LIBOR fraud and existential risk for the sixteen biggest banks in the world

Recently, it was publicly announced that the sixteen largest banks in the world have been involved in committing fraud by setting LIBOR (the basic interest rate banks charge each other) at artificially high levels.  When the LIBOR is higher than it should be, people pay more interest on their loans than they should, and banks thereby make more money on their loans.

Hundreds of trillions of dollars in loans, and even more in derivative contracts, have been affected by this fraud.  Since it was discovered by regulators, banks have been rushing to confess their roles in order to reduce their potential civil and criminal liability.  Several banks have already entered into limited immunity deals by offering information on their misdeeds.

What is much worse, however, and the reason behind the banks’ haste to confess, is that fraud in the inducement to sign these loans and derivative contracts would allow victims to void their contracts and claim treble damages and even punitive damages.  Theoretically, attorneys general could indict and prosecute specific people on criminal charges.  If this happened on a large scale, these banks could all be wiped out– completely put out of business.

You can imagine the negative effects that destruction of the sixteen largest banks in the world could cause: complete failure of the world’s financial system.  The resulting depression would make the Great Depression look like the Great Recession.

You can see why the banks are so forthcoming: they need the protection of the government to avoid being wiped out by civil suits and people repudiating their loan contracts.  The most important holders of these fraudulent loan papers and derivatives are city and state governments.  Detroit, which is in bankruptcy court, is directly affected because of derivative contracts that were entered into by city officials administering their pension system.  If they could repudiate those contracts, it would save their pensioners from losing nearly their entire pensions.

Part of the problem is that city and state governments are bought and paid for by large financial institutions.  Campaign contributions that are clearly bribes for favors received are a regular feature of local and state government.  In particular, attorney general associations are simply conduits for money from large interests to candidates for office, in order to obtain cooperation from the officeholders.  The banks know that they can receive good treatment from attorney generals if they can avoid too much public anger over the issues involved.

Therefore, banks are falling over themselves to cooperate and supply information about what they had done, in order to get the best possible treatment from the attorneys general who are responsible for prosecuting them and trying to get back some of the money that they have lost by overpaying interest.

Pay close attention to these developments: you are likely to see banks paying fines of up to a billion dollars each.  You are unlikely to see any individuals prosecuted for what was clearly criminal behavior: operating as a cartel to set interest rates in violation of anti-trust laws.  It is true that there is documentary evidence in the form of embarrassing emails showing criminal behavior by known individuals, but that evidence will never be used because the attorneys general have received large campaign contributions from these same criminals.