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Fraud Charges on Interest-Rate Swaps

Articles & Blogs - International Commentary

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Regular readers will be familiar with my position on the banksters' gigantic, interest-rate swap scam (see “WHO Were the Winners on Interest-Rate Swaps”). In that piece, I pointed out a remarkable “coincidence”: specifically, that all the winners on bets on interest-rate swaps were big-banks – primarily the Wall Street Oligarchies.

I also pointed out the inherent conflict of interest in these contracts, in that (unlike normal “insurance”) the banks writing up these contracts were capable of causing pay-outs to themselves on these contracts. For those who didn't read that previous commentary, here is how the scam worked. The same big-banks which were responsible for creating the U.S. housing-bubble (and the trillions of dollars of “securitized” scam-investments that went with it) knew that when their Ponzi-scheme blew up that this crash in financial markets would force governments to slash their interest rates. However, this is not what the bankers were saying to their victims when they were drawing-up these contracts.

To begin with, their accessory, Federal Reserve Chairman Ben Bernanke was hard at work duping the world with his propaganda that the U.S. had a “Goldilocks economy” where U.S. markets (and U.S. house prices) would just keep going up, forever. Despite the fact that this was never a possibility, people all over the world were conned into believing that there was only upward pressure on interest rates (to “cool off” the U.S. economic juggernaut).

Big-banks (led by Wall Street) then went around the world scamming towns, cities, schools, and hospitals into entering into these “interest-rate swaps” - with the bankers promising their victims that these interest-rate swaps would help them “save money” on their borrowing costs. In reality, once the Wall Street Ponzi-scheme imploded, and markets crashed, these chumps all suffered huge losses – meaning all the bankers booked huge gains.

Supposed “economic genius”, Larry Summers (who is currently telling Barack Obama how to run the U.S. economy) was scammed for nearly $1 billion, while the head of Harvard University – in financing only $2 billion of borrowing.

Today, it appears that legal authorities in Milan, Italy have adopted the same interpretation of these contracts as I did. They have charged three of the multi-national banking oligarchies with criminal fraud: JP Morgan (American) , Deutsche Bank (German), and UBS (Swiss). This is huge news on a number of fronts, which I will review one-by-one.

To begin with, there is the essence of these fraud charges, themselves. Italian authorities are alleging that these bankers violated UK securities laws in drawing up these contracts. Specifically, they did not inform the victims that (by nature of these contracts) the victims were not “clients” of the banks, but rather “counterparties”.

This distinction is of massive importance since as clients, the victims would have been entitled to know of the bankers' inherent conflict of interest – as part of the bankers' “fiduciary duty” - along with clear warnings of the risks in these transactions. On the other hand, with the victims as “counterparties”, this meant that the bankers were acting in an adversarial role to these parties: specifically, these banks were betting against their victims (and the victims didn't know this).

If, as seems likely, the bankers failed to clearly designate these parties as “counterparties”, then this is a proverbial “open and shut” case. Keep in mind that these interest-rate swap victims were used to always dealing with these bankers on a client/fiduciary basis, and not as “counterparties” - since obviously the people entering into these contracts were not financial professionals, themselves. Given this context, there would be an onus on the bankers to be especially forthcoming about this change in the very nature of their legal relationship.

This also explains why Italian authorities are choosing to begin criminal rather than “civil” proceedings. Under “civil law” (i.e. a “law suit”), the City of Milan could still recover all its losses from the bankers (along with additional, punitive damages). Also, under “civil law”, the burden of proof is much, much lower: merely a “balance of probabilities”.

Under criminal law, however, the Italian authorities have to meet the ultimate burden of proof (“beyond a reasonable doubt”) and they also have to establish additional 'ingredients' of this “crime” which it would not be necessary for them to prove in an ordinary civil case. Thus, Italian authorities are obviously extremely confident in the strength of their case.

Naturally, this case will have world-wide repercussions. To begin with, as with all trials, there will be a “discovery” phase. During this time, all of the confidential documents and communications among the bankers relating to these contracts will become public. Thus, even if the Italian government is not successful in convicting and jailing some of these banksters (given the high burden of proof), if they uncover any supportive evidence, at all, of banker misconduct, this guarantees that (more) law suits will spring up all over the world – seeking to recover the trillion dollars (or so) in the ill-gotten gains of these banking oligarchies. Indeed, the City of Milan, itself, is free to sue the banksters, whether or not it succeeds with its criminal prosecution.

As I have often repeated in my own writing, whatever is left of these Oligarchs (once the “dust settles” on all of their scamming) will be consumed in the largest tidal-wave of litigation which the world has ever seen. With most of these villains based in the U.S., and with the U.S. having the loosest, most-punitive civil law system on Earth, American litigation lawyers must be having “wet dreams” about what lies ahead for them.

Already, the state of New York ended the year with a total backlog of over 4.7 million cases – the highest amount ever. While this includes all New York legal cases (most of which have nothing to do with the bankers), there is also an enormous time-lag (especially in complex financial proceedings) between the time the alleged “wrong” occurred, and litigation begins.

That is the “good news” for the Oligarchs. The bad news is that this tidal-wave of litigation will hang over all these banks for at least the next decade – like the Sword of Damocles. Thus, even if any of these Oligarchs can miraculously survive being held accountable for their acts, all of these institutions will soon be legally “radioactive”: their massive, potential liabilities will strongly discourage anyone from doing any business with these firms.

This is yet another indication of the psychopathic behavior of the Wall Street Oligarchs, which I have alluded to in recent, previous commentaries. How could the banksters have ever believed they could scam the world for a trillion dollars (or so) on this one scam – with no one noticing that all the “winners” on these contracts were banks, and all the (big) losers were non-banks? How could the banksters have believed they could enter into adversarial relationships with all these clients – and not even tell them about it?

Having destroyed various sub-sectors in which they operate, one by one, through their endless scams, the Wall Street predators will ultimately do what all psychopaths do: destroy themselves. The daunting task for the Rest Of The World will be to attempt to minimize the “collateral damage” they suffer – as the Oligarchs are vaporized, one by one.

Comments (6)Add Comment
written by Bernhard (Buzz) Lorfing, March 18, 2010
It is truly astounding; however, the expression "Bullshit baffles brains" comes to mind.
Jeff Nielson
written by Jeff Nielson, March 18, 2010
It's just AMAZING that you had all these "players" committing HUGE sums of money to these interest rate swaps - and apparently NONE of them even knew that the bankers would be "betting against them" on all these swaps.

While obviously the bankers exploited these chumps, you really have to ask yourself about the "due diligence" of all the institutions (like Harvard University) which jumped into these deals.

I'm also REALLY fascinated with the issue of HOW the bankers explained these transactions. Most particularly, HOW could they explain to all these chumps that they would be able to "save money" on these "swaps" - without the party on the OTHER SIDE of the swap (the banker) LOSING money (lol)?

It appears that most vampires could learn a lesson or two from bankers - when it comes to mesmerizing their prey!
written by Bernhard (Buzz) Lorfing, March 18, 2010
If someone approaches you with a deal that will save you money, just show them the door and caution them about the spring loading that could make the door hit them in the butt on the way out.

No one in this world is ever going to make the effort in time and the expense to show you how to make money or reduce expenses. What's in it for them must be explored or it's a non-starter.

The other point I'd like to make is the larger the herd in a particular sector of the market or asset class is the bigger a target they are for predation and in risk of attack.

Right now I am particularly concerned with the huge congregation of sheeple in the bond markets; they are sitting ducks just waiting to be spooked into a panic but at least the feel safe because there's always safety in numbers. Right ???
written by Mark Morris, March 18, 2010
God, my blood's beginning to boil! Although totally unprovable, how could the banks in their public service endeavers bat a thousand in IRS's without insider info? Bernanke you bastard!

In the real world, playing with interest rate swaps you'd win a few and loss a few, wouldn't you? It's pure gambling, or at least it is on paper! Now being a big, TBTF, freakin bank among banks you might be expected to have certain expertise that would afford for something north of a 50% winning percentage, say 60%. Now that would be a real money maker percentage day in and day out, month after month.

But how can you play a fair, friendly game of cards with someone when you don't know their taking your house with a stacked deck?

Ultimately, no matter what the banks call their little scam, I think the big, bad shysters have called down a major s-h-i-t storm upon themselves and as you say; it's bye bye, ill-gotten American pie.
Jeff Nielson
written by Jeff Nielson, March 17, 2010
Marco, the part I really like is with respect to the "proprietary trading" issue. The banksters argued that when they bet AGAINST their clients that this should NOT count as "proprietary trading" - because they were performing a "public service", by "taking the other side of the trade".

Presumably, this is what they will now argue with the interest rate swaps: that when they were betting AGAINST their clients (and AGAIN without them knowing it) and took a TRILLION dollars (or so) from them that they were performing a "public service".
written by Mark Morris, March 17, 2010
What an excellent bit of writing for a less than perfect crime! What makes this whole thing so diabolical is that these malignant bankster types had come forth with tidings of great joy, for faithful clients of unwavering trust, who had benefitted from sound advice and investment expertise in the past.

Like sheep being herded to the slaughter pen, towns, cities, counties, school districts, and all manner of political sub-divisions, were shown the wonderful path to expenditure savings and asset growth by the professionals they trusted most, their big-time, big-deal bankers.

Downside? What downside? There is no downside. Can't you read the news, or watch the TV and listen to our government experts running this prosperous country? Is there no one slicker than a craven banker selling you short and robbing you blind with "the perfect deal"?

Well, come to find out maybe these one-way rapes weren't such a bargain after all, at least not for the bankers. It does seem possible that the Masters of the Universe may have been duped by their own pathetic greed! Could it be that the wolves in sheep's clothing were inadvertently the sheep all along?

Stupid bankers, I certainly hope so!

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