YouTube video

Bill Black: The LIBOR fraud stole millions upon millions from American
cities and people around the world

Story Transcript

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Baltimore.

And Baltimore (that’s the city) is leading the charge of American cities suing some of the big banks because they manipulated the LIBOR rate—that’s the London interbank offering, where banks every day get together and decide—compare notes, apparently, and establish what will be interbank loan rate, which tends to influence something like $800 trillion of investments in derivatives, mortgages, and they apparently were manipulating this to their advantage. Of course, the banks deny all of this. They deny it even though Barclays Bank, one of the bigger these banks, had to negotiate a settlement with the British government for several hundreds of millions of dollars but still claims it did no wrongdoing.

Now joining us is an expert in bank wrongdoing, Bill Black. He’s a former financial regulator. He teaches at the University of Missouri–Kansas City. He’s the author of the book The Best Way to Rob a Bank Is to Own One. And he’s an often-contributor to The Real News Network. Thanks for joining us again, Bill.


JAY: Alright. So the banks are saying that they didn’t manipulate this rate. Even though Barclays made this settlement, there’s still the American banks claiming they didn’t do anything of the kind. And they’re saying—one of the main accusations against the banks is that they lowered rates in a manipulative way—and raised them, but in some ways the accusation coming from Baltimore and some of the other cities is that they lowered rates. And the banks are saying, well, how would it be in our interest to lower rates when we would have made less money on the loans we were lending out? They’re suggesting it would have been a wash, so why do it. So take us through this.

BLACK: So there are two different ways in which LIBOR was manipulated, according to the admissions from Barclays and the documents that have been revealed. One way that it was manipulated was to help the trading positions that the banks had. So the banks are massive banks. Barclays is a $1 trillion bank. And, of course, it’s doing all kinds of trades. Well, those trades would be helped if interest rates were reported to be higher or lower, because that would move the LIBOR rate, and their investments are based or indexed off of the LIBOR rate.

And so the emails demonstrate conclusively that that’s exactly what Barclays did, that they would put in false statements to the British Bankers Association, which is the group that compiles LIBOR, claiming that they could borrow money from other banks at a certain rate. But that statement would not be true. It would be manipulated to maximize the value of the trading position.

JAY: And that makes the banks look stronger than they really were, and allows them to borrow money elsewhere in the financial markets, which they can then go and play in proprietary trades and derivatives trading and all the various subprime nonsense that was going on. Is that part of the story?

BLACK: It’s actually worse than that. This isn’t an accounting fraud. This actually makes them a profit. In other words, they’re able to gimmick the trade after the trade is made. Say I make a trade that would be worth more if LIBOR fell and LIBOR didn’t fall. Well, I just manipulate LIBOR so that it does fall, and then my trade wins. So I can take a losing bet and change it into a winning bet. So this comes, of course, at the expense of whoever is on the other side of the trade.

JAY: And often that is—and sometimes that’s a city like Baltimore.

BLACK: It could be a city like Baltimore. It could be anybody. It could be other banks as well. So that one is—you know, no ones even attempts to defend that, other than some people who claim, well, it must have been sort of a wash—they were cheating some people and helping others. You know, that’s insane. As you said, we’re talking about manipulating things that change the transaction for hundreds of trillions of dollars of investments.

JAY: Now, explain the process. There’s a daily morning phone call, and representatives of the biggest banks are on it, and they wink-wink nudge-nudge. What is the wink-wink nudge-nudge? What exactly do they do?

BLACK: Well, they’re not supposed to wink-wink nudge-nudge. They’re supposed to report what it actually costs them to borrow from other banks of their ilk on a short-term basis in a particular currency, and then the British Bankers Association takes those and it tosses out, you know, the highest rates and it tosses out the bottom rates and does sort of an average of the ones that are left, and it’s published as LIBOR. So, you know, LIBOR might be 2 percent as denominated in U.S. dollars for overnight money, and it might be 2.5 percent denominated in Swiss francs for seven-day money, that type of thing.

But the key is that LIBOR is used to index interest rates wherever the interest rates vary with changes in the economy. This is supposed to protect you against inflation and the interest rate risk that comes from inflation—or deflation, for that matter. And LIBOR is by far the largest index in the world, so it’s used, you know, as I said, in hundreds of trillions of dollars of transactions. Plus many of these transactions can be quite long-term, including U.S. and Canadian mortgages and such. And so—and United Kingdom mortgages. So if you locked yourself in, in the U.S. context, to a 30-year mortgage at LIBOR plus 4 percent (which is how it would be phrased), then you were stuck for 30 years with a higher rate because of that manipulation that day of LIBOR.

JAY: Right. Now, Bill, take us through the other way. Baltimore, in some of the American cities’ case, if I understand correctly, is actually more that the rates were lowered artificially, as—I understand the upward thing. How does Baltimore lose money when the rates go down?

BLACK: Okay. So this is the second type of scam that Barclays has admitted to, and this scam was in the context of the full bloom of the financial crisis. And during the full bloom of the financial crisis, LIBOR was looked at as the equivalent of a thermometer that showed how bad the fever was at these very large banks from their consumption of these toxic mortgages. And the idea was, if it cost you a lot of money, you know, more money to borrow from your nearest rivals, who presumably knew you best, well, they would only be demanding that higher interest rate if they knew you were sicker. And so LIBOR was supposed to be this objective measurement that showed how sick the banks were.

So the idea was to manipulate LIBOR artificially down, so that it was as if you were reporting, I have hardly any fever at all, I’m really quite good. Now, the controversy in particular is: did the British banking authorities and the British government encourage the banks to manipulate LIBOR downwards during the heyday of the financial crisis?

JAY: Right. Alright. So let’s pick up again with Baltimore. So why does Baltimore lose money when they manipulate the rate down?

BLACK: So Baltimore, and anybody else who bought a security that paid interest that varied, depending on—it was indexed off of LIBOR—say they entered a deal where they got LIBOR plus 4 percent. Well, if you artificially deflate LIBOR’s rate, then they get less money in Baltimore.

JAY: This is: Baltimore then takes some of its money, it parks it in bonds of some kind, and it earns money the higher the rates are. So if rates go down, the yield back on the bonds to them is less and Baltimore’s out millions of dollars. And this is a city that probably no one needs to be reminded is closing recreational centers, so a few millions of dollars makes a big difference. So is that right?

BLACK: That’s correct, although it didn’t have to be just bonds, and probably larger, various kinds of financial derivatives. And so cities and localities and industries often try to protect themselves against interest rate risk and inflation. In a situation where they’re getting a fixed rate of interest, they will enter into what’s called an interest rate swap, and in the swap they get a variable rate of interest instead. The counterparty pays them this variable rate of interest, which, again, is typically based off of LIBOR. So if it’s manipulated down, they get less money in this swap. And there are trillions of dollars of these swaps. And so everybody that purchased the variable interest rate portion of these swaps got less money because of the manipulation of LIBOR during the acute phase of the crisis, when everything was going crazy, which was a long time, a couple of years, times hundreds of trillions of dollars. You can see you can get massive damages.

JAY: Right. Okay. Now, apparently this practice began perhaps in 2005 and such. In 2007, The New York Times reported on Friday that an employee from Barclays informed the New York Fed, then headed by Tim Geithner, that this was going on, and apparently there was more information came from Barclays to the New York Fed in 2008. So, I guess, a two-part question here. One, is this essentially a criminal conspiracy between these banks? And two, is it possible that Geithner’s going to be implicated in all of this? Start with one.

BLACK: Under the U.S. laws, it is a criminal conspiracy if what Barclays says is true, because this was a cartel operation in which they purported to simply be reporting prices but in fact they were creating and fixing prices for the benefit of the members of the cartel.

So we have to be a little careful about pronouns when you say it began in 2005. We think what began in 2005 was the first type of manipulation that I described, which is where the banks manipulate LIBOR, either up or down, to make their trading positions more valuable. So that began, according to news stories that are out, at least as early as 2005. And, of course, this is without much discovery or investigation of the other major banks, so this day could get pushed back quite a bit.

In 2007, the New York Fed was—which is where Geithner was the president—was informed by Barclays traders that the rate was being manipulated down. So this is when the crisis has begun. And they, the New York Fed, is then informed on additional occasions by Barclays that the rate’s being manipulated down. And the New York Fed certainly takes no effective action. The New York Fed has not really said what it did, other than some, you know, vague stuff that we looked at it or something. But they don’t appear to have made criminal referrals. That’s going to be the key question: did they make criminal referrals on all of this to the Justice Department?

JAY: And so if this is going to be pursued in a way you think it should be pursued, what are the next steps by the Justice Department or the regulators who—I mean, it’s not like they didn’t know. We know one of the main regulators of all this is the New York Fed, and they did know. So it’s not like the regulators didn’t know about this.

BLACK: And worse, the story in Barclays’ story is that the Bank of England encouraged them and indeed pressured them to—them being Barclays—to provide artificially lowered rates to make the British banking system look safer. If that’s true, then it’s very difficult for British authorities to prosecute.

JAY: And it may be true for the New York Fed too, for the same reasons.

BLACK: That’s right. So if the New York Fed screwed up our ability to prosecute by not taking any action against Barclays, well, you know, that’s not a crime by Geithner, but it’s certainly something where he should resign immediately for that additional screwup to all the other—I mean, he was an abject failure as a regulator.

What we haven’t explained at this point is, while this is the London Interbank Offered Rate, LIBOR, there are American banks participating in the creation of LIBOR, and these American banks, of course, were regulated directly by the New York Fed, as well as the New York Fed actually had regulatory authority over the operations of a number of the British banks in the United States, and therefore should have been on its toes investigating in that capacity as well.

JAY: Alright. We’ll come back to you in a few days, Bill, as this story continues to break and sort of keep going at this. Thanks very much for joining us.

BLACK: Thank you.

JAY: And thank you for joining us on The Real News Network. And don’t forget the “Donate” button over here, ’cause if you don’t click that, we can’t do this.


DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.

Creative Commons License

Republish our articles for free, online or in print, under a Creative Commons license.

William K. Black, author of The Best Way to Rob a Bank is to Own One, teaches economics and law at the University of Missouri Kansas City (UMKC). He was the Executive Director of the Institute for Fraud Prevention from 2005-2007. He has taught previously at the LBJ School of Public Affairs at the University of Texas at Austin and at Santa Clara University, where he was also the distinguished scholar in residence for insurance law and a visiting scholar at the Markkula Center for Applied Ethics.

Black was litigation director of the Federal Home Loan Bank Board, deputy director of the FSLIC, SVP and general counsel of the Federal Home Loan Bank of San Francisco, and senior deputy chief counsel, Office of Thrift Supervision. He was deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement.

Black developed the concept of "control fraud" frauds in which the CEO or head of state uses the entity as a "weapon." Control frauds cause greater financial losses than all other forms of property crime combined. He recently helped the World Bank develop anti-corruption initiatives and served as an expert for OFHEO in its enforcement action against Fannie Mae's former senior management.