Too-big-to-fail banks implicated in $500 trillion fraud: biggest price-rigging scandal in history

In Rolling Stone, the amazing Matt Taibbi documents a breaking price-rigging scandal involving the world's biggest banks. The $500 trillion conspiracy to game the interest-rate swaps victimizes every city, town, state and nation that uses bonds to raise money, diverting an unimaginable sum from tax coffers to the pockets of mega-rich bankers. If you've been staring around at the empty storefronts, closed libraries and schools, homeless and breadlines since 2008 and wondering "Where did all the money go?" then wonder no longer.

Though interest-rate swaps are not widely understood outside the finance world, the root concept actually isn't that hard. If you can imagine taking out a variable-rate mortgage and then paying a bank to make your loan payments fixed, you've got the basic idea of an interest-rate swap.

In practice, it might be a country like Greece or a regional government like Jefferson County, Alabama, that borrows money at a variable rate of interest, then later goes to a bank to "swap" that loan to a more predictable fixed rate. In its simplest form, the customer in a swap deal is usually paying a premium for the safety and security of fixed interest rates, while the firm selling the swap is usually betting that it knows more about future movements in interest rates than its customers.

Prices for interest-rate swaps are often based on ISDAfix, which, like Libor, is yet another of these privately calculated benchmarks. ISDAfix's U.S. dollar rates are published every day, at 11:30 a.m. and 3:30 p.m., after a gang of the same usual-suspect megabanks (Bank of America, RBS, Deutsche, JPMorgan Chase, Barclays, etc.) submits information about bids and offers for swaps.

And here's what we know so far: The CFTC has sent subpoenas to ICAP and to as many as 15 of those member banks, and plans to interview about a dozen ICAP employees from the company's office in Jersey City, New Jersey. Moreover, the International Swaps and Derivatives Association, or ISDA, which works together with ICAP (for U.S. dollar transactions) and Thomson Reuters to compute the ISDAfix benchmark, has hired the consulting firm Oliver Wyman to review the process by which ISDAfix is calculated. Oliver Wyman is the same company that the British Bankers' Association hired to review the Libor submission process after that scandal broke last year. The upshot of all of this is that it looks very much like ISDAfix could be Libor all over again.

"It's obviously reminiscent of the Libor manipulation issue," Darrell Duffie, a finance professor at Stanford University, told reporters. "People may have been naive that simply reporting these rates was enough to avoid manipulation."

And just like in Libor, the potential losers in an interest-rate-swap manipulation scandal would be the same sad-sack collection of cities, towns, companies and other nonbank entities that have no way of knowing if they're paying the real price for swaps or a price being manipulated by bank insiders for profit. Moreover, ISDAfix is not only used to calculate prices for interest-rate swaps, it's also used to set values for about $550 billion worth of bonds tied to commercial real estate, and also affects the payouts on some state-pension annuities.

So although it's not quite as widespread as Libor, ISDAfix is sufficiently power-jammed into the world financial infrastructure that any manipulation of the rate would be catastrophic – and a huge class of victims that could include everyone from state pensioners to big cities to wealthy investors in structured notes would have no idea they were being robbed.

Everything Is Rigged: The Biggest Price-Fixing Scandal Ever (Thanks, Elix!)


    1. I don’t understand why there is even a concept of reputable vs. disreputable bankers.  Banking, at its most basic, is the rich taking advantage of the poor and less fortunate.  “I have something you don’t. You may have it at a price, and only if I say so, and I set the terms for you to repay me.”  So a 500 trillion fraud?  Puhleez.  As much money as is in banking in total, ever, is as much money that is a fraud.

      1. and since the Jews are the bankers of the world…

        Banking is far more complex than your simple little analysis. It’s a market like any other. Some of the interactions are ‘bad’ for the consumer — but most wouldn’t be able to afford buying a car / house when they want to without loans. It’s a service. It’s useful. It can be abused — especially once there are monopolistic tendencies.

        1.  Bullshit. It’s not that banking _can_ be abused – there’s no system in human history that can’t – it’s that banking _has been_ systematically abused. For _years_, by _every_ major player in the industry, and to the extreme detriment of literally every other human being on the planet. That’s not even an exaggeration.

          Also, what’s with bringing Jews into this? Nobody inserted them into this conversation except you, and it kinda nukes your credibility. Knock that shit off.


          and since the Jews are the bankers of the world… let’s kill all the Jews?

          Preeeetty sure that counts as a Godwin.

          It’s a market like any other.

          Not really.  That’s why it was more heavily regulated than most markets for most of the 20th century and might have something to do with the fact that when a lot of those regulations got repealed more recently we started having a lot of trouble with “monopolistic tendencies.”  For one thing, banking would seem to have significantly higher barriers to entry than most industries.

          1. …I don’t think that’s what happened.  Roman Kofman implied that awjt believes Jews are evil, etc. etc.  This seems to me to be likening awjt to a Nazi to discredit awjt’s arguments without addressing their substance which is exactly what Godwin’s Law is about.

        3. Yeah, thanks for Godwinning me.  And you are dead wrong. (edit: not you Roman, the person above, I clicked reply on the wrong thing) Most of the world’s richest people are not Jewish, so the logic simply fails.  I have nothing against Jewish people.  Some of my best friends are Jewish and I would Aldo Raine anyone who tried to hurt one of them. 

          I also know bankers (who are and are not Jewish), and the ones I know are fine people. 

          But I stand by my conviction that banking itself is a fraud.  It is built upon a playing card house of exceptions and favoritism.  Fuck them.

      2.  well banking at it’s core is “i have something you don’t (security) and will take something you don’t want (responsibility) and will pay YOU for this service, in exchange i get to spend some of your money but don’t worry you can get it back just so long as not everyone wants their money back at once”

        1. Yes, that’s banking in the traditional sense as a financial intermediary.  In this day and age though, “banking” also refers to investment banking, which, at it’s core, is more like legalized gambling.  Many “banks” like Citigroup are involved with both.

          The point of this story is basically that the gambling side asked the traditional side to lie in order to make their bets pay off.
          All in all, I don’t think the traditional side is all that evil.  It’s mainly the gambling side that causes problem.

          1.  he said “banking at it’s most basic” i corrected him on what banking at it’s most basic is

  1. I read this last night online; I keep waiting for Matt’s head to explode.  That will happen sooner than the outrage he’s expecting from the American public in response to the depth of the corruption in the global banking mafia. 

  2. I read stuff like this and just shake my head.  Forwarded it to Senator Warren… Hopefully she’ll be able to make something out of it

  3. It is insane, but it’s also the most perfect of scams because the public doesn’t have the patience or fortitude to pay attention, let alone fight it.

    1. Nor does the public really have a way to fight it.  The only people who could theoretically fight this are regulators and congress, and both of those are owned by the banks already. 

      1. Yes, the personnel making up high-level people at the banks and at the regulatory industry are often the same people.  There’s likely a lot of regulatory capture going on there.  That’s not the whole story though.  In some cases, it’s just a fear that an aggressive prosecution could cause havoc on the financial markets.  It’s a bit like how bailing out AIG, etc. was very distasteful, but still more palatable than watching the financial system collapse.

        It’s a bit like a hostage situation.  That’s why you have to end “Too Big to Fail.”  You can’t go after firms unless they’re small enough that destroying them doesn’t take down everything else.

        1. Too Big to Fail wasn’t even the real problem, the concern was that they were all failing for the same reason at the same time.  I mean Wells Fargo might have been considered too big, but we let it fail anyway.  This is really a regulatory problem.  The regulators don’t have the balls to say “No, you can’t make money that way, it’s too systemically risky.”  So now the only way to play is to take the maximum amount of risk possible to reap the megabucks when they pay off, and to hand off the failure to the public when it doesn’t.

          Maybe if there was some system where a bank that came up with a complex financial instrument was the only one allowed to use it.  That way when any one particular system crashes, it only takes one bank with it.  Probably wouldn’t work though, as banks would make minor tweaks to whatever was making money and claim it as their own.  It would also create an incredible arms race on Wall Street as banks rushed to make as many weird instruments as they can think of.

        2.  It’s a bit like how bailing out AIG, etc. was very distasteful, but
          still more palatable than watching the financial system collapse.

          I agree, which is why the empty libertarian style threats about letting the system crash to correct itself could not be taken seriously, however you left out another option: The state taking them over and breaking them up/winding them down unless they can cover their bad debts with private assets. At the very least jail, and better deals for the taxpayers. The fraudsters didn’t just get bailed out, they got all their bad debts taken over by taxpayers.

  4. This goes along with the revelations in United States of America v. Carollo, Goldberg and Grimm, where the banks were found fixing interest rates on municipal bonds all over the country.  At a loss to the public of TRILLIONS of dollars.  This was run the same way the Mafia fixed bids for garbage contracts, for example.

    And the Goldman/Sachs “huddle”, where the brokers got together to “chat”, trading insider information.

    And the LIBOR scandal, fixing the rate that banks charge each other, and thereby the rates they charge everyone else.

    And the banks helping the super-rich move money off-shore to avoid taxes.

    Each of these has cost trillions of dollars to the world economy.

    My response:

  5. Was there ANY chance that things like this weren’t still going on…or that this is the ONLY thing the banks are up to.

  6. Does anyone have a good recipe for banker?  Maybe something along the lines of a luau pit pig roast?  There’s no sense in fattening up these pigs if we’re not going to eat them.

  7. Unfortunately, “Too big to fail” also means too big to punish meaningfully.  It’ll end with a fine that is far less than the profit that was made.

    1. I don’t think they are too big to fail.  I think the people who are supposed to be regulating them find the bribes too big to turn down.

      From the article “The presence of Covington & Burling in the suit – representing, of all companies, Citigroup, the former employer of current Treasury Secretary Jack Lew – was particularly galling. Right as the Libor case was being dismissed, the firm had hired none other than Lanny Breuer, the same Lanny Breuer who, just a few months before, was the assistant attorney general who had balked at criminally prosecuting UBS over Libor because, he said, “Our goal here is not to destroy a major financial institution.””

    2. As we saw last year with the HSBC money-laundering scandal, this is already the case. The Feds declined to prosecute criminal activity because of the destabilization to the financial system this could allegedly cause. In other words, too big to fail means too big to jail. Which raises the question: what is the point of having stricter financial regulation if the government will not enforce existing laws on large financial institutions?

  8. I can’t imagine a problem of this type, on this scale, being resolved through conventional political processes.

  9. This article has not answered the question “Where has the money gone” so much as who it has gone to, and the actual where is important. What do these foul and greedy people spend the money on? Luxuries, mostly. You read about the bankers spending ten thousand dollars (or was it pounds?) on wine with lunch, etc. A thousand dollar bottle of wine has little or no actual value outside the ultra-rich community any more than a piece of fine art. By consuming goods of this kind the rich have a profound effect on the general economy. It is essentially like burning money, or jumping into Lake Titicaca covered in gold dust (which used to be a yearly ritual for rich South American natives, look it up). It prevents inflation, and the luxury industries employ tons of people. I tend to think of it as an utterly hateful by-product of capitalism and a market driven economy. And I can’t think of anything to do about it except join them.

  10. Obama isn’t going to do much, if anything about it.  He keeps finding new and interesting ways to sell the American public out.  After reading through a New Yorker article on problems with immigration  deportations by the Obama administration (which has escalated deportations that include American citizens who were caught up in the rush to get all those migrants out), it won’t surprise me at all if he and that moral failure of an AG, Holder, do absolutely nothing, because hey, our job is to fuck with the little people, and ignore the big ones.  

  11. I don’t understand the point of these investigations if everyone in the banking industry is immune from any kind of prosecution, and any fines issued are not even as much as a slap on the wrist compared to what was obtained through illegal and fraudulent business practices. If only the whole world were Iceland.

  12. Occupy Wall Street was right, and we let the media lie to us. We laughed at them, and they floundered without leadership while the media continued to tell us about the smelly stoners wasting their lives squatting on Important Peoples’ property.

    OWS suffered from a lack of leadership and a lack of clear direction, but they were right.

    1. If they had a leader they would have been much easier to attack, corrupt, jail (uh kill) directly. Look at what’s happened to the leaders of movements that threaten the status quo in the past.

      1. There are various strategies that might deal with that, though. (Most of them involving emulation of a national leader strategy, that is, hire an army to protect the leader.)

  13. I’d like someone to detail for me how jailing any of the top banksters would make the financial system crash.

    I expect they’d just be replaced by another one, who would perhaps be a bit more cautious and less greedy in his stealing.  At what the CEOs are paid, I can’t see ANY shortage of job applicants.

    But I am open to hearing about how “the system would crash” is supposed to play out.

    Lots of people make the bald assertion that it would, I’d like them to explain in reasonable detail how that happens.  Because I don’t believe it.  Just another boogeyman.

  14. The sad part about the response to this story is the people who put forward the argument that everything will collapse if these big banks suffer losses or go out of business. Where are those predictions coming from? Why, from the very same people perpetrating the fraud, the bankers and captured regulators.  Why are people like Bernanke trustworthy when predicting disaster, yet scoundrels when it comes to the actual operation of the banks?

    If the big banks go bankrupt, the only people whose world will be destroyed are the very people Taibbi is writing about – the people using the system to transfer money from the taxpayers to their own pockets via government. When a bank goes bankrupt, it doesn’t have to stop operating, and even if it does, there are other banks to pick up the slack and there are other options available. Assets don’t mysteriously vanish, and the people who take the most losses are the ones who took the risks. Most people wouldn’t even notice in their day-to-day routines, or would be mildly inconvenienced.

    When banks are protected by the government from the consequences of their actions, this sort of thing will pretty much inevitably follow – and it will continue until people get tired of it, and stop “our” government from looting us to benefit them. The sooner that happens, the better off we’ll all be. Well, except the bankers. :)

  15.  This is a really misleading title.  It’s not a $500 trillion fraud, it’s a fraud involving the manipulation of $500 trillion dollars in assets.  Even skimming from a pool that big, of course, is an almost unfathomable degree of theft, there’s not need to reach when it comes to headlines.  (The 2011 revenue for the NFL was $9 billion dollars, or a .0018% of that, for comparison.)

    Why am I bringing it up, then?  Because reading the Boing Boing headline my first reaction was that someone screwed up a decimal point, and actually made me really skeptical of the article you linked.  I read “$500 trillion fraud” as meaning bankers defrauding people out of $500 trillion, and that just doesn’t make sense.

    I realize “banks steal currently unknown portion of $500 trillion” isn’t as a good of a headline, but really.  This is the worst white collar crime in the history of the world.  You don’t need to oversell it.

    Shoot, Rolling Stone does just fine with “The Biggest Price Fixing Scandal Ever.”

  16. Umm, trillion and billion are different. By a factor of 1000. A 500 trillion USD fraud would be more money than actually exists (several times over). The article actually says $550 BILLION dollars worth of capital was affected.

    1. Were you also reminded of that scene from Austin Powers? So sad that a decent story is spoilt in this way.

  17. So if I understand this correctly, every morning we ask a conglomerate of private onion-growers what onions are worth, and then government and private investors, at all levels, purchase onions based on this index price.  When it turns out they were charging us more than onions were worth we fine then for a fraction of the profits, but continue to have faith in the overall system.

    At least I *wish* that’s what was going on.  At least then we’d be getting some onions out of the deal.

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