By Pam Martens: September 24, 2013
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.
As we reported in early July, the administration of LIBOR has been removed from the British Bankers’ Association and turned over to the New York Stock Exchange (NYSE/Euronext). We reported on the conflicts with that plan, which has gone forward anyway:
“The idea that turning over the administration of Libor to the NYSE, whose major shareholders include some of the Wall Street firms currently under investigation for rigging Libor, would restore confidence in using Libor as an interest rate benchmark is…well…typical of Wall Street’s irrational thinking.
“According to a March 31, 2013 report from Morningstar, the following Wall Street firms are among the major shareholders of NYSE/Euronext: Citigroup, 6.5 million shares; Morgan Stanley, 5.9 million shares; JPMorgan Asset Management (UK) Ltd., 4.9 million shares; Merrill Lynch & Co. Inc., 4.2 million shares; Deutsche Bank AG, 3.7 million shares; Credit Suisse First Boston, 3.6 million shares; Goldman Sachs & Co., 3.1 million shares.
“The Board of Directors of NYSE/Euronext includes former executives from across Wall Street, raising further red flags about the independence of the rate setting mechanism. NYSE/Euronext also owns Liffe, a derivatives exchange operated out of Europe. Liffe trading includes derivatives indexed to Libor.”
NCUA was created by the U.S. Congress to regulate, charter and supervise federal credit unions. Its predecessor, the Bureau of Federal Credit Unions, dates back to 1934 when President Franklin D. Roosevelt signed the Federal Credit Union Act into law, authorizing the formation of federally chartered credit unions in all states. With the backing of the full faith and credit of the U.S. Government, NCUA operates and manages the National Credit Union Share Insurance Fund, insuring the deposits of more than 95 million account holders in all federal credit unions and the majority of state-chartered credit unions.
In addition to filing the LIBOR lawsuit yesterday, NCUA filed lawsuits in Federal court in New York against nine banks or financial institutions for selling nearly $2.4 billion of “faulty” mortgage backed securities to corporate credit unions.
Defendants in those suits include Morgan Stanley & Co., Inc. and Morgan Stanley Capital I Inc., Barclays, J.P Morgan/Bear Stearns, Credit Suisse, Royal Bank of Scotland, UBS, Goldman Sachs, Wachovia and Residential Funding Securities, LLC, now Ally Securities.