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Wall Street Greed: Not Too Big for a California Jury

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Greed is not so good. by

Sixteen of the world's largest banks have been caught colluding to rig global interest rates.  Why are we doing business with a corrupt global banking cartel?

United States Attorney General Eric Holder has declared that the too-big-to-fail Wall Street banks are too big to prosecute.  But an outraged California jury might have different ideas. As noted in the California legal newspaper The Daily Journal

California juries are not bashful - they have been known to render massive punitive damages awards that dwarf the award of compensatory (actual) damages. For example, in one securities fraud case jurors awarded $5.7 million in compensatory damages and $165 million in punitive damages. . . . And in a tobacco case with $5.5 million in compensatory damages, the jury awarded $3 billion in punitive damages . . . .

The question, then, is how to get Wall Street banks before a California jury. How about charging them with common law fraud and breach of contract?  That's what the FDIC just did in its massive 24-count civil suit for damages for LIBOR manipulation, filed in March 2014 against sixteen of the world's largest banks, including the three largest US banks -- JP Morgan Chase, Bank of America and Citigroup.  

LIBOR (the London Interbank Offering Rate) is the benchmark rate at which banks themselves can borrow. It is a crucial rate involved in over $400 trillion in derivatives called interest-rate swaps, and it is set by the sixteen private megabanks behind closed doors.

The biggest victims of interest-rate swaps have been local governments, universities, pension funds, and other public entities. The banks have made renegotiating these deals prohibitively expensive, and renegotiation itself is an inadequate remedy. It is the equivalent of the grocer giving you an extra potato when you catch him cheating on the scales. A legal action for fraud is a more fitting and effective remedy. Fraud is grounds both for rescission (calling off the deal) as well as restitution (damages), and in appropriate cases punitive damages.

Trapped in a Fraud

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Nationally, municipalities and other large non-profits are thought to have as much as $300 billion in outstanding swap contracts based on LIBOR, deals in which they are trapped due to prohibitive termination fees. According to a 2010 report by the SEIU (Service Employees International Union):

The overall effect is staggering. Banks are estimated to have collected as much as $28 billion in termination fees alone from state and local governments over the past two years. This does not even begin to account for the outsized net payments that state and local governments are now making to the banks. . . .

While the press have reported numerous stories of cities like Detroit, caught with high termination payments, the reality is there are hundreds (maybe even thousands) more cities, counties, utility districts, school districts and state governments with swap agreements [that] are causing cash strapped local and city governments to pay millions of dollars in unneeded fees directly to Wall Street.

All of these entities could have damage claims for fraud, breach of contract and rescission; and that is true whether or not they negotiated directly with one of the LIBOR-rigging banks.

To understand why, it is necessary to understand how swaps work. As explained in my last article here, interest-rate swaps are sold to parties who have taken out loans at variable interest rates, as insurance against rising rates. The most common swap is one where counterparty A (a university, municipal government, etc.) pays a fixed rate to counterparty B (the bank), while receiving from B a floating rate indexed to a reference rate such as LIBOR. If interest rates go up, the municipality gets paid more on the swap contract, offsetting its rising borrowing costs. If interest rates go down, the municipality owes money to the bank on the swap, but that extra charge is offset by the falling interest rate on its variable rate loan. The result is to fix borrowing costs at the lower variable rate.

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At least, that is how they are supposed to work. The catch is that the swap is a separate financial agreement -- essentially an ongoing bet on interest rates. The borrower owes both the interest on its variable rate loan and what it must pay on its separate swap deal. And the benchmarks for the two rates don't necessarily track each other. The rate owed on the debt is based on something called the SIFMA municipal bond index.  The rate owed by the bank is based on the privately-fixed LIBOR rate.

As noted by Stephen Gandel on CNNMoney, when the rate-setting banks started manipulating LIBOR, the two rates decoupled, sometimes radically. Public entities wound up paying substantially more than the fixed rate they had bargained for -- a failure of consideration constituting breach of contract. Breach of contract is grounds for rescission and damages.

Pain and Suffering in California

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Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling WEB OF DEBT. In THE PUBLIC BANK SOLUTION, her latest book, she explores successful public banking models historically and (more...)

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One good way to think of an interest rate swap whe... by Robert Cowen on Thursday, Apr 24, 2014 at 6:33:17 PM
We're not talking municipalities alone, we're talk... by Guglielmo Tell on Saturday, Apr 26, 2014 at 3:51:52 PM
Wow! Just one more way that Wall Street has manage... by Disillusionist on Thursday, Apr 24, 2014 at 7:25:01 PM
That is why we support Ellen Brown. She thinks out... by Mari Eliza on Thursday, Apr 24, 2014 at 9:33:45 PM
She is an extremist lawyer. ... by BFalcon on Sunday, Apr 27, 2014 at 8:30:35 AM
I personally think that NO financial institution i... by John Shriver on Friday, Apr 25, 2014 at 2:49:47 PM
Personally and emotionally I wish Mrs. Ellen Brown... by Guglielmo Tell on Saturday, Apr 26, 2014 at 12:44:03 AM
"We don't need a third Party, we need a second Par... by Ellen Brown on Saturday, Apr 26, 2014 at 11:03:29 AM
Perhaps the entire system is corrupted by two-face... by J.Patrick Hickey on Saturday, Apr 26, 2014 at 1:32:43 PM
The court system is broken.  Whoever has the ... by Neal C Chambers on Monday, Apr 28, 2014 at 5:01:27 PM
When you deal with crooks you get cheated.  I... by Derryl Hermanutz on Saturday, Apr 26, 2014 at 4:20:00 PM
Thanks Derryl.  Agreed on the public bank! &n... by Ellen Brown on Saturday, Apr 26, 2014 at 8:31:13 PM
How do you have nothing to do with oligarchs that ... by Neal C Chambers on Monday, Apr 28, 2014 at 5:02:36 PM
Why do you misquote your  link?You say:"Unite... by BFalcon on Sunday, Apr 27, 2014 at 8:26:41 AM
Are you suggesting that employers should not be pr... by Jim Arnold on Sunday, Apr 27, 2014 at 11:57:06 AM
I am not suggesting anything there, I just qu... by BFalcon on Sunday, Apr 27, 2014 at 9:06:08 PM
"The department at times has shown a reluctance to... by Jim Arnold on Monday, Apr 28, 2014 at 8:38:07 AM
OK, so you disagree with that particular article."... by BFalcon on Tuesday, Apr 29, 2014 at 9:32:34 AM
"Reluctance" is a temporary state. It leads either... by Jim Arnold on Tuesday, Apr 29, 2014 at 5:41:11 PM
Yes, I am serious.A person wants a loan. The incom... by BFalcon on Tuesday, Apr 29, 2014 at 7:14:22 PM
I'm sorry. Your political worship, like all forms ... by Jim Arnold on Wednesday, Apr 30, 2014 at 1:11:57 AM
Doesn't sound right. There is nothing political he... by BFalcon on Wednesday, Apr 30, 2014 at 3:58:32 AM
Perhaps 'convicted' employers should have their up... by Neal C Chambers on Monday, Apr 28, 2014 at 5:06:23 PM
I doubt it is concern over the jobs of the bankers... by Ellen Brown on Sunday, Apr 27, 2014 at 12:38:20 PM
Oh, I agree. It used to be the Repugs that would u... by Jim Arnold on Sunday, Apr 27, 2014 at 1:49:49 PM
See above, please.She twisted the words and I did ... by BFalcon on Sunday, Apr 27, 2014 at 9:16:00 PM
It was actually Bill Black who said Holder said th... by Ellen Brown on Sunday, Apr 27, 2014 at 9:33:18 PM
Well, what you wrote in the article was inaccurate... by BFalcon on Sunday, Apr 27, 2014 at 11:42:58 PM
Lighten up, BFalcon!!!!!So what if Ellen paraphras... by Neal C Chambers on Monday, Apr 28, 2014 at 5:14:21 PM
 We have enough misinformation already.Those ... by BFalcon on Tuesday, Apr 29, 2014 at 9:50:03 AM
First, that was not the issue. You quoted him wron... by BFalcon on Sunday, Apr 27, 2014 at 9:12:40 PM
I believe that one of the attempts to create a bet... by BFalcon on Sunday, Apr 27, 2014 at 9:18:30 PM
And what makes you happy?"California juries are no... by BFalcon on Sunday, Apr 27, 2014 at 8:28:27 AM
Those aren't pitchforks.  They're monetary aw... by Ellen Brown on Sunday, Apr 27, 2014 at 9:36:17 PM
That is not what you talk about.If damages are mil... by BFalcon on Sunday, Apr 27, 2014 at 11:34:04 PM
You seem to neglect the widely known fact that ban... by Neal C Chambers on Monday, Apr 28, 2014 at 5:18:12 PM
You have a point, but...It is true that right now ... by BFalcon on Tuesday, Apr 29, 2014 at 9:45:47 AM