Courtesy of Pam Martens.
Yesterday, the National Credit Union Administration (NCUA) filed suit in U.S. District Court for the District of Kansas against 13 foreign banks and U.S. based JPMorgan Chase, charging the group with violating federal and state anti-trust laws through their manipulation of interest rates in the setting of the London Interbank Offered Rate (LIBOR), a benchmark used to set rates on everything from student loans to interest rate swaps to adjustable rate mortgages.
NCUA, the regulator of U.S. credit unions, alleges the defendants conspired to achieve multiple benefits for themselves to the detriment of their customers and investors. According to the complaint, the motives were to suppress LIBOR in order to benefit their trades that were tied to LIBOR, to reduce their borrowing costs, to deceive the market as to the true state of the banks’ creditworthiness, and to deprive their counterparties of the level of interest rate payments to which they were entitled.
On the issue of benefitting their own trading position, NCUA specifically mentions JPMorgan, noting: “Derivatives traders within the Defendant banks held extensive trading positions tied to LIBOR. For instance, Defendant JPMorgan had interest rate swaps with a notional value of $49.3 trillion. By artificially manipulating LIBOR, Defendants were able to book enormous unearned profits…JPMorgan acknowledged in 2009 that a difference of 1% (or 100 basis points) was worth over $500 million to the bank.”
Relevant to the motive of attempting to portray themselves as more credit worthy than they actually were, the complaint quotes from an April 10, 2008 report from Citigroup Global Markets Inc., a subsidiary of Citigroup:
“[T]he most obvious explanation for LIBOR being set so low is the prevailing fear of being perceived as a weak hand in this fragile market environment. If a bank is not held to transact at its posted LIBOR level, there is little incentive for it to post a rate that is more reflective of real lending levels, let alone one higher than its competitors. Because all LIBOR postings are publicly disclosed, any bank posting a high LIBOR level runs the risk of being perceived as needing funding. With markets in such a fragile state, this kind of perception could have dangerous consequences.”
Citigroup was not named as a defendant in the suit, ostensibly because it was not one of the banks from which the credit unions bought investments. NCUA is charging that the manipulation of LIBOR by the named banks resulted in losses to five failed corporate credit unions: U.S. Central, WesCorp, Members United, Southwest and Constitution. Corporate credit unions are wholesale credit unions that provide services to retail credit unions, such as check clearing, electronic payments, and investments.
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