LIBOR rigging bankers defrauded local councils’ funds

 

 

Treasury reports reveal how local authorities lost hundreds of millions – if not billions –as a consequence of the LIBOR rate rigging scandal.

British councils face 34% cuts to vital services that can be attributed to reductions in government funding. Austerity cuts are interlinked to Britain’s support for the banker’s through the bailout. Additionally, LIBOR rate rigging reduced the councils’ investments. The common tendency within the scandal was to “low-ball” or drop interest rates, this meant councils received lower returns as these are pegged to LIBOR. On a broader level, understanding how LIBOR fixing hit councils’ investments is one way to sharply define how – by manipulating the system – the bankers’ ill gotten gains came at society’s loss.

Treasury reports for 2008 show there were £31 billion of investments by local authorities, with annual interest profits of £1.8billion. The report also states, “Interest rates fell between October 2008 and March 2009, putting pressure on budgets.”Fell is one way to put it, were rigged downwards would be more accurate in light of the legal findings about this fraud.

As an average, the British authorities’ £31 billion was getting an interest rate of 5.8%.
31,000,000,000 x 5.8 = 1,800,000,000

An ONN article on Wednesday explained how, through LIBOR manipulation, the banking sector reduced the amount it paid back for its bailout debts. This article also highlighted how the FSA found Barclays guilty of frequently reducing LIBOR submissions downwards, during the financial crisis. This “low-balling” had the effect of reducing the rate of interest return for financial products. The FSA verdict also found that traders picked particular days to fix the LIBOR rate even further. This was because these days affected the 3 month, 6 month and annual Libor rates.

The following graph shows variations of the LIBOR fixes. It was calculated by theWall Street Journal. Although it represents American LIBOR, the trend it shows is the same as what happened to the British and LIBOR rates in other countries. In this deregulated banking world: LIBOR was a fraud without borders.

 

  • The gaps between the lines are the difference between what the WSJ calculated LIBOR should be and what it was rigged at.
  • The sharp spikes are indicative of bank submittors targeting certain days, to get the LIBOR down, which could affect rates for annual products.
  • The red arrow and dotted lines show the difference on one day in March 2008. It shows that the LIBOR rate should have been 3.35, however, was “lowballed” to 2.55%.

In a simple scenario, had all the councils pooled their investments into one scheme and their rate was determined on this day they would have lost £248,000,000 by this rate rigging, when multiplied over 12 months of returns.
Because they should have got 31,000,000,000 with a 3.35% interest = 32,038,500,000
Whereas the rigged rate for their 31,000,000,000 was 2.55% interest = 31,790,500,000 less by 248million

Although this situation is hypothetical, this graph is real. Whoever, in the whole world, had interest rates pegged to this US LIBOR on this day would have lost 0.8% on their return.

With the total value of derivatives in the world at between 360-500 trillion, the impact globally of this manipulation for just one day is almost un-quantifiably large, however, with so much at stake it seems logical that this does not mean it is unsolvable. It just needs methodical research applied.

The graph also illustrates the pack mentality of LIBOR submissions; LIBOR manipulation encouraged other banks down that may not have been involved in the rate rigging. This is especially telling, at a time of financial uncertainty when they would normally rise as they should be less likely to lend to each other.

Broader implications

This ballpark figure of 2008 losses attributed to LIBOR fixing of one quarter of a billion represents a great deal for local council services.

Beyond this, by applying the same methodology, considering the impact on schools, hospitals and other major departments the enormous amounts that LIBOR defrauded the British state begin to become clear. To say nothing of the social cost to humanity, as LIBOR is the rate that affects trillions of pounds worth of derivatives.

For instance, Local authority pension funds last year were valued by theDepartment for Communities and Local Government at £148 billion. If this was roughly the same figure in 2008, then the one day fix used as an example would account for over a billion of additional losses.

A crucial question must be: why are British councils, government and pension funds not taking banks to courts in class action law suits?

Although under reported by the mainstream media, this tactic is in action.

In America, various cities and counties are taking banks to court. Nassau County in New York claims five years worth of LIBOR rigging cost them $13million. Whereas the much larger Baltimore city filed court papers that claim it bought “tens of millions of dollars worth of interest-rate swaps” during the period when the alleged fixing took place. In Britain, the only class action so far is by Guardian care homes, who are suing Barclays for £70million for the losses the old people’s homes suffered due to LIBOR fixing.

With so much money at stake and the potential for councils, NHS Trusts, government departments, pension funds, PFI contracts and others to recoup money effectively taken by rigging – it does not seem too presumptuous to imagine a whole raft of further cases coming soon to British courts to recover significant taxpayer losses.

 
© 2012 Occupy London
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