Comparing Bay Area Minimum Wage Increases

Berkeley and Richmond recently upped their minimum wages, and Oakland and San Francisco are also considering significant lifts for their lowest-wage workers. But each city’s minimum wage plan differs in significant ways. These differences reflect the balances of power between workers and employers, unions and business leagues, in each city.

In Oakland, labor and community organizations banded together as a coalition last year and decided to place an initiative directly on the ballot in time for the elections this November. That decision to circumvent the city council prevented what happened in Richmond and Berkeley. In Oakland’s neighbors to the north initial calls by grassroots activists for a $15 minimum wage were translated into a much smaller increase. Final legislation in these two cities was further watered down. Business lobbyists successfully argued that an immediate and significant hike in the minimum wage for all workers would cause unemployment, business closures, and a drain economic activity from these cities.

Berkeley’s minimum wage therefore isn’t very large, and it isn’t indexed to inflation, so it loses value quickly.

Richmond’s minimum wage, while larger on paper, may not impact very many workers in the city because of complicated exemptions that allow lots of employers to simply not pay the new municipal minimum wage, or to pay a lower “intermediate” amount.

In San Francisco the process has been legislative, like Richmond and Berkeley. But instead of starting from $15 and cutting downward, San Francisco’s board of supervisors appear headed toward $15 by 2018. If they pass the minimum wage legislation that was considered at today’s rules committee, San Francisco’s minimum wage will rise from it’s current $10.75 to $12.25 next year.

That would match the proposed increase that Oakland voters will consider in November. But then San Francisco’s minimum wage would jump another 75 cents in 2016, and then a dollar in 2017 and another dollar in 2018. Those increases significantly outpace the rate of inflation.

Here’s what the different enacted and proposed minimum wage increases in the Bay Area look like compared to one another.

In Oakland the “Lift Up Oakland” ballot initiative would raise the minimum wage for all employees in March 2015 to $12.25 and then increase this wage each year to prevent it from losing value from inflation. The Oakland Chamber of Commerce is attempting to place a competing measure on the ballot that would phase in a minimum wage increase, but the increases charted below for this proposal would not benefit all workers as the Chamber’s proposal carves out certain categories of employers and employees.

 

San Francisco’s proposed minimum wage would rise to $15 in 2018, possibly bringing pay just above the bare minimum considered a living wage.

 

Differences between Berkeley and Richmond’s recently passed minimum wage laws, and San Francisco and Oakland’s proposed minimum wages are larger than this graph would imply. In Richmond the number of workers excluded from the new minimum wage of $13 by 2018 is probably very large due to exemption of “small businesses” from having to comply, and a complicated provision that establishes an “intermediate” minimum wage halfway between the city and state minimum wages, allowing employers who obtain half their income from sales or services provided outside the city to pay this lesser wage.

 

 

Capital of Inequality

Part of San Francisco’s Union Square hyper-lux retail offerings, the De Beers store which features armed guards at the entrances. Ferrari recently opened a store a block away on Stockton Street. Haute Couture names obscure fill the district’s buildings offering items of conspicuous consumption.

Through the Financial Crisis and the Great Recession, inequality has intensified through income, housing, and public debt in the Bay Area. Black and Latino communities have lost wealth and power, while white and Asian communities have mostly to recovered. At the top, the wealthiest 5 to 10 percent, have made enormous gains.

Imagine a place where the hills are lined with the mansions of millionaire families, some of them billionaires. Their residences sit atop forested ridge lines with views of a peaceful ocean, or upon oak-studded peninsulas that jut into an azure bay. In this place they want for nothing. De Beers opened a retail store in one of their favorite shopping districts a few years ago, next to haute couture names like Bulgari, Cartier, and Gucci. An investment bank opened a “coffee shop” just a couple blocks from the headquarters of no less than seven Fortune 500 corporations, to catch their employees after work for talks over lattes about what to do with all that money crowding their bank accounts. Posh towers filled with luxury apartments sprout from the city center where multiple cranes seem to perpetually dot the skyline. iPhones pop from the palms of pedestrians like third hands, and newfangled apps like third eyes give them instantaneous information about the latest opulent consumer activities. Everything glows with money and power, a lot of it.

Below the hillsides glittering with wealth are even more expansive terrains of crumbling homes and apartment buildings —many foreclosed upon and awaiting some kind of financial death— packed with families that barely scrape together twenty thousand dollars a year to live on. Their views: smokestacks, port cranes, freeway overpasses, and scrap yards, or, sometimes on a clear day, if they ever think to pause from survival mode, they can see the hills, the mansions, the gleaming skyscrapers beyond reach, the towering campaniles of universities where they can never afford to send their children.

This place is characterized by the crowding of impoverished human beings, most of them of African and Latin American descent, into hollowed out industrial zones where factory buildings and abandoned warehouses echo the bustle of past decades. This economy of yesterday was exported to the new shop floors of China. Among the only things left are the toxic plumes of chemicals spreading slowly under fence lines. In this place entire generations face severe poverty and a decimated public sector – especially the schools. Tens of thousands of adults exist, persist, somehow without meaningful work or income. Tens of thousands of house-less persons —likely no longer even part of the statistical surveys used to calculate joblessness and income— wander the streets and sleep in the cracks of weathered concrete each night. Every few months the police slay a youngster under questionable circumstances. Crime is rampant. Violent crime is hard to avoid, part of the overall suffering.

The splendid heights and stratospheric wealth would not be so contemptible was it not hanging directly over such desperate poverty. Of course the two things are not unrelated.

Welcome to the San Francisco Bay Area, in the Golden State of California.

The West Coast financial center of the United States.

The epicenter of the tech industry.

The global vortex of venture capital.

One of the most brutally unequal places in America, indeed the world.

If measured by the same metrics that are used to gauge income inequality within nation states, the Bay Area’s internal divide between its rich and its poor would place San Francisco between China and the Dominican Republic, making it roughly the 30th most unequal state in the world. China is now the estimated home to 317 billionaires. California counts perhaps 90 billionaires. Half of these, mostly white men, live in San Francisco and Silicon Valley. The Census counted 4.2 million persons slipping below their definition of poverty last year in California.

In the distribution of income and wealth, California more resembles the neocolonial territories of rapacious resource extraction and maquiladora capitalism than it does Western Europe. Oakland is more El Salvador than it is EU. The Bay Area metropolis is more Bangladesh than Belgium.

California is just one of seven states that has the distinction of ranking higher than the national average on three basic metrics of income inequality, as measured by the Bureau of the Census. Its gini coefficient of income inequality was most recently measured at 0.47.

The ratio of income between the top 10 percent and the bottom ten percent, as well as the ratio of income between the top five percent and the bottom twenty percent show staggering divides in economic power that few other places in America, indeed the world, surpass.

Source: Weinberg, Daniel H., “U.S. Neighborhood Income Inequality in the 2005-2009 Period,” American Community Survey Reports, U.S. Census Bureau, October, 2011.

The only states that compare to California’s harsh inequalities are deep southern states structured by centuries of racist fortune building by pseudo-aristocratic ruling classes, and the East Coast capitals of the financial sector.

Source: Weinberg, Daniel H., “U.S. Neighborhood Income Inequality in the 2005-2009 Period,” American Community Survey Reports, U.S. Census Bureau, October, 2011.

The economies of Louisiana, Mississippi, and Alabama remain bound by racial inequalities founded in slavery and plantation agriculture; the wealthy elite of all three states remain a handful of white families who control the largest holdings of fertile land, and own the extractive mineral and timber industries, and the regional banks.

Texas, with its sprawling cities, global banks, energy corporations, universities, and tech companies, is more like California in that its extreme economic inequalities are as new as they are old. Stolen land and racial segregation combine with unworldly new fortunes built on the Internet and logistical revolutions in manufacturing and markets to manifest a gaping divide in power and wealth between the few and the many. The Texas border, like California’s, opens up vast pools of Mexican and immigrant labor for super-exploitation by agribusiness and industry.

The same goes for New York, Connecticut, and Washington D.C. the other most unequal places in the United States. New York and Connecticut, like California, have become societies divided by an upper stratum of financial-sector workers and corporate employees whose salaries and investments simply dwarf the bottom half of the population’s earnings, and unlike the South, this extreme level of inequality is rather new in its source of valorization. Washington D.C. is split between the federal haves, mostly fattened contractors who run the military, or who represent the interests of the billionaires in California and New York, and the have-nots, mostly Black and immigrant service sector workers who wait on these technocrats of empire.

It’s a strange club, the super-inequitable states of the U.S. This exclusive list pairs the bluest coastal enclaves of liberal power with the reddest Southern conservative states. In terms of wages and wealth these places have a lot in common.

San Francisco’s real estate roller coaster. The Financial Crisis cut 20% off home values in San Francisco, but the U.S. Federal Reserve’s bond buying program, coupled with broader tax and fiscal policies, has created a rally in securities markets, handing the wealthiest Americans enormous gains in net worth. These economic policies benefiting the rich are evident in San Francisco’s real estate prices. Secondarily is the Tech 2.0 boom in San Francisco and Silicon Valley, pulling in thousands of new residents to work in Internet, biotech, and other industries where six figure salaries are the norm.

In San Francisco homes now routinely sell for millions. Not mansions. Not even particularly large houses. Just simple homes built decades ago. In most other markets they would fetch the national median home price of about $170,000. San Francisco, which locals like to call “the City,” sees dozens of real estate deals every month in which a cool million or two pass hands, and afterward the new owner, usually someone with freshly minted tech or finance money, has the modest structure demolished and scraped away. The new thing is to build upward, and lavishly, from scratch. Heated stone bathroom floors and wine cellars are popular. Securing a pad in Noe Valley or Bernal Heights for a few million is seen as a reasonable way to spend money.

In San Francisco the western end of Broadway is known as “billionaire’s row.” Quite a few of the side streets and parallel avenues like Jackson, Pacific, and Washington are lined with estates that trade hands on occasion for a few tens of millions. No tear downs here. The villas and manors along these avenues were built by sugar barons and banking tycoons of centuries past. Silicon Valley’s most senior executives, and the City’s hedge fund managers, buyout barons, bankers, and a few celebrities make up most of the neighborhood’s owners. Their children attend exclusive private schools in Pacific Heights where they are preened for Stanford and Princeton.

It is becoming hard to identify any part of San Francisco as an “elite” enclave. Tech 2.0, as the Google and Facebook-led regional boom is being called now, has vested thousands of twenty somethings as well as senior executives with billions in IPO cash and billions more in salaries to hunt for real estate, and they have chosen San Francisco, nearly all of it, as their preferred stomping grounds. Maybe it will only be another decade until Broadway starts getting called trillionaire’s row.

Sea View Avenue, Piedmont, California. 71 percent white, only 5 percent of Piedmont’s population is Black or Latino. Median household income is $200,000, and wealth holdings are much more. Piedmont supports its own public schools, police force, parks, and libraries.

Across the Bay is a slightly more modest version of billionaire’s row, probably better called a millionaire’s row running across the ridge line from Oakland north to Kensington. In the middle of Oakland, in fact completely surrounded by the scrappy industrial city by the Bay, is the city of Piedmont. When it was founded in the 1920s its first residents gave it the nickname “city of millionaires.” They restricted housing to single family residential homes on large lots from the start to prevent Black and immigrant families from moving up the hillside. Sea View Avenue is where the big money that wants to show off buys real estate, but the entire city boast a median home price of $1.4 million. The Berkeley hills are similarly rich and populated by an unusually high number of lawyers.

Lawyers, especially tort defense, corporate, and tax lawyers who serve the wealthy and defend corporate America from labor unions, environmentalist, and consumer advocates, also love Marin County. Across the Golden Gate from San Francisco, Marin is not much more than a bedroom community for corporate lawyers and CEOs who want a little more room and sun than San Francisco provides. If Piedmont was a city shelter to exclude the working class, then Marin is similar, but on the level of a county. Despite growing pockets of Latino poverty in older towns like Novato and San Rafael, Marin remains one of the wealthiest counties in the U.S. on a per capita basis. Marin’s Black population is segregated into the tiny Marin City, one of the only places public housing was allowed to be built. Marin City’s residents work in the retail sector and some of the industry along San Rafael’s waterfront. They earn near the bottom of the region’s wage scale and subsist on a fraction of the income their wealthy neighbors take in each month.

Hagenberger Road, East Oakland. Oakland is over 50 percent Black and Latino. Sections of the city such as the area pictured above are 90 percent non-white. In the typical pattern of environmental racism, residential homes are in close proximity to major roadways, highways, rail lines, industrial facilities, scrap yards, and utilities.

Unemployment stalks the working poor of the Bay Area, threatening to force them into insolvency and bankruptcy, foreclosure and displacement. During the first Dot Com boom of the late 1990s unemployment was at five percent for white Bay Area residents. For those living along the billionaire’s and millionaire’s rows, unemployment is a meaningless concept. The capital invested by the rich, by their clever advisers who run the hedge funds and private equity shops, earns interests and returns on equity far larger than any years honest wage labor can eek out. The tax code provides for this with carried interest and the lowest personal income tax rates for top earners in many decades. Hordes of tax lawyers, many who live in Marin, the Oakland hills, and San Francisco, will eagerly structure a family’s investments and bills to minimize taxes, so long as they possess a minimum of $5 million in liquid assets – preferably more.

Black men in the Bay Area have consistently suffered an unemployment rate double that of white men. Through the entire George W. Bush presidency, a period characterized by an economic policy to benefit the wealthiest with low taxes and interest rates, Black men endured double digit unemployment rates, reaching about 13 percent when Obama took office. The Financial Crisis sent Black unemployment rates skyrocketing in San Francisco, Oakland, Richmond, and Vallejo, upwards of 22 percent in 2010.

Economic policies under Obama —both those he championed, and those he compromised on— have been very good for the wealthy, and that’s reflected best by the real estate and consumption bubbles frothing over places like San Francisco. The Federal Reserve Bank’s unprecedented purchases of bonds and its low lending rates have produced rallies in stock and debt markets which have greatly re-inflated the fortunes of the rich.

The Pew Research Center recently summed up this polarizing redistribution of wealth from the bottom to the top by noting simply that since 2009 the wealthiest 7 percent of Americans experienced an increase of 28% in their net worth, while the bottom 93 percent actually lost 4 percent of their savings.

The San Francisco Bay Area’s current tech boom is further dividing the wealthy few from the impoverished masses. Companies like Google, Apple, and Oracle are among the least diverse workplaces places where men outnumber women, and white and Asian employees dominate the ranks of lowly programmers and senior executives. The need to hire thousands of engineers is drawing waves of college graduates to Silicon Valley and San Francisco, and they’re washing over the current residents like a tide of suffocating oil. Some of the tech buses —private transit systems operated by Silicon Valley’s largest firms to shuttle employees from San Francisco to their suburban campuses in Santa Clara County— now run lines into Oakland and Hayward, a sign that their employees are increasingly colonizing formerly undesirable zones of real estate.

The drift apart between the pale wealthy few and the impoverished multitudes of darker-skinned peoples is evident on the level of whole cities. San Francisco enjoys robust public finances, high credit ratings, low per capita debt to income ratios, and many well funded public services. However, two decades of intense gentrification mean that this healthy public sector increasingly caters only to those “citizens” who can afford to live in San Francisco.

Pushed out of the region’s urban core, in the 1990s and 2000s Black, Latino, and some Asian immigrants found themselves in the affordable locales of Vallejo, Stockton, Richmond and Oakland. Further out towns like Antioch, Brentwood, and Pittsburg became increasingly non-white and working class. In the Financial Crisis these cities hemorrhaged residents and revenues due to some of the highest foreclosure rates in the nation. Vallejo and Stockton went bankrupt after slashing the most basic services. Vallejo is 75 percent non-white. Stockton is 80 percent non-white.

The wealthiest Bay Area communities, the “towns” of Hillsborough, Woodside, Atherton, Los Altos Hills, and the city of Piedmont are three quarters white with median incomes in the six figures. Public finances barely flinched during the Great Recession. A few of these local governments in fact have no outstanding public debt.

Atherton and Los Altos Hills have zero bonded public debt.

Oakland has almost a billion just in bonded debt.

In the tony Marin hamlet of Fairfax the public debt burden resting on each resident is about 1.7 percent of their annual income.

In Richmond the ratio of public debt to personal income for each resident is 16 percent.

Richmond, a quarter Black and a third Latino, is a tangle of oil and chemical refineries run primarily by Chevron. Not a year ago a massive fire at one of the company’s plants spewed toxic vapors and smoke into the sky, poisoning thousands of residents.

Chevron is headquartered in San Ramon, another exclusive, mostly white suburban environment with low municipal debt and a household median income of $121,000 a year.

It’s a Banker’s World

LIBOR litigation to recoup damages after the biggest financial fraud in world history has been thrown out

A cartoon depiction of JP Morgan, the hyper-influential banker of the early 20th Century. Several of Morgan’s banks and bank holding companies merged to form today what is known as JP Morgan Chase, one of the banks at the center of the LIBOR fraud.

Sixteen banks at the core of the global financial system —including JP Morgan, Bank of America, and Citigroup— scored a major victory on Friday when a federal judge dismissed nearly all the charges brought against them by a group of plaintiffs that includes municipal governments, pension funds, bondholders, and other investors who lost billions of dollars as a result of LIBOR rigging. The ruling is a major setback, both legally, and financially, for those harmed by the LIBOR manipulation conspiracy. Among the most damaged are are thousands of local governments that were played like ATMs during the Financial Crisis by the banks. Banks used their power to set 3-Month and 1-Month LIBOR rates so as to extract potentially billions in interest rate swap payments from the public. Countless small investors lost equally huge sums of money as investments indexing LIBOR were rigged to pay out less. The lawsuit’s dismissal ensures that the banks will keep billions of dollars in ill-gotten gains. The ruling may also bolster the banks’ positions against ongoing investigations and settlements sought by government regulators in the US, Europe, and Japan.

Strangely, the judge’s order (available here) acknowledged the massive global fraud that caused financial damages to the public in favor a few wealthy institutions. However, Judge Naomi Reice Buchwald relied on technical legal arguments to throw out the core claims of the lawsuit. In other words, the ruling doesn’t deny that the crime occurred and that the Plaintiffs sustained serious damages, but still dismisses the claims.

“We recognize that it might be unexpected that we are dismissing a substantial portion of plaintiffs’ claims, given that several of the defendants here have already paid penalties to government regulatory agencies reaching into the billions of dollars,” concluded Judge Buchwald in her 161 page order. She justified this position, however:

“…these results are not as incongruous as they might seem.  Under the statutes invoked here, there are many requirements that private plaintiffs must satisfy, but which government agencies need not.  The reason for these differing requirements is that the focuses of public enforcement and private enforcement, even of the same statutes, are not identical.  The broad public interests behind the statutes invoked here, such as integrity of the markets and competition, are being addressed by ongoing governmental enforcement.”

Government regulators have already proven through their own investigations that LIBOR was rigged to enrich the banks at the expense of their customers and counterparties who entered into LIBOR-linked derivatives contracts, or purchased LIBOR-referencing securities. Beginning as early as 2005 Barclays, a member of the British Bankers Association, submitted false quotes to Thompson-Reuters, the company responsible for calculating and disseminating the different LIBOR rates each day. The false quotes were designed to skew LIBOR upward, or downward, by precise amounts, so as to benefit the positions of Barclays traders against their counterparties. In doing so Barclays violated securities laws and committed a fraud that harmed countless other market participants relying on LIBOR to value their financial deals.

To date Barclays, UBS, and the Royal Bank of Scotland have all paid fines for manipulating LIBOR rates. A Japanese subsidiary of UBS even pled guilty to criminal charges, but regulators targeted only the Japanese subsidiary so as to leave the Swiss holding bank UBS legally unscathed. The fines for these three banks totaled only $2.5 billion, probably much less than they gained by manipulating various LIBOR rates for more than a half decade. None of the banks have been criminally charged. Even so, Judge Buchwald said that authorities are adequately investigating and punishing the financial companies, and that civil litigation to recoup money and impose penalties does little to advance justice.

During the Financial Crisis beginning in late 2007, and through 2010, the banks manipulated 1 and 3-Month LIBOR rates downward in order to both give the impression that they were weathering the global liquidity crisis, and that investors should not withdraw their money or sell bank stock. (LIBOR is supposed to gauge the rate of interest at which a bank can secure a dollar loan from one of its peers, so lower rates appear to indicate a healthier bank balance sheet.) As credit markets froze up in 2007 and 2008, the banks hunted for cash to close out trades on losing positions and settle hefty credit default swap obligations, among other ballooning liabilities. The banks extracted bigger payments from their counterparties on swaps, and other derivatives contracts that use LIBOR to calculate interest rate payments, by further depressing LIBOR.

Much of this cash was squeezed from cities, counties, public schools, public hospitals, public utilities, ports, airports, and other agencies that purchased interest rate swaps to convert variable rate bond debt into fixed rates. The manipulation of LIBOR since 2007 likely impacted swaps hedging hundreds of billions in public debt, causing billions in inflated payments by local governments to the banks.

The City of Baltimore was a big purchaser of interest rate swaps used to hedge bond debt. Baltimore also purchased and held other LIBOR-linked derivatives as investments. Baltimore lost millions of dollars as a result of LIBOR manipulation, and filed its lawsuit against the banks in August of 2011. Other local governments soon joined Baltimore, creating a class action group of plaintiffs that potentially included hundreds or thousands of local governments across the United States.

Bondholders and other securities investors filed their own separate lawsuits alleging fraud and damages due to the bankers’ conspiracy. All of these cases were consolidated before Judge Naomi Reice Buchwald in the Southern District Court, District of New York in 2012.

The local governments united behind Baltimore —including most recently the California cities of Richmond and Riverside, and counties of San Diego and San Mateo, as well as the East Bay Municipal Utility District, all of which filed their own lawsuits early in 2013— sought to recoup damages from the banks by using US anti-trust, and anti-racketeering laws under the Sherman Act, Clayton Act, and the RICO Act. Judge Buchwald ruled, however, that the Plaintiffs cannot sue under these laws because they have not sustained anti-trust damages, among other reasons.

With respect to the anti-trust allegations, Judge Buchwald argued that LIBOR was never a “market” rate that banks competed among one another to set. Instead, Buchwald notes, rightly in fact, that LIBOR was a non-market endeavor that did not reflect an actual rate the banks borrowed money at, but a rate at which the banks claimed they could borrow money from one another. Because the banks were not in competition with one another to produce LIBOR, they cannot be said to have suppressed competition, or manipulated the market. The damages sustained by local governments as a result of LIBOR rigging cannot technically be said to have resulted from an anti-trust conspiracy, said Buchwald.

So even though the banks dishonestly rigged LIBOR, resulting in huge financial damages to countless counterparties and investors, under Buchwald’s reasoning the banks have not violated the letter of the Sherman Act and US anti-trust law. According to Buchwald:

“Regardless of whether defendants’ conduct constituted a violation of the antitrust laws, plaintiffs may not bring suit unless they have suffered an “antitrust injury.”  An antitrust injury is an injury that results from an anticompetitive aspect of defendants’ conduct.   Here, although plaintiffs have alleged that defendants conspired to suppress LIBOR over a nearly three-year-long period and that they were injured as a result, they have not alleged that their injury resulted from any harm to competition.  The process by which banks submit LIBOR quotes to the BBA is not itself competitive, and plaintiffs have not alleged that defendants’ conduct had an anticompetitive effect in any market in which defendants compete.  Because plaintiffs have not alleged an antitrust injury, their federal antitrust claim is dismissed. “

This of course will come as a surprise to close observers of the financial system; LIBOR became the underlying interest rate of reference for the global derivatives market precisely because it was assumed that it was an honest determination of the rate of interest, or price, which banks charge one another to secure dollar denominated loans. Indeed the motives of some of the banks to depress their individual LIBOR quotes between 2007 and 2010 indicates that each bank’s individual quote was compared to other banks to gauge the company’s health, making it a somewhat competitive measure of credit worthiness. Countless financial workers, from CEOs to floor traders, have assumed for years now that LIBOR was a market rate. Even Bloomberg News, the financial industry’s favorite online news and data source, lists LIBOR under its “market data” tab.

But even if LIBOR had taken on some pseudo-market characteristics, and even though it was believed to be an honest determination of lending rates, Judge Buchwald is correct in noting that LIBOR was never a mechanism of the “free markets” which anti-trust laws are designed to regulate. Instead, as I have pointed out elsewhere, LIBOR was always “a club of powerful banks inventing the price of money, and expecting that other banks, corporations, and even sovereign states would accept their word.” This raises a fundamental question that the LIBOR lawsuits have proven incapable of addressing. Because they are predicated on anti-trust laws, these lawsuits assume free markets in which some participants abused ill-gotten power to distort otherwise fair prices. The current financial system is not a “free market,” and bank rates are inherently political in nature.

The second law around which Baltimore and other local governments built their case was the Racketeering Influenced and Corrupt Organizations Act, better known as RICO. Here Judge Buchwald ruled that the Plaintiffs have no case against the banks under RICO, first because of a 1995 law that virtually exempts financial criminals from being subject to RICO law, and because of the global nature of the crime.

The Private Securities Litigation Reform Act (PSLRA) was written by the financial industry and passed after an intensive lobbying effort that included spending millions on the elections campaigns of both Republican and Democratic Senators and Representatives by the world’s biggest banks. Under the PSLRA, crimes by financial companies that would otherwise be subject to RICO, are instead exempted under the rationale that they are better dealt with under securities fraud law.

The PSLRA also made it more difficult for scammed governments and customers to sue powerful financial companies; securities fraud lawsuits can only be filed and advanced with strong evidence of wrongdoing before trial. RICO lawsuits, on the other hand, can be filed with less evidence, relying on the pre-trial discovery process to turn up more facts and build a stronger case. This informational asymmetry that greatly disempowers the public, and small fish in the financial markets, and favors the big banks, brokers, and traders, was precisely the point of the PSLRA, and even though President Clinton vetoed the law upon its passage in 1995, the Congress, in a rare show of bi-partisan cooperation, and swimming in financial industry cash and influence, overturned his veto.

As if this legal roadblock isn’t enough to kill the RICO claims, Judge Buchwald added that the global nature of the LIBOR fraud exempts the crime and the criminals from prosecution under RICO. “RICO applies only domestically, meaning that the alleged “enterprise” must be a domestic enterprise,” ruled Buchwald in her decision. “However, the enterprise alleged by plaintiffs is based in England,” where the British Bankers Association is based, and where Eurodollar securities are traded. So in this case the global nature of the financial system serves to put the banks beyond the reach of the US law.

Judge Buchwald relied on other technical aspects of federal and state laws to dismiss the LIBOR Plaintiffs’ claims, including the the statute of limitations under the Commodities Exchange Act. The CEA’s statute of limitations is two years from the point in time that the harmed parties become aware of the potential crime. Under a complicated chain of reasoning including the publication dates of various press reports and academic articles raising doubt’s about LIBOR’s assumed validity, Judge Buchwald dismissed any claims against the banks stretching back to manipulation of LIBOR prior to May 29, 2008, and barred most other possible claims related to LIBOR manipulation before April 15, 2009, leaving virtually only instances of LIBOR rigging after that date as crimes that the Plaintiffs can sue for damages over.

The Plaintiffs bringing the LIBOR lawsuits forward could not be reached before press time, but they still have the ability to appeal the decision if they so choose.

LIBOR: Viewing the biggest financial crime in world history from California

The City of London, the world’s most central financial hub and site of the biggest Eurodollar money market which LIBOR was created to govern.

The importance of uncovering the complete truth about the LIBOR rigging conspiracy cannot be overstated for local communities across the United States, especially here in California.

It’s been five years since a few academics and journalists began to dig up evidence that something was wrong with the London Inter-Bank Offered Rate, or LIBOR (pronounced appropriately as “lie-bore.”) The data that curious researchers were compiling couldn’t be explained using the prevailing definition of what LIBOR supposedly was: a trustworthy interest rate that accurately gauged the market price of borrowed US dollars held overseas by the world’s biggest banks. Instead, their findings pointed toward something other than an idealized neoliberal market, influenced only by impersonal supply and demand forces. Many began to realize that the data could easily be explained if the banks were rigging the LIBOR rate in their favor. Strange discrepancies in LIBOR’s correlation to other rates, and to the economic fundamentals of the bank companies responsible for formulating the rate, showed something seriously amiss, but it made sense if the banks were cheating.

The motives of the banks have been clear from the beginning. A few banks that dominate the marketplace for derivatives stand to make billions if LIBOR moves in their favor on particular days when contractual payments between them and their customers come due. They therefore suppressed the rates in order to skim billions of dollars off derivatives and investments. Later these same banks suppressed LIBOR rates to create the illusion that their balance sheets were robust during the financial crisis. This also allowed them further rounds of money-siphoning from their unwitting derivatives customers.

Until recently LIBOR rates have been set by a panel of banks that are members of the British Bankers Association (BBA). The BBA is a private industry group established almost 100 years ago to lobby for the financial industry in one of its global hubs, London. The BBA really came into power in the mid-1980s with the creation of LIBOR. LIBOR was created to further integrate the giant global money market in US dollars held in overseas banks or holding companies, and therefore unregulated by the US Federal Reserve. Called “Eurodollars,” because they originally were dollar savings accumulated in European banks, especially banks in London, these funds quickly became a de facto global currency. LIBOR began as a way for the banks to standardize investment products for these vast pools of American dollars flowing through Europe, and later Japan, the Middle East, and Latin America. By the 1990s LIBOR had become such an important set of interest rates, and US dollars held overseas had becomes such an important source of credit for US consumers, that LIBOR became the key global interest rate around which many financial products were pegged. As LIBOR became more and more important to the globalization of finance, it accrued a sort of official, trusty gloss; nearly everyone assumed that LIBOR was a market rate reflecting competition. Instead, LIBOR has probably all along been a fudged rate, determined less by vast market forces and invisible hands, and more by the vulgar self-interest and power of the elite banks that set LIBOR rates.

Last year government investigations into this globe-spanning crime —rightly called the biggest financial scam in all of history— led to multi-billion dollar fines against Barclays, the Royal Bank of Scotland, and UBS, the 7th, 8th, and 20th largest banks in the world, respectively. Criminal investigations spearheaded by US, UK, Japanese, Canadian, Swiss, and Singaporean authorities are ongoing and aimed at other banks such as Citigroup, JP Morgan, Bank of America, and other “too big to fail” institutions. More details of the crime will be forthcoming as e-mails, internal documents, phone tapes, text messages, and other evidence, is made public, and as the banks are forced to pay significant fines, and sign plea agreements.

While this scandal might seem worlds away, concerning complex financial concepts and obscure money market instruments dealt by bankers out of skyscraper offices in the City of London, the importance of uncovering the complete truth about the LIBOR rigging conspiracy cannot be overstated for local communities across the United States, especially here in California.

Why? First, LIBOR has been used since the 1990s to determine cash flows on interest rate swaps that local governments have purchased from banks to insure themselves against wild swings in variable interest rates owed on billions of municipal debt. Messing with LIBOR messes with the payments due on these instruments.

Second, LIBOR has also been used as a main interest rate of reference for an array of investment products that yield a variable return, dipping and rising in concert with LIBOR. Local and state governments have used these investment products, called “municipal derivatives reinvestment products” to temporarily park public funds, while pension systems and government enterprises like utilities use them make investments. Governments and public agencies earn LIBOR rate returns on their dollars invested in numerous kinds of municipal derivatives, so if LIBOR is illegally fixed downward, they earn less income.

Through both of these forms of exposure, local governments have potentially been harmed by LIBOR-fixing perpetrated by the banks, often times the very same banks that have sold them swaps or municipal derivatives investment products.

California is fast emerging as a center of investigation and litigation into the LIBOR-fixing conspiracy. California is the largest single municipal debt market in the United States, and one of the largest in the world. Last year alone the state of California and its cities, counties, school districts, and other public entities issued $65.7 billion in total public debt. Because of California’s regressive tax structure and chronic budget crises, the state’s multitude of governments have been among the most aggressive in issuing variable rate debt hedged with interest rate swaps.

The Golden State’s local governments have also been the largest purchasers of municipal derivatives contracts from banks because streams of tax and fee revenues often don’t match up with the dates that payments to public employees and contractors come due. Collusive suppression of LIBOR rates by the 16-member panel who were trusted to provide accurate quotes could mean that California local governments have paid untold millions to their interest rate swap counterparties (the banks) that should otherwise have remained in budgets and used to fund school construction, bus lines, street paving, water and sewerage services, etc.

In the 1990s and 2000s local governments across California increasingly issued bonds with variable rates. Investment bank underwriters and municipal debt advisers from the private sector encouraged variable rate bond financing because it promised lower interest rates for California’s cash-strapped municipalities. To hedge against the risk that variable rates might explode, as they did in the 1980s, the banks sold interest rate swaps to local governments. The swaps effectively converted floating rate debt into a fixed rate. Under a typical swap contract the bank seller agrees to pay a floating rate designed to mimic the variable rate interest on the bond debt, and in return the local government agrees to pay a fixed rate. I’ve written elsewhere about how this deal blew up and created a financial injustice when variable interest rates plummeted during and after the Financial Crisis, but the LIBOR rigging conspiracy adds to these harms. The US government bailed out the banks and assisted them in taking “toxic” derivatives assets off their hands, but stood idly by while cities, counties, and public agencies suffered without aid during the Financial Crisis, allowing derivatives instruments on the public’s books to blow up and drain budgets. At this very moment the banks perpetrated an illegal scam to suck even more money from the public via further depression of LIBOR.

Barclays, RBS, UBS, and other banks worked together to suppress LIBOR below even the depths to which it sank after 2008. A number of lawsuits filed by various cities, counties, and public agencies in California asserts the banks did this to skim off an unknown, but very large, amount of money from their public victims, and also to bolster their own balance sheets during the crisis. By suppressing LIBOR the banks ensured that the net difference between the variable rates they owed, and the fixed rates the public was paying on swaps, was wider than it would otherwise have been. This net difference meant that the public owed the banks higher amounts when the interest rate swap payments came due (usually twice a year).

For San Francisco this could mean that millions have been stolen from the capital budget of its Airport. SFO currently has seven interest rate swaps it has purchased to convert variable rate bond debt into synthetic fixed rates. The airport’s counterparties on its swaps included JP Morgan Chase, Merrill Lynch (owned by Bank of America), and Goldman Sachs. Each of these banks likely benefited from conspiratorial suppression of LIBOR, even if it was by just a few basis points (hundredths of a percent). JP Morgan Chase and Merrill’s parent Bank of America are both members of the panel that sets LIBOR, and are both believed to have played a role in the conspiracy.

San Francisco’s pension system may have also been raided by the banks through its speculative investments in swaps. According to the most recent audit of the San Francisco Retirement System’s portfolio, the city’s pension system holds two interest rate swaps on its books with a notional value of $15 million. In prior years, SFERs held other swaps. In 2010, the Retirement System’s audit showed three interest rate swaps with a total notional value of $41 million. Over the last two years these swaps drained $5.3 million from the pension system, and some of these losses might have been due to the downward manipulation of LIBOR. Also on the Retirement System’s books are other investments in bank loans, options, and other securities that might have been impacted by the LIBOR fraud.

San Francisco’s LIBOR damages are probably small in comparison to other local governments and public agencies. The East Bay Municipal Utility District has already filed a lawsuit in federal court alleging damages from bank rigging of LIBOR. The water district’s complaint, filed in January of 2013, alleges that LIBOR suppression drained potentially millions, again from interest rate swap agreements with some of the very banks that sit on the LIBOR-panel: Citibank, JP Morgan Chase, and Bank of America. East Bay MUD lists nine interest rate swaps potentially affected by LIBOR rigging in its lawsuit.

East Bay MUD’s swaps had a total notional amount of $481 million in 2012, according to the utility’s most recent financial report. Downward manipulation of LIBOR by just 10 to 50 basis points (1/10th to 1/2 of a percent) could have drained between $481,000 to $2,400,000 through East Bay MUD’s swap payments every six months. Over a few years, say the conspiracy’s 2007-2010 time-frame alleged in EBMUD’s lawsuit, this would add up to millions of dollars stolen by the banks.

The cities of Richmond, San Diego, and Riverside, and the County of San Mateo, are other California governments that have now filed lawsuits against the banks responsible for setting LIBOR. All of these lawsuits have been consolidated into a larger class action case currently being heard in the U.S. District Court, Southern District of New York, before Judge Naomi Buchwald. There are now about two dozen LIBOR manipulation lawsuits that have been filed and consolidated in New York. The lead case is the City of Baltimore and the New Britain Firefighters’ and Police Benefit Fund lawsuit against the 16-bank LIBOR panel, filed in April of 2012.

More California cities, counties, and public agencies are expected to file their own lawsuits soon, however. CalPERS, which has numerous investments that fluctuate in value and yield with LIBOR, is also said to be investigating its own exposure to rate rigging.