The FDIC Sued Wall Street. Why Won’t Cheated California?
|May 28, 2014||Posted by Staff under Corruption, Financial|
This 2014 excerpt of Occupy, Apr 25, is by Ellen Brown.
How to get Wall Street banks before a California jury? How about charging them with common law fraud and breach of contract? That’s what the FDIC just did in its massive 24-count civil suit for damages for LIBOR manipulation, filed in March 2014 against sixteen of the world’s largest banks, including the three largest US banks – JP Morgan Chase, Bank of America, and Citigroup.
LIBOR (the London Interbank Offering Rate) is the benchmark rate at which banks themselves can borrow. It is a crucial rate involved in over $400 trillion in derivatives called interest-rate swaps, and it is set by the sixteen private megabanks behind closed doors.
The biggest victims of interest-rate swaps have been local governments, universities, pension funds, and other public entities. The banks have made renegotiating these deals prohibitively expensive, and renegotiation itself is an inadequate remedy. It is the equivalent of the grocer giving you an extra potato when you catch him cheating on the scales. A legal action for fraud is a more fitting and effective remedy. Fraud is grounds both for rescission (calling off the deal) as well as restitution (damages), and in appropriate cases punitive damages.
Banks are estimated to have collected as much as $28 billion in termination fees alone from state and local governments over the past two years. This does not even begin to account for the outsized net payments that state and local governments are now making to the banks…
Interest-rate swaps are sold to parties who have taken out loans at variable interest rates, as insurance against rising rates. The most common swap is one where counterparty A (a university, municipal government, etc.) pays a fixed rate to counterparty B (the bank), while receiving from B a floating rate indexed to a reference rate such as LIBOR.
If interest rates go up, the municipality gets paid more on the swap contract, offsetting its rising borrowing costs. If interest rates go down, the municipality owes money to the bank on the swap, but that extra charge is offset by the falling interest rate on its variable rate loan. The result is to fix borrowing costs at the lower variable rate.
The catch is that the swap is a separate financial agreement – essentially an ongoing bet on interest rates. The borrower owes both the interest on its variable rate loan and what it must pay on its separate swap deal. And the benchmarks for the two rates don’t necessarily track each other. The rate owed on the debt is based on something called the SIFMA municipal bond index. The rate owed by the bank is based on the privately-fixed LIBOR rate.
Public entities wound up paying substantially more than the fixed rate they had bargained for – a failure of consideration constituting breach of contract. Breach of contract is grounds for rescission and damages.
A sampling of swaps within California, involving ten cities and counties, one community college district, one utility district, one transportation authority, and the state itself, the collective tab was $365 million in swap payments annually, with total termination fees exceeding $1 billion.
Requiring UC Davis to pay $9 million in termination fees and other costs to several banks would have covered the tuition and fees of 682 undergraduates for a year.
Why has UC’s management not tried to renegotiate the deals? The revolving door between management and Wall Street. Current and former business and finance executives play a prominent role on the UC Board of Regents.
Why do our state and local governments continue to do business with a corrupt global banking cartel?
They could set up their own publicly-owned banks, on the model of the state-owned Bank of North Dakota.
Ed. Notes: Rather than establish yet another bureaucracy, why not just expand the powers of public treasuries so they can act like banks? Let them accept savers and lend to borrowers.
Bigger picture, why let so much money be concentrated into one entity, whether a big bank or any government? A lot of the money that banks are stealing legally are “rents” or the money that the members of society spend for land and resources and privileges like corporate charters. That spending could be re-directed — using taxes and/or fees — into public treasuries then back out again as dividends to those members of society (a la Alaska’s oil share). Thereby the “rents” would not be left lying around for unscrupulous bankers or politicians.
Further, if you got a Citizen’s Dividend — your share of society’s surplus — then you would not need to save so much for the future, nor would you need to borrow so much or accept investments to start a business. Plus, you’d not need to save or borrow so much if you didn’t have to pay taxes on your earnings, your purchases, and your buildings. Thus, the whole rationale for having a banking “industry” could be reduced to a negligible aspect of the economy and of society.