According to the Wall Street Journal, a banker came forward to admit that bankers have been manipulating LIBOR rates, leading to a full blown investigation of how interest rates are being manipulated to steal money from taxpayers. What is a LIBOR rate? Well, it is basically a benchmark rate used to determine the rates involved in something called interest rate swaps, which is the “gun” Chase Bank has been using to rob you blind.
What are Interest Rate Swaps?
The worst part is – these things are so complicated that very few people outside of finance and Government have any idea what they are. Therefore, you rarely hear about it on the news, and when you do you probably tune it out. Well, you might want to start paying attention. Interest rate swaps accounted for 82% of the derivatives trading by JP Morgan Chase in 2011, resulting in $1,400,000,000 in revenue – one of their largest sources of profit.
Essentially, municipal bonds are issued by cities, counties and other local government agencies all the time in order to raise money to build bridges, libraries, roads or other local projects. To protect against a rise in interest rates, many municipalities were tricked into entering into a interest rate swap which was supposed to protect them as interest rates rose. However, interest rates fell and they were stuck paying above market interest on these bonds. So how did interest rates fall?
The Federal Reserve Interest Rate Manipulation Scheme
The Federal Reserve sets the interest rates, and in order to bail out the big banks like JP Morgan Chase they passed on the losses to municipalities like your city or county which was only trying to build bridges and schools. If you’re wondering why so many of these municipalities are teetering on the edge of bankruptcy, now you know. You can thank Chase Bank and the Federal Reserve.
In the end, the losses will just be passed on to you – the taxpayer. It is the single largest theft in US History and it was made legal by The Federal Reserve. In the end, local governments (ie, you and your neighbors) were stuck paying almost 50x the interest rate that the big banks like JPMorgan Chase were paying.
According to Mike Elk, in an article he wrote on the role of interest rate swaps in bankrupting municipalities:
The markets were pricing in serious falls in the prime interest rate. . . . So it would have been clear that this was not going to be a good deal over the life of the contracts. So the states and municipalities were entering into these long maturity swaps out of necessity. They were desperate, if not naive, and couldn’t look to the Federal Government or Congress and had to turn themselves over to the banks.
As almost all reasoned economists had predicted in the wake of a deepening recession, the federal government aggressively drove down interest rates to save the big banks. This created opportunity for banks – whose variable payments on the derivative deals were tied to interest rates set largely by the Federal Reserve and Government – to profit excessively at the expense of state and local governments. While banks are still collecting fixed rates of from 4 percent to 6 percent, they are now regularly paying state and local governments as little as a tenth of one percent on the outstanding bonds – with no end to the low rates in sight.
What’s the solution?
The only solution is community banking. Cities and states to need to localize their banking to prevent this from happening in the future. Many cities, counties and states have the necessary resources to set up local banks, but they better start soon. The game is rigged and the house never loses. The longer we play this game the more we’re going to lose. Talk to your local representatives, you’d be surprised where it might get you.