The LIBOR Scandal

Coming Economic Armageddon?

It was variously reported as the “Wall Street Heist of the Century,” “Biggest Fraud of All Time,” and “Mother of All Scandals.”

“It” is the fixing of the LIBOR (London Interbank Offered Rate) which sets the interest paid on hundreds of trillions of dollars of financial transactions.

By most reports, all the Wall Street and major European banks were in on the deal, conspiring for years to defraud not only consumers, but businesses, investors and municipal governments (taxpayers) of untold billions. Municipalities — maybe yours — took the hit in interest rate swaps.

Wall Street watchdog Pam Martens explains the scam.

“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...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 1 percent, while contractually bound to pay Wall Street firms as much as 3 to 6 percent in a fixed rate for 20 years or longer. If the local or state governments or school boards wanted out of the deal, a multimillion dollar penalty fee could be charged based on the rate structure and notional (face amount) of the swap.”

In only a preliminary investigation, Pennsylvania Auditor General Jack Wagner identified more than 600 swaps entered into between October 2003 and June 2009, by 107 of Pennsylvania’s 500 school districts and 86 other local governments, for more than $14.9 billion in municipal bonds.

Huge losses have been reported nationwide, including nearby Philadelphia, Bethlehem and Reading. Many may still be unreported, concealed by municipal officials, wary of voters’ wrath.

So the fixing of the LIBOR involves fantastic losses by the American people. Very big news, indeed. For two days, And then — nothing.

Nothing in the New York Times, Wall Street Journal or Washington Post. No damning expose by CNN, or anyone else in the major media. No outrage from the president, attorney general or secretary of the Treasury. No legislation in Congress to take back the stolen billions. Only silence. Why?

The answer was provided in a recent essay by former Reagan Deputy Treasury Secretary Paul Craig Roberts. Not only were all the major banks in on the fix, so too were the Federal Reserve and the Bank of England.

“As the Federal Reserve and the Bank of England are themselves fixing interest rates at historic lows in order to mask the insolvency of their respective banking systems, they naturally do not object that the banks themselves contribute to the success of this policy by fixing the LIBOR rate and by selling massive amounts of interest rate swaps, a way of shorting interest rates and driving them down… The lower is LIBOR, the higher is the price or evaluations of floating-rate debt instruments… and thus the stronger the banks’ balance sheets appear.”

Roberts asks if the only way the U.S. and U.K. financial systems can be kept afloat is by systemic fraud, and concludes, “The answer is yes.” He explains.

“Imagine the Federal Reserve called before Congress or the Department of Justice to answer why it did not report on the fraud perpetrated by private banks, fraud that was supporting the Federal Reserve’s own rigging of interest rates (and the same in the UK.)

“The Federal Reserve will reply: “So, you want us to let interest rates go up? Are you prepared to come up with the money to bail out the FDIC-insured depositors of JP Morgan Chase, Bank of America, Citibank, Wells Fargo, etc.? Are you prepared for U.S. Treasury prices to collapse, wiping out bond funds and the remaining wealth in the US and driving up interest rates, making the interest rate on new federal debt necessary to finance the huge budget deficits impossible to pay, and finishing off what is left of the real estate market? Are you prepared to take responsibility, you who deregulated the financial system, for this economic Armageddon?

“Obviously, the politicians will say NO, continue with the fraud.”

So here is where the American people have been led by the deregulators, “The Market Knows Best” wizards of the Clinton years — Rubin, Greenspan, Summers and their acolytes, Presidents Bush and Obama and current Treasury Secretary Geithner: into a trap.

Either the American people acquiesce to massive fraud and the skimming of countless billions by Wall Street, or we collapse the dollar, or we wait for the rest of the world — even now decoupling from the dollar — to collapse its value, and destroy what is left of the wealth of the American people.

The U.S. governing elite have nothing to say because they are terrified. Like Mickey Mouse in the movie Fantasia, vainly trying to stop the flood let loose by the mops and buckets he brought to life, they don’t know what to do.

In my next column, some modest suggestions.