LIBOR: How big banks conspired to cheat the people

Republican presidential candidate Mitt Romney went to London to attend the opening ceremonies of the Olympic Games. But that wasn’t his real reason for the visit.

That same July 26 evening, he picked up as much as $1.1 million in campaign contributions from high-level officers of Barclays, a huge British bank.

Because foreign contributions to U.S. campaigns are illegal, the Barclays donors to Romney all listed addresses in the United States, where Barclays Capital has expanded its presence since the recent credit crisis, when it acquired most of Lehman Brothers’ U.S. assets.

To balance the risk, at least one Barclays banker also contributed the maximum allowed to Barack Obama. (AP, July 26)

Of course, most people know that the big banks buy elections and politicians. What makes donations from Barclays stand out is that it is the first bank to also admit it was involved in manipulating the largest market index in the world:  the London interbank offered rate, or Libor.

Libor is supposed to be an index of the interest rates that the biggest banks in the world use to lend to each other. In reality, it is nothing of the sort.

The index, determined by the British Banking Association, is composed of a daily survey of selected banks. The question asked is not what interest rates the bank is actually paying, but what it thinks other banks would charge if it were to borrow money from them.

This index has been used as the basis for more than $10 trillion in loans and $350 trillion (yes, trillion) in so-called derivatives. In reality, it is nothing more than an opinion survey done by and for the big banks — and open to the worst sort of lying and manipulation. Among the 18 member banks are Bank of America, Barclays, Citibank, Deutsche Bank, Royal Bank of Canada, HSBC and JPMorgan Chase.

A 2010 study made by two economists at UCLA and the University of Minnesota found that the Libor was not a true measure of actual borrowing costs; in other words, despite Libor’s gigantic position of power, it is at its very foundation a virtual fraud. (Connan Snider and Thomas Youle, “Does the Libor reflect banks’ borrowing costs?” April 2, 2010)

Rates on about $10 trillion in corporate loans, mortgages and student loans worldwide are pegged to Libor, usually with a markup of several percentage points, according to University of Edinburgh professor, Donald MacKenzie. The total amount of financial contracts tied to Libor, particularly interest-rate swaps — a type of financial derivative — exceeds $300 trillion, or $45,000 for every person in the world. (USA Today, Sept. 28, 2008)

Libor’s influence should not be underrated. For example, 14 percent of all student loans in the U.S., which make up 43 percent of private or “alternative” loans, are tied to the Libor. (Bankrate.com)

Every year, thousands of students leave school facing few job opportunities and a lifetime of crushing debt. This debt is often subject to a rising interest rate set by a manipulative cabal of the biggest banks in the world. Masked as “student aid,” these loans are hawked by such entities as Bank of America and Sallie Mae.

Libor also sets the interest rates for millions of mortgages around the world. Many of those losing their homes to bankruptcy or foreclosure can trace their misery straight back to the interest rates set by Libor, which resulted in their monthly payments doubling or tripling.

But the robbery does not stop with student loans and mortgages. Tens of thousands of local governments all over the world have found themselves victimized by Libor and the machinations of the big banks. The irony is that many of these banks were recently bailed out with taxpayer money.

Hooking a waterpipe to a cesspool

In September 2003, James Barker, the superintendent of the Erie City School District in Pennsylvania, claimed he saw no way out. The 81-year-old Roosevelt Middle School was on the verge of being condemned. The district was running out of money to buy new textbooks. And local big business hawks had ruled out any tax increase.

Then, JPMorgan Chase, the second-largest bank in the U.S. and a member bank of the Libor, made Barker an offer that seemed too good to be true.

David DiCarlo, an Erie-based JPMorgan Chase banker, told Barker and the school board on Sept. 4, 2003, that all they had to do was sign some loan papers. He said it would benefit them, in case interest rates increased in the future. He also said the bank would give the district $750,000.

“You have severe building needs; you have serious academic needs,” Barker, 58, says. “It’s very hard to ignore the fact that the bank says it will give you cash.” So Barker and the board members agreed to the deal. (Bloomberg.com, Feb. 1, 2008)

What the New York-based JPMorgan Chase official didn’t tell them was that the bank would get more in fees than the school district would get in cash: $1 million more.

Three years later, as interest rate benchmarks, including Libor, went the wrong way for the school district, the Erie board paid $2.9 million to JPMorgan to get out of the deal.

“That was like a sucker punch,” said Barker. “It’s not about the district and the superintendent. It’s about resources being sucked out of the classroom. If it’s happening here, it’s happening in other places.” (Bloomberg.com, 2008)

It is difficult to have much sympathy for James Barker and his ilk, who are subservient to big business even as they are snookered by them. But the damage done to the Erie community is real. This so-called rust belt city of 100,000, facing increasing poverty and debt, has been told it must lay off public workers and slash money for education and other public services, just so the big banks can reap obscene profits. In the case of JPMorgan and the Erie school district, the profits are about 300 percent.

It should be remembered that those interest rates on which Erie gambled and lost were manipulated.

Widespread fraud

As news of the Libor scandal has spread, more and more evidence of the banks’ gambling with public funds has come to light. According to James Rickards, a hedge fund manager and author in New York City, the Libor fraud “may be the mother of all bank scandals.” (U.S. News & World Report, July 23)

Barclays was fined $453 million — just a pittance compared to the billions in profits gained from its misdeeds. Other big banks are fearful that not only will they be investigated, too, but that exposure of the whole seamy mess may cause a collapse.

Some of those affected are of course the thousands of smaller banks and businesses that use the Libor.  But tens of thousands even more affected are states, municipalities and local governments that have succumbed to the wiles of the giant banks.

The city of Baltimore is suing more than a dozen major banks, claiming the institutions conspired to manipulate the Libor. However, as with the case of Erie, the Baltimore officials are not entirely blameless. They are rightly attacking the manipulation of the Libor rate but are not talking about why they invested public funds in financial derivatives tied to the Libor, a practice similar to gambling.

As of this writing, the attorneys general of five states are investigating the Libor manipulation. New York and Connecticut are investigating “with the goal of providing restitution to state agencies, municipalities, school districts and not-for-profit entities nationwide that may have been harmed by any illegal conduct.” (Bloomberg.com, July 17)

An unasked question is why many of these same states passed legislation allowing municipalities and school districts to use public money for financial derivatives in the first place.

What is staggering is that these practices have become commonplace around the world, including in Europe and parts of Asia. Because both the banks and the municipalities involved are very secretive, the exact  number of local governments involved is unknown. But it runs into the tens of thousands.

Despite calls for the “reform” of Libor by both Federal Reserve Chair Ben Bernanke and U.S. Treasury Secretary Timothy Geithner, no one should expect anything to change anytime soon — unless, of course, there is another financial crash. Both Geithner and Bernanke have admitted that they knew what was going on at Libor and did very little about it.

The world capitalist/imperialist system is guilty of innumerable crimes, but for the Libor scandal alone, it richly deserves to be overthrown.