hedge funds trade of the century greek bonds federal reserve

Bail Out The Banksters?
loans securities derivatives libor index rate swaps hidden fees fraud sifma municipal bonds manipulation

Iceland Arrested Bankers, Look What Happened

Please do understand the latest banking scandal but also understand effective reform. We trim, blend, and append five 2012 articles from: (1) CityAM, May 16, on hedge funds by J. Harris; (2) Reuters, Jly 10, on LIBOR by C. Mollenkamp; (3) AlterNet, Jly 17, on swaps by P. Martens; (4) Reuters, Jly 23, on arrests; and (5) UpWorthy, Jun 28, on Iceland by The Young Turks.

by Julian Harris, by Carrick Mollenkamp, by Pam Martens, by Reuters, and by The Young Turks

Opportunistic hedge funds were celebrating the “trade of the century” as Greek authorities agreed to pay out €435m (£346m) of bonds that were not included in recent haircuts.

Bonds denominated in currencies such as sterling, which are liable to laws outside Greece, now appear more likely to be paid up in full.

Back in December and January, major banks and pension funds were selling them off cheap, at around 30 per cent level. Many were snapped up with that discount of 70 per cent. Now bonds in sterling are redeemed at par [100 per cent].

To read more

JJS: Heads I win, tails you lose. Those big banks rigging Greek bond prices were also rigging their reports on their own lending rates to each other. It’s a case of the parasite living so much better than the host!

The Federal Reserve Bank of New York may have known as early as August 2007 that the setting of global benchmark interest rates was flawed.

The role of the Fed is likely to raise questions about whether it and other authorities took enough action to address concerns they had about the way Libor rates were set.

According to the calendar of then New York Fed President, Timothy Geithner, who is now U.S. Treasury Secretary, it even held a "Fixing LIBOR" meeting on April 28, 2008.

Among those invited, along with Geithner, was William Dudley, who was then head of the Markets Group at the New York Fed and who succeeded Geithner as its president in January 2009. Also invited was James McAndrews, a Fed economist who published a report three months later that questioned whether Libor was manipulated.

As a bank doing business in the United States, Barclays last month agreed to pay $453 million to British and U.S. authorities to settle allegations that it manipulated Libor, a series of rates set daily by a group of international banks in London across various currencies.

The rates are an integral part of the world financial system and have an impact on borrowing costs for many people and companies as they are used to price some $550 trillion in loans, securities, and derivatives.

By manipulating Libor, banks could have made profits or avoided losses by wagering on the direction of interest rates.

To read more

JJS: That must’ve looked good on Geithner’s resumé when it came time to choose a new Secretary of the US Treasury: “stood by and did nothing while my cohorts looted the public.” People like Geithner show that the elite and the government are not separate entities (as they have not been for millennia) but a conscious tail (them) wagging an unconscious dog (us). While the worst abuses by the financial system often come to light, its ongoing ordinary business operations still get excused -- while the system should be replaced.

Libor, the interest rate benchmark that was rigged by a banking cartel, stands for London InterBank Offered Rate. The Libor index is used as a key index for setting loan rates around the world, including adjustable rate mortgages, credit card payments and student loans here in the U.S.

As of March 31, 2012, U.S. banks held $183.7 trillion in interest rate contracts but just four firms represent 93% of total derivative holdings: JPMorgan Chase, Citibank, Bank of America, and Goldman Sachs. As of March 31, 2012, there were 7,307 FDIC insured banks in the U.S. All of those banks, including the four above, have a total of $13.4 trillion in assets. Why would four banks need to hedge to the tune of 13 times all assets held in all 7,307 banks in the U.S.? To squeeze out even more billions.

The Libor rate was used to manipulate, not just tens of trillions of consumer loans, but hundreds of trillions in interest rate contracts (swaps) with municipalities across America and around the globe. (Milan prosecutors have charged JPMorgan, Deutsche Bank, UBS, and Depfa Bank with derivatives fraud and earning $128 million in hidden fees.)

Municipalities typically entered into an interest rate swap by 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 which from 2000 through 2011 spent $96.4 million lobbying Congress. Neither group was an independent monitor for the public interest.

In many cases, continuing to this day, the municipality ended up receiving a fraction of one percent, while contractually bound to pay Wall Street firms as much as 3 to 6 percent in a fixed rate for twenty years or longer.

The state and local governments who were desperate to exit the abusive interest rate swaps have paid banks $28 billion in termination fees from 2006 through early 2008. That amount does not include the ongoing interest payments that were and are being paid. More swaps may be as yet unacknowledged by embarrassed municipalities.

Canadian prosecutors have implicated JPMorgan and Citibank in a criminal probe, as well as other banks. At least 12 global banks are being investigated by U.S., British, and European authorities.

To read more

JJS: While the left excuses speculation by local governments (blaming Other and exonerating Self is typical of political and religious people), gambling is gambling and greed is greed no matter who does it. If you lie down with dogs, you’ll get up with fleas. One more aphorism: shame on you for tricking me once but shame on me for you tricking me twice.

Your radar should be screaming warning beeps whenever a well-dressed stranger offers you a deal too complex to understand. Forever throughout history, complexity has been the enemy of equity. Just KISS: Keep It Simple, Stupid.

You want to control Wall Street? Sure, jail the worst offenders, but also take a good hard look in the mirror.

Sources familiar with investigation say American prosecutors close to arresting individuals over Libor scandal.

Banks also face a growing number of civil lawsuits from cities, companies and financial institutions claiming they were harmed by rate manipulation. Morgan Stanley recently estimated that the 11 global banks linked to the Libor scandal may face £9bn in regulatory and legal settlement costs through 2014.

To read more

JJS: Heads will role but whose heads? Some employees, albeit well-paid. But what about management? Directors? Major stockholders? Lobbyists? Negligent regulators? Politicians who accepted contributions? The problem is not just bad people but also a bad system. A better system, even if not fraud-proof, would not let savings accumulate on Wall Street but instead keep a region’s common wealth circulating at home.

For those of you who think the bailout is the only option watch this .

JJS: Of course, nobody should be above the law and banksters should be in jail. That goes without saying. However, it misses the crucial underlying issue. Banks don’t do anything any differently from homeowners when owners use their property not as a home but as an investment that they try to buy low and sell high.

What makes it possible to sell a property at a much higher price is nothing the owner has done; houses age and wear out. The key factor is something society has done, and that usually is grow. When population grows -- usually by people moving in -- they swell demand for existing homes and for new homes. No owner made population grow and no owner alone is entitled to the rise in the value of land (locations, more precisely). The value of land and resources belongs to all members of society equally.

Society can recover the socially-generated value of land by levying a tax on land or instituting land dues or charging site-use fees or leasing public land at full-market value, etc. When local government does that, and then spends the raised revenue on desired services or pays out a dividend to residents (a la Alaska and Aspen CO) -- or does both -- it keeps land value circulating locally. Doing that keeps “land rent” out of homeowners’ mortgages.

Removing the value of land from mortgages means buyers have to borrow much less, banks profit much less, and banks have much less collateral on their books for backing up their tricky deals. It means local reformers can reform Wall Street by passing local legislation. Just adopt land dues, keep those millions of dollars of land rents flowing at home, and Wall Street will be cut down to size.

It’s fair to redirect land rents into the public treasury. Those values are generated by all of us, by society in general, and so constitute our common wealth. But it’s not fair to tax individual efforts. To be fair, at the same time that reformers recover Earth’s worth, government should respect true private property and shift taxes off buildings, sales, and wages. Those are the values individuals do create.

By de-taxing our efforts, we make economies much more efficient. In efficient economies, both wages and returns on sound investments are higher. That means workers and managers don’t have to borrow so much because their income is greater and savers are happy to invest with them. All that reduces the amount of debt in society, so banks lose profit, lose power, and lose prestige. They become our servants rather than our masters, which is as it should be.

But the key, as always, is to redefine property, to see Earth’s worth as common wealth, to cure ourselves of the lust to speculate in land, and to adopt the geonomic shift of taxes and subsidies. It’s a tall order. But it will bring the banks to heel and it has worked wherever tried.


Editor Jeffery J. Smith runs the Forum on Geonomics and helped prepare a course for the UN on geonomics. To take the “Land Rights” course, click here .

Also see:

Should Goldman Give Back $2.9 Billion to Taxpayers?

Fed balance sheet hits another record size as ...

How a Few Bankers Blew Up Merrill Lynch

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