At one time, calling the large
multinational banks a "cartel" branded you as a
conspiracy theorist. Today the banking giants are
being called that and worse, not just in the major
media but in court documents intended to prove the
allegations as facts.
Charges include
racketeering (organized crime under the US
Racketeer Influenced and Corrupt Organizations
Act, or RICO), antitrust violations, wire fraud,
bid-rigging, and price-fixing. Damning charges
have already been proven, and major damages and
penalties assessed. Conspiracy theory has become
established fact.
In an article in the July 3
Guardian titled "Private Banks Have Failed - We
Need a Public Solution", Seumas Milne writes of
the London Interbank Offered Rate (Libor)
rate-rigging scandal admitted to by Barclays Bank:
It's already clear that the rate
rigging, which depends on collusion, goes far
beyond Barclays and indeed the City of London.
This is one of multiple scams that have become
endemic in a disastrously deregulated system
with in-built incentives for cartels to
manipulate the core price of finance.
... It could of course have happened
only in a private-dominated financial sector,
and makes a nonsense of the bankrupt free-market
ideology that still holds sway in public life.
... A crucial part of the explanation is
the unmuzzled political and economic power of
the City ... . Finance has usurped democracy.
[1]
Bid-rigging and
rate-rigging Bid-rigging was the subject of
the US v Carollo, Goldberg and Grimm, a 10-year
suit in which the US Department of Justice
obtained a judgment on May 11 against three GE
Capital employees. Billions of dollars were
skimmed from cities all across America by
colluding to rig the public bids on municipal
bonds, a business worth $3.7 trillion.
Other banks involved in the bidding scheme
included Bank of America, JPMorgan Chase, Wells
Fargo and UBS. These banks have already paid a
total of $673 million in restitution after
agreeing to cooperate in the government's case.
Hot on the heels of the Carollo decision
came the Libor scandal, involving collusion to rig
the inter-bank interest rate that affects $500
trillion worth of contracts, financial
instruments, mortgages and loans. Barclays Bank
admitted to regulators in June that it tried to
manipulate Libor before and during the financial
crisis in 2008. It said that other banks were
doing the same. Barclays paid $450 million to
settle the charges.
The US Commodities
Futures Trading Commission (CFTC) said in a press
release that Barclays Bank "pervasively" reported
fictitious rates rather than actual rates; that it
asked other big banks to assist, and helped them
to assist; and that Barclays did so "to benefit
the bank's derivatives trading positions" and "to
protect Barclays' reputation from negative market
and media perceptions concerning Barclays'
financial condition." [2]
After resigning,
top executives at Barclays promptly implicated
both the Bank of England and the Federal Reserve.
[3] The upshot is that the biggest banks and their
protector central banks engaged in conspiracies to
manipulate the most important market interest
rates globally, along with the exchange rates
propping up the US dollar.
CFTC did not
charge Barclays with a crime or require
restitution to victims. But Barclays' activities
with the other banks appear to be criminal
racketeering under federal RICO statutes, which
authorize victims to recover treble damages; and
class action RICO suits by victims are expected.
The blow to the banking defendants could
be crippling. RICO laws have taken down the
Gambino crime family, the Genovese crime family,
Hell's Angels, and the Latin Kings. [4]
The payoff - in interest rate
swaps Bank defenders say no one was hurt.
Banks make their money from interest on loans, and
the rigged rates were actually lower than
the real rates, reducing bank profits.
That may be true for smaller local banks,
which do make most of their money from local
lending; but these local banks were not among the
16 mega-banks setting Libor rates. Only three of
the rate-setting banks were US banks - JPMorgan,
Citibank and Bank of America - and they slashed
their local lending after the 2008 crisis. In the
following three years, the four largest US banks -
Bank of America, Citi, JPMorgan and Wells Fargo -
cut back on small business lending by a full 53%.
The two largest - Bank of America and Citi - cut
back on local lending by 94% and 64%,
respectively. [5]
Their profits now come
largely from derivatives. Today, 96% of
derivatives are held by just four banks -
JPMorgan, Citi, Bank of America and Goldman Sachs
- and the Libor scam significantly boosted their
profits on these bets. Interest-rate swaps compose
fully 82% of the derivatives trade. The Bank for
International Settlements reports a notional
amount outstanding as of June 2009 of $342
trillion. [6] JPMorgan - the king of the
derivatives game - revealed in February 2012 that
it had cleared $1.4 billion in revenue trading
interest-rate swaps in 2011, making them one of
the bank's biggest sources of profit.
The
losers have been local governments, hospitals,
universities and other non-profits. For more than
a decade, banks and insurance companies convinced
them that interest-rate swaps would lower interest
rates on bonds sold for public projects such as
roads, bridges and schools.
The swaps are
complicated and come in various forms; but in the
most common form, counterparty A (a city,
hospital, and so forth) pays a fixed interest rate
to counterparty B (the bank), while receiving a
floating rate indexed to Libor or another
reference rate. The swaps were entered into to
insure against a rise in interest rates; but
instead, interest rates fell to historically low
levels.
Defenders say "a deal is a deal";
the victims are just suffering from buyer's
remorse. But while that might have been a good
defense if interest rates had risen or fallen
naturally in response to demand, this was a
deliberate, manipulated move by the Fed acting to
save the banks from their own folly; and the
rate-setting banks colluded in that move. The
victims bet against the house, and the house
rigged the game.
Lawsuits
brewing State and local officials across
the country are now meeting to determine their
damages from interest rate swaps, which are held
by about three-fourths of America's major cities.
Damages from Libor rate-rigging are being
investigated by Massachusetts Attorney General
Martha Coakley, New York Attorney General Eric
Schneiderman, officers at CalPERS (California's
public pension fund, the nation's largest), and
hundreds of hospitals.
One victim that is
fighting back is the city of Oakland, California.
On July 3, the Oakland City Council unanimously
passed a motion to negotiate a termination without
fees or penalties of its interest rate swap with
Goldman Sachs. If Goldman refuses, Oakland will
boycott doing future business with the investment
bank. Jane Brunner, who introduced the motion,
says ending the agreement could save Oakland $4
million a year, up to a total of $15.57 million -
money that could be used for additional city
services and school programs. Thousands of cities
and other public agencies hold similar toxic
interest rate swaps, so following Oakland's lead
could save taxpayers billions of dollars.
What about suing Goldman directly for
damages? One problem is that Goldman was not one
of the 16 banks setting Libor rates. But victims
could have a claim for unjust enrichment and
restitution, even without proving specific intent:
Unjust enrichment is a legal term
denoting a particular type of causative event in
which one party is unjustly enriched at the
expense of another, and an obligation to make
restitution arises, regardless of liability
for wrongdoing ... [It is a] general
equitable principle that a person should not
profit at another's expense and therefore should
make restitution for the reasonable value of any
property, services, or other benefits that have
been unfairly received and retained.
Goldman was clearly unjustly
enriched by the collusion of its banking
colleagues and the Fed, and restitution is
equitable and proper.
Rico claims on
behalf of local banks Not just local
governments but local banks are seeking to recover
damages for the Libor scam. In May 2012, the
Community Bank & Trust of Sheboygan,
Wisconsin, filed a Rico lawsuit involving
mega-bank manipulation of interest rates, naming
Bank of America, JPMorgan Chase, Citigroup, and
others. [7] The suit was filed as a class action
to encourage other local, independent banks to
join in. On July 12, the suit was consolidated
with three other Libor class action suits charging
violation of the anti-trust laws.
The
Sheboygan bank claims that the Libor rigging cost
the bank $64,000 in interest income on $8 million
in floating-rate loans in 2008. Multiplied by
7,000 US community banks over 4 years, the damages
could be nearly $2 billion just for the community
banks. Trebling that under Rico would be $6
billion.
Rico suits against banking
partners of Mers Then there are the Mers
lawsuits. In the State of Louisiana, 30 judges
representing 30 parishes are suing 17 colluding
banks under Rico, stating that the Mortgage
Electronic Registration System (Mers) is a scheme
set up to illegally defraud the government of
transfer fees, and that mortgages transferred
through Mers are illegal. A number of courts have
held that separating the promissory note from the
mortgage - which the Mers scheme does - breaks the
chain of title and voids the transfer. [8]
Several states have already sued Mers and
their bank partners, claiming millions of dollars
in unpaid recording fees and other damages. These
claims have been supported by numerous studies,
including one asserting that Mers has irreparably
damaged title records nationwide and is at the
core of the housing crisis. What distinguishes
Louisiana's lawsuit is that it is being brought
under Rico, alleging wire and mail fraud and a
scheme to defraud the parishes of their recording
fees.
Readying the
lifeboats Trebling the damages in all these
suits could sink the banking Titanic. As Seumas
Milne noted in The Guardian:
Tougher regulation or even a full
separation of retail from investment banking
will not be enough to shift the City into
productive investment, or even prevent the kind
of corrupt collusion that has now been exposed
between Barclays and other banks ... .
Only if the largest banks are broken up,
the part-nationalized outfits turned into
genuine public investment banks, and new
socially owned and regional banks encouraged can
finance be made to work for society, rather than
the other way round. Private sector banking has
spectacularly failed - and we need a democratic
public solution.
If the last quarter
century of US banking history proves anything, it
is that our private banking system turns malignant
and feeds off the public when it is deregulated.
It also shows that a parasitic private banking
system will not be tamed by regulation, as
the banks' control over the money power always
allows them to circumvent the rules.
We
the people must transparently own and run the
nation's central and regional banks for the good
of the nation, or the system will be abused and
run for private power and profit as it so clearly
is today, bringing our nation to crisis again and
again while enriching the few.
Ellen Brown is an attorney and
president of the Public Banking Institute, PublicBankingInstitute.org.
In Web of Debt, her latest of 12 books, she
shows how a private cartel has usurped the power
to create money from the people themselves, and
how we the people can get it back. Her websites
are webofdebt.com and
ellenbrown.com.
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