Great explanation of LIBOR and its impact on States and Cities.

[trumad]

Multiply this world-wide and you'll understand how huge this scandal is.

<snip>
The complaints being voiced by municipalities are mostly related to their use of a popular financial contract known as an interest rate swap. States and cities generally enter into these swaps with specific banks so that they can borrow money in the bond market. They pay bondholders based on a floating interest rate — like an adjustable-rate mortgage — but end up paying their bankers a fixed rate through a swap. If Libor is artificially lowered, the municipality is stuck paying the same fixed rate, but it receives a smaller variable payment from its bank.

Even before the current controversy, some municipal activists have said that banks took advantage of the financial inexperience of municipal officials to sell them billions of dollars of interest rate swaps. Experts in municipal finance say that because of the particular way that cities and states borrow money, they are especially liable to lose out on their swaps if Libor drops.

Mr. Shapiro, who helps cities, states and companies negotiate these contracts, said that if a city had interest rate swaps on bonds worth $1 billion and Libor was artificially pushed down by 0.30 percent, which is what the lawsuits contend, that city would have lost $3 million a year. The lawsuit claims the manipulation occurred over three years. Barclays’ settlement with regulators did not specify how much the banks’ actions may have moved Libor.

In Nassau County, the comptroller, George Maragos, said in a statement that according to his own calculations, Libor manipulation may have cost the county $13 million on swaps related to $600 million of outstanding bonds.

A Massachusetts state official who spoke on the condition of anonymity because of potential future legal actions, said the state was calculating its potential losses.

“We are deeply concerned and we are carefully analyzing all of our options,” the official said.
http://dealbook.nytimes.com/2012/07/10/libor-rate-rigging-scandal-sets-off-legal-fights-for-restitution/?hp

[RagAss]

1. The Criminals continue to operate with impunity.

And we let them.

[badtoworse]

2. Manipulating the LIBOR was wrong, but I don't see how the municipalities were damaged.

You use a swap to protect against interest rate volatility and establish a fixed cost of servicing debt. By agreeing to the swap, you're protected if interest rates rise, but you give up any benefit if they drop. That is elementary and anyone involved in municipal finance would understand it.

Once the municipalities entered into the swap, they became indifferent to subsequent up or down movement in the LIBOR. The fact that LIBOR was manipulated down seems irrelevant to me because the only way the cities could have done better would be if the manipulation had occured before they executed the swap. Are they going to argue that the banks should have manipulated LIBOR sooner?

[arendt]

3. The answer is in the article.

If Libor is artificially lowered, the municipality is stuck paying the same fixed rate, but it receives a smaller variable payment from its bank.

They got paid less than they should.

Do you need any more details?

[trumad]

4. Don't understand how this isn't easily understood.

As you noted---it's right fucking there.

[econoclast]

8. There is more to it than that...

The following comes from an article by Darwin BondGraham :
" What swaps allowed many governments to do was to replace a floating rate with a synthetic fixed rate that was often significantly lower than would otherwise be possible if the local government itself directly issued a fixed-rate debt. Local governments tend to be able to issue slightly lower initial variable-rate debt than other sorts of borrowers (mostly large business corporations) can in other debt markets. Conversely, many banks and corporations can issue fixed rate debt at significantly lower rates than local governments have been able to."

So city WANTS to pay a FIXED rate. But for technical market reasons they would pay a relatively high fixed if they issued fixed rate debt. BUT, again for technical market conditions, they are able to borrow at a variable rate at a rate lower than the average bear.

Conversely, other borrowers WANT to be variable rate payers but find that they are able to borrow at a fixed rate at a rate lower than the average bear.

Ok. Solution. Each party issues debt in the form in which they can borrow at a preferential rate. City issues variable rate debt. Corporation issues fixed rate debt.

Then they SWAP the payments!

The city pays to the corporation the fixed rate on the corporate debt. That fixed rate is lower that the fixed rate that the city would pay if they issued fixed rate debt themselves. So the City saves money. The Corp takes in the fixes rate payment in from the City and uses it to make the payments on the fixed rate debt they issued.

The Corp pays to the City the variable rate on the variable rate debt. That variable rate is lower than the variable rate the Corp would pay if they issued variable rare themselves. So the Corp saves money. The CITY takes in those variable rate payments and uses them to PAY THE VARIABLE RATE DEBT THEY ISSUED!

So if Cities received lower variable rates on their swap so also their variable rate debt payment should be lower !!!! The swap payments in should match the debt payments out. For both parties.

[badtoworse]

9. Sounds like "no harm, no foul". Correct?

[uponit7771]

11. no, lotta harm lotta foul lotta M$M underreporting of this issue

[badtoworse]

12. How about some details or an explanation of what the harm was?

Just saying there was harm adds nothing to the discussion.

[badtoworse]

5. I can definitely see how hedge funds and financial institutions could have been hurt

The article mentioned lower payments that cities' received on certain financial contracts that are tied to LIBOR, but I don't know what those might be. For the most part, the article seems to say that the municipalities' are claiming losses because they still had to pay the fixed rate they agreed to under the swap. I don't see how that is a valid claim

[RagAss]

6. Because the variable rate was manipulated.

[badtoworse]

7. Two questions

1.) What payments were the cities receiving that were based on LIBOR?

2.) Once you are indifferent to the variable rate (i.e. after you execute the swap), what difference does it make what happens to variable rates?

In the case of a swap, cities could have been hurt in two ways: If the LIBOR had been manipulated higher on the day the swap was executed or if the risk premium was manipulated higher. The article does not claim either of those things happened.

[WilliamPitt]

10. Up

[coalition_unwilling]

13. A million here and a million there and pretty soon you're

talking 'real money'

K&R for education and discussion.

Thanks for posting.

[riderinthestorm]

14. K&R nt

[dixiegrrrrl]

15. Thank you for this..very enlightening.