This isn’t the sexiest topic to talk about, but it always seems that the most pertinent issues work that way. Why is that? I think it’s meant to be that way so people won’t get mad, but if we knew how our government, banks and multinational corporations were colluding to steal from us, we would be livid. But that’s neither here nor there. The facts are the most important things. What we decide to do with them is our choice.
The London Interbank Offered Rate, or Libor, is the average interest charged on trades between banks. It is agreed upon by banks and the benchmark interest used for trades around the world.
Last week, news broke that Barclays, a British banking and financial services company, manipulated Libor interest rates and lied about the borrowing costs from 2005 to 2009—These actions ended up costing the company a $453 million fine.
Barclay’s chief executive Bob Diamond has since resigned and agreed to forfeit his £20 million ($30 million) bonus.
To make matters worse, emails leaked by Diamond that hint at the British government pushing Diamond and other CEOs to manipulate Libor. The implications are massive.
American banks were not far behind in this game of manipulating interest rates (the Americans were involved in a separate, but similar scandal). According to the reporting by Matt Taibbi of Rolling Stone magazine,
The defendants in the case – Dominick Carollo, Steven Goldberg and Peter Grimm – worked for GE Capital, the finance arm of General Electric. Along with virtually every major bank and finance company on Wall Street – not just GE, but J.P. Morgan Chase, Bank of America, UBS, Lehman Brothers, Bear Stearns, Wachovia and more – these three Wall Street wiseguys spent the past decade taking part in a breathtakingly broad scheme to skim billions of dollars from the coffers of cities and small towns across America. The banks achieved this gigantic rip-off by secretly colluding to rig the public bids on municipal bonds, a business worth $3.7 trillion. By conspiring to lower the interest rates that towns earn on these investments, the banks systematically stole from schools, hospitals, libraries and nursing homes – from ‘virtually every state, district and territory in the United States,’ according to one settlement. And they did it so cleverly that the victims never even knew they were being cheated. No thumbs were broken, and nobody ended up in a landfill in New Jersey, but money disappeared, lots and lots of it, and its manner of disappearance had a familiar name: organized crime (quote viaRolling Stone).”
Federal Prosecutor Wendy Waszmer told jurors just how easy it was for these companies and their heads to rip off the public. She said,
“Even though some aspects of municipal bond finance are complex, the fraud here was simple,” she told the jurors. “It was about lying and cheating cities and towns in a bidding process that was in place to protect them (quote via Rolling Stone).”
The process is really kind of simple. If a hospital is looking to get extra funds, it goes to Wall Street for a bond. Let’s say this hospital needs to raise $50 million. The hospital (or the issuer) will eventually have to pay Wall Street (or the provider) back the money borrowed with interest.
Since the hospital won’t use all the money immediately, they go back to Wall Street and look to invest the rest of that $50 million. This is where the broker comes in. He or she has a job to auction off the hospital’s $50 million to the highest bidder. Most laws require that a broker auction off that bond to at least three banks so the hospital can collect interest at a free market price.
Here’s where the financial firms and banks chose to do the wrong thing: The broker would tell the competing banks, which were looking to invest the hospital’s bond, what the other banks’ offers were. This allowed the banks to lower the interest rate they owed to the hospital low enough to barely beat their competitors’ bids. It was a ploy that duped municipalities out of thousands of dollars each time the bond was traded.
This may not seem like a lot, but if done enough times over a decade, the profits the banks and brokers made would be in the billions—And they were. This essentially funneled money allocated to schools, hospitals, libraries and the public to Wall Street and alleged government officials.
To be honest, this is theft and collusion among alleged governments, central banks, cartels and financial service companies to the highest degree. They extracted money from nations, states and municipalities, but for what? It can’t be solely in the name of greed because even economists know that these actions can doom a system and throw the world’s nations into civil wars or worse: another world war.
Income inequality has been on the verge of reaching Great Depression levels. Mix this with more Americans losing their wealth and asset values and you have yourself a disaster? Did we not learn from the crisis in 2008?
I don’t mean to be “doom and gloom,” but it’s hard to see the light on this one.
Here are some links to more articles on the financial industry: