald and Morgenson, munis paid over $4 billion to escape "swaps" deals, after paying monster interest rates until they did. North Carolina paid $60 million that August to Dexiabank, equal to 1,400 full-time employees' salaries. California Water Resources spent $305 million to escape the clutches of Morgan Stanley "swaps". Reading, Pennsylvania paid $21 million to JPMorgan Chase, equal to a year's real-estate tax revenue, and fell into state receivership. Oakland, California is being destroyed by Goldman-Sachs "swaps" (see separate report). More recently New York State has bled to Wall Street $243 million — which it had to borrow on Wall Street — to escape them.

Research by the Refund Transit Coalition found that a sample of 1,100 current "swaps" deals at more than 100 government agencies, together are robbing taxpayers of $2.5 billion/year.

Now — after the same banks which rigged the LIBOR rates have been bailed out with perhaps $6 trillion in purchases and $25-30 trillion in liquidity loans by U.S. and European governments and central banks — these banks can borrow at virtually zero rates. But the states and municipalities trapped in their "swaps" can not refinance their bonds, and continue to pay 6-8% interest or monster criminal "penalties" to get out.