SoCal Governments Target Swap-Tainted Banks

A few California local governments last week took a crucial step, almost unnoticed, to demand that banks pay back tens of millions of dollars which they allegedly conspired to take from the taxpayers. The City of Riverside, San Diego County, San Mateo County and five other government bodies sued almost two dozen multinational banks over the harm they allegedly caused taxpayers in the global “LIBOR” [London Interbank Offered Rate] scandal.

Notably absent from this initiative, however, are our California’s largest local governments: L.A. City and L.A. County. Equally notable is the failure of the news media, apart from specialized, business-oriented news services and blogs, to pay attention to what could be a major game changer in the 99%’s fight to make banks pay for crashing our economy.

Why should we care about something as obscure as the LIBOR financial index?

Because it set the interest rates for trillions of dollars in loans across all sectors of the global economy – ranging from your auto or home equity loan to multi-billion dollar government and corporate borrowings.

LIBOR was supposed to be an honest, un-manipulated measure of the interest rate big banks pay when they borrow from each other. However, recent investigations by bank regulators in the U.S., Britain, Japan and other nations revealed that the world’s biggest banks lied to drive down LIBOR. The cheating hurt public agencies, the California lawsuits say, because it:

• Reduced interest rates banks pay on billions of dollars in complex transactions with government agencies;
• Disrupted efforts by local government to minimize risks they faced from changing interest rates when borrowing to fund public services and public investment;
• Tricked those governments into signing onto banking deals they would have avoided as too risky if they knew about the bankers’ lies.

Each plaintiff has a long list of transactions on which they allege that banks cheated them. For the City of Riverside these include:

• A 2005 “swap” agreement deal with Merrill Lynch Capital services involving an $82.5 million electric revenue bond;
• Three transactions with Bear Stearns Capital Markets involving $180 million worth of bonds issued in 2005 and 2006;
• A $119 million 2007 deal with Bank of America.

Each of these deals involves a complex financial instrument known as a “swap.” Swaps were designed to work like insurance policies, protecting government agencies against interest rate fluctuations when they borrowed to fund short-term budget gaps or long-term investment in public infrastructure. They would let government borrow at the floating interest rates preferred by many investors but protect them against rising costs if interest rates spiral upward. Governments hedged their risk with swap agreements under which banks provided them payments based on LIBOR.  So when bankers lied to drive down LIBOR, they also took money from our cities and counties

Understanding these deals and demanding payback from cheating banks is absolutely critical to the future of public services in all our communities.

The following resources can help policymakers and average citizens understand the problem and confront the banks.

• For a smartly reported overview of the impact on public services across the country, view this video report.
• To learn more about swap deals which threaten to bankrupt public transit systems across the country, and connect with groups fighting back, turn to the Refund Transit Coalition.
• For full details on the banks’ alleged global conspiracy and its specific impact on California taxpayers, study the 146-page complaints filed January 9 in federal courts across California.

99%ers who live in the City of Riverside, or in San Diego and San Mateo Counties should applaud our local officials for demanding that the banks pay for their LIBOR lies. As for the rest of us, it’s time to ask our city councils and boards of supervisors when they will stop cutting services and start making the banks pay.

(Steve Askin holds an MBA from one of the One Percent’s favorite schools, the Columbia University School of Business. His post first appeared on Good Jobs LA and is republished with permission.)