Goldman Sachs Profited from Manipulation of Libor Rates

We wondered whether or not Goldman Sachs may have had anything to do with the manipulation of Libor rates that has been in the news recently.  But Goldman itself did not need to manipulate interest rates as the Fed did it for the banks by first bailing them out and then by artificially reducing interest rates to near zero for an extended period of time.  All Goldman had to do was make a bunch of swap contracts with municipalities and wait for the implosion of the world financial system, and violà, they make big money from their swaps.  Easy, peasy!

Banks would not only be unable to survive if interest rates went up; they would also lose on their interest rate swaps.  So interest rates conveniently stay low.  Another example of the banks being able to say, "heads we win; tails you lose."

Wall Street Confidence Trick:  How Interest Rate Swaps Are Bankrupting Local Governments
By Ellen Brown - Web of Debt
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In a March 15th article on Counterpunch titled “An Inside Glimpse Into the Nefarious Operations of Goldman Sachs: A Toxic System,” Darwin Bond-Graham adds these cases from California:

The most obvious example is the city of Oakland where a chronic budget crisis has led to the shuttering of schools and cuts to elder services, housing, and public safety. Oakland signed an interest rate swap with Goldman in 1997. . . . 

Across the Bay, Goldman Sachs signed an interest rate swap agreement with the San Francisco International Airport in 2007 to hedge $143 million in debt. Today this agreement has a negative value to the Airport of about $22 million, even though its terms were much better than those Oakland agreed to. 

Greg Smith wrote that at Goldman Sachs, the gullible bureaucrats on the other side of these deals were called “muppets.” But even sophisticated players could have found themselves on the wrong side of this sort of manipulated bet. Satyajit Das gives the example of Harvard University’s bad swap deals under the presidency of Larry Summers, who had fought against derivatives regulation as Treasury Secretary in 1999. There could hardly be more sophisticated players than Summers and Harvard University. But then who could have anticipated, when the Fed funds rate was at 5%, that the Fed would push it nearly to zero? When the game is rigged, even the most experienced gamblers can lose their shirts. 

Courts have dismissed complaints from aggrieved borrowers alleging securities fraud, ruling that interest-rate swaps are privately negotiated contracts, not securities; and “a deal is a deal.” So says contract law, strictly construed; but municipal governments and the taxpayers supporting them clearly have a claim in equity. The banks have made outrageous profits by capitalizing on their own misdeeds. They have already been paid several times over: first with taxpayer bailout money; then with nearly free loans from the Fed; then with fees, penalties and exaggerated losses imposed on municipalities and other counterparties under the interest rate swaps themselves. 

Bond-Graham writes: 

The windfall of revenue accruing to JP Morgan, Goldman Sachs, and their peers from interest rate swap derivatives is due to nothing other than political decisions that have been made at the federal level to allow these deals to run their course, even while benchmark interest rates, influenced by the Federal Reserve’s rate setting, and determined by many of these same banks (the London Interbank Offered Rate, LIBOR) linger close to zero. These political decisions have determined that virtually all interest rate swaps between local and state governments and the largest banks have turned into perverse contracts whereby cities, counties, school districts, water agencies, airports, transit authorities, and hospitals pay millions yearly to the few elite banks that run the global financial system, for nothing meaningful in return. 

Read the whole article here