Messing with Libor cost millions
Instead of raising fares and proposing to charge riders a fee when they have to buy a new MetroCard, the Metropolitan Transportation Authority should be looking to recoup millions of dollars that the big banks may have improperly charged them.
After crashing Wall Street and costing tens of thousands of workers their jobs and homes, now we find out that big banks have been accused of manipulating key benchmark interest rates that underpin many loans and financial products — potentially costing governments, investors and consumers billions of dollars.
Libor — or the London Interbank Offered Rate — is a rate based on how much interest big banks would expect to pay to borrow money from one another. Interest rates for everyday things like student loans, credit cards and mortgages, and even long-term debt that big institutions like the MTA carry, are often pegged to the Libor rate, too.
The Justice Department recently announced that Barclays admitted engaging in interest rate manipulation in connection with Libor and has agreed to pay $160 million in penalties to resolve violations. According to the department, Barclays, in an attempt to benefit its trading positions and manipulate perceptions of its financial health, misquoted rates. The department is continuing to investigate Libor manipulations by other financial institutions.
According to The New York Times, other banks, such as Citigroup, JPMorgan Chase and UBS, are in discussions with regulatory authorities over this issue.
The issue of Libor manipulation has a direct effect on many public entities like New York City and state government and the MTA — which are paying banks hundreds of millions of dollars annually on deals called interest rate swaps — complex derivatives intended to keep down interest costs related to municipal debt.
Even without the issue of Libor manipulation, these deals have become a drag on public budgets and are backfiring thanks to the historically low interest rates driven down in response to the financial crisis caused by the big banks. As a result, as of early July, we estimate that the state, the city and the MTA combined are paying more than $215 million net annually to banks on these deals.
According to a 2011 report coauthored by UnitedNY, if the MTA’s nearly $120 million net swap payouts in 2010 had been used for transit expenses instead of payments to banks, the MTA could have spared bus and subway riders deep service cuts and avoided some 1,800 jobs lost in layoffs and positions that had to be eliminated.
It’s bad enough that governments are shelling out hundreds of millions in net swap payments to the banks. But these swap deals are often based on Libor, and Libor manipulation just makes the situation worse.
This is because typical interest rate swaps are meant to protect public entities from rising interest rates. But when variable rates like Libor are artificially lowered, the costs to these entities go up — while the banks make even more money.
If the Libor rate were driven artificially low by merely 0.29 of a percentage point (a figure cited in a lawsuit brought by Baltimore), dozens of these swap deals could be costing tens of millions more than they otherwise would have.
If the MTA were to prevail in a successful lawsuit, it could potentially recover triple damages, which could help mitigate budget shortfalls and avoid layoffs, fare hikes and fees.
According to Bloomberg News, a former managing director at Citigroup stated: “Libor has always been a lie, because it represents what banks would pay for funds rather than what they are actually paying. People who have an incentive to make money from mispriced markets are able to misprice those markets.”
All of this leaves the 99% paying for deals created — and possibly manipulated — by and for the 1%. Enough is enough.
Samuelsen is president of TWU Local 100 and Rivera is executive director of UnitedNY.