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The LIBOR scandal is big, and getting bigger, as more and more entities line up to sue the bloomers off the big banks involved in the manipulation. What at first seemed almost non-newsworthy has blossomed into the crime of the century as small banks, pension funds, cities, and towns line up to try to recoup some of the money they lost during the ongoing swindle.
Small banks like the Community Bank & Trust of Sheboygan of Wisconsin are filing suit against banking behemoths Bank of America (NYSE: BAC ) , JPMorgan Chase (NYSE: JPM ) , Citigroup (NYSE: C ) , and a host of others under the U.S. Racketeer Influenced and Corrupt Organizations Act. The bank claims that the collusion of these big banks suppressed interest rates and, thus, the bank's income. Investment group Charles Schwab and the City of Baltimore have sued all 16 banks involved in the scandal under the Sherman Antitrust Act, and the California Public Employees Retirement System is currently trying to determine damages. Many more lawsuits are in the making, and doubtless scads more will follow.
A history of corrupt financial deals
Lloyd Blankfein of Goldman Sachs (NYSE: GS ) recently expressed concern that the LIBOR mess is further eroding public trust in the financial system. He is certainly not wrong, and he probably felt bold enough to make such a statement only because his bank is not suspected of involvement. Goldman Sachs is no stranger to scandal, however, and has participated in some hijinks of this nature, too. It's interesting how new allegations of wrongdoing seem to make everyone forget about prior offenses, particularly if the most recent one is of a monumental scale. The fact is, though, that these and other big banks have a history of manipulating interest rates to feather their own nests -- to the detriment of other institutions, investors, and local governments.
Collusion among banks to set interest rates and win contracts has been going on for some time, as the recent culmination of the case U.S. v. Carrollo, Goldberg, and Grimm points up. As reported in Rolling Stone, these three employees of General Electric subsidiary GE Capital were recently found guilty of conspiring with major Wall Street banks from around 1999 to 2006 of fixing public auctions of municipal bonds. The nipping and tucking of interest rates paid on these bonds floated to fix roads and build schools bilked cities and towns of incalculable amounts of money necessary to fund the day-to-day business of municipalities across the nation.
In the Carrollo case, the shaving of hundredths of one percent off interest rates on rigged bids was not to mask a sickly balance sheet, but to make extra money for the brokers and financial institutions. Auctioneers were bribed to turn public bidding into a private party, as the GE employees and banks such as B of A, UBS, JPMorgan, and Wells Fargo (NYSE: WFC ) decided which company won which bid, and for how much. Auctioneers would tell the contrived winner how much its competitors bid for the job of investing the town's bond money, sealing the deal.
This scenario played out innumerable times, padding the pockets of the cheaters while siphoning away money that cities should have been earning on their invested funds. The four aforementioned banks agreed to cooperate with the government in the case and paid fines of $673 million. Other institutions, such as Goldman Sachs and AIG, were also involved, as were several European banks.
On a smaller scale, Wall Street was also instrumental in the ruination of Jefferson County, Ala., which declared bankruptcy last year over its $3 billion sewer debt -- on a facility that was supposed to cost only $250 million. Wall Street banks such as JPMorgan and Goldman Sachs "helped" the corrupt officials of that county balloon the costs to unmanageable levels. JPMorgan, in particular, made millions continually refinancing the county's debt, though it had to maintain a constant stream of bribe money to keep the work flowing. The situation was so lucrative for the firm that it even paid Goldman Sachs a $3 million bribe to get out of town when Goldman started sniffing around the area, apparently attracted to the sweet smell of success.
And now, LIBOR
LIBOR has the potential to be mind-blowing in scope and magnitude. The dollar value of products and contracts that LIBOR influences is estimated at $800 trillion worldwide, affecting everything from bonds to credit cards to mortgages. There are serious questions to be answered, too. How much money did the rate rigging cost municipalities, investors, and pensions? Did interest-rate suppression allow subprime mortgage holders to postpone default, thereby allowing the market to be flooded with soon-to-be-toxic collateralized debt obligations?
The wave of lawsuits is not good news for investors, as banks could very well drown under the deluge -- or get stuck treading water for years. It will be slow and lingering, with legal and settlement costs eating up anything resembling dividends. In addition, the recent submission by the biggest banks of living wills designed to assist in their orderly disassembly during another crisis (in theory) pretty much precludes another bailout. I don't expect that Joe and Jane Main Street Investor will be at the head of the pack picking clean the bones of the dying banking industry, either. They will have to get in line behind all the other creditors and will probably get nothing.
The problem with escalating corruption is that, eventually, it comes to light and at least some of the miscreants involved are made to pay for the dirty deeds. It will take time, but in my view eventually one or more of these banks will be sued out of existence. Bank investors, beware.
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