+++ 30. Juli 2012 +++
U.S. Cities, States, Haul Banks into Court
One aspect of the political/legal assault against interest rate rigging in the U.S. has been the filing of lawsuits, demanding restitution for funds lost on the purchase of interest rate swaps by city, county and state governments, as well as by hospital districts, pension funds and hedge funds.
Dozens of actions have been filed, some of which have been consolidated. A look at one, in which the city of Baltimore, Maryland is the lead plaintiff, indicates how serious a problem this will be for banks, which are also facing criminal charges for collusion in manipulating rates.
The Baltimore case accuses financial firms of conspiring to keep the key interest rate benchmark low, forcing the cities to have to pay, when the rigged rates remained low. The suit, which was filed last August, names Bank of America and Citibank, two of the U.S. banks involved in determining LIBOR, and also Barclays, which has already admitted its guilt.
When Baltimore bought bonds for various projects, including for parking infrastructure and water utilities, they also bought interest rate swaps to protect them against an increase in interest rates. They argue that, under the terms of these contracts, they had to pay, when the rates stayed low – so the fact that the banks manipulated the rate downward, cost them additional money. In 2008, Baltimore had more than $500 million tied up in LIBOR-related swaps.
Baltimore Mayor Stephanie Rawlings-Blake, in speaking of the importance of the city's lawsuit, said, “We cannot stand by when we feel we are being cheated. You're talking about $1 or $2 million...that's a fire company, that's recreation centers [which are being shut down to pay the swaps]. That's services that our city needs, and we're going to fight for that.”
Peter Shapiro, of the Swap Financial Group, pointed out that more than 75% of major cities have contracts linked to LIBOR. In looking at the extent of the thievery involved, he gave the following example: If a government had $1 billion worth of swaps in the three year period identified in the suit, and it can be shown that banks suppressed LIBOR by .2%, it would cost the government $6 million. “That would pay for a lot of nurses, policemen, or transit workers,” he added.
Other investigations by governments have given specific figures of money lost. The Comptroller of Nassau County, New York, charges that it has been defrauded of $13 million, while the states of Massachusetts and Virginia are in the final phases of investigations into their losses. More than 500 nonprofit hospitals bought interest rate swaps. Even discount brokerage house Charles Schwab claims that several of its mutual funds were defrauded through interest rate manipulation.
While these civil suits mount, the real threat to the banks is not that they will be bankrupted, if they lose the lawsuits. The threat they face is criminal charges, which could lead to the liquidation of the banks involved. With trillions of dollars worth of debt tied to LIBOR, the ongoing investigations will demonstrate that the whole Trans-Atlantic financial system is hopelessly rotten, and bankrupt to boot.
~ deutsch + english ~
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