The Noticing New York coverage suggested that Bloomberg might be going out on a limb when he stated, after being briefed on the subject by Mark Page, his budget director, that any losses for which the city might sue would be a “de minimis amount of money.”
At the moment that’s what the mayor has said but other government officials, including the office of John Liu, the city comptroller, aren’t backing Bloomberg up with any similar assessment that city losses will be “de minimis.”
The NYC Comptroller’s Office
A spokesman for Comptroller Liu informed Noticing New York that Liu’s office is “closely monitoring developments and are keeping all our options on the table as the financial scope of the suspected manipulations is determined.” That seems reasonable as the New York State Attorney General is conducting a joint investigation with the Connecticut Attorney General that could soon be joined in by other states’ attorneys general and has vowed to “follow the facts wherever they may lead.”
Following up on the mayor’s remarks I asked Liu’s office whether his office could confirm the mayor’s statement that any losses the city may suffer from the LIBOR manipulation will be “de minimis.” Asking Liu’s office for such a confirming assessment makes sense since Liu’s office monitors the city’s finances and is supposed to be looking over the mayor’s shoulder to ensure the mayor’s proper management of the same. In addition, given that pension funds are usually among the funds most quickly cited as likely to have sustained appreciable losses as a consequence of the rate manipulation and the Comptroller’s office has responsibilities for the city pension fund I asked whether Liu’s office could confirm that any losses for any of the other funds for which the Comptroller has responsibilities, including the city pension fund, will be “de minimis”?
A spokesman for Liu, characterizing the situation as “fluid,” stated that the office was unable to provide confirmation on either of these questions. When Bloomberg said that the city would only have “de minimis” losses did he mean just the city standing alone in the most technical sense or did he also mean the city pension fund and other technically separate city agencies that are nonetheless tied in with the city’s financial health? One can only guess. To be fair, the Comptroller’s office was altogether more cautiously timid than Bloomberg, not even willing to confirm that it has lawyers looking at the lawsuits that Bloomberg has already publicly proclaimed are possible.
The New York City Housing Development Corporation
The New York City Housing Development Corporation (“HDC”) is one city agency that could suffer losses due to the LIBOR scandal without those losses being technically considered losses suffered by the city itself. HDC is looking at issuing more bonds for a new residential building furthering Forest City Ratner’s envisioned Atlantic Yards mega-monopoly. Noticing New York gave recent testimony on the proposed bond issuance that, among other things, went into the connection of the proposed bond issuance to the LIBOR scandal issue. The new building would be on the same block as the “Barclays” Center and would be structurally and reputationally integrated with it.
Noticing New York contacted HDC and, like the Comptroller’s Office, HDC would not confirm that any losses suffered by HDC or its bondholders from the LIBOR manipulation will be “de minimis.” Mark Page, the city’s budget director with whom mayor Bloomberg conferred before characterizing any possible city losses as “de minimis” is on HDC’s board. If after talking with Budget Director Page Bloomberg meant to say that the city would not incur any significant losses in big picture terms he would presumably have been representing that HDC as part of that big picture was not expected to incur any losses. That would seemingly make it a no-brainer for HDC (which HDC board member Mark Page should have checked in with to make such an assessment) to confirm that all its possible losses will be “de minimis.” But it didn’t.*
(* Here is one semi-absurd possible background explanation to contemplate: HDC foresees possibly significant losses which the city budget director believes will be cancelled out for the city in big picture terms by ways LIBOR rate manipulation may have benefitted other city financial activities. There will be more on the complexity of calculating net losses later in this article.)
When HDC would not confirm that any losses suffered by HDC or its bondholders from the LIBOR manipulation will be “de minimis” I had a follow-up question to put to the agency the next day:
Can HDC confirm that if any losses suffered by HDC or its bondholders are substantial there will be no effect or reduction in subsidies available for HDC projects, including perhaps, but not limited to, subsidy for projects like the Forest City Ratner Building ("Building 2") that HDC held a hearing about last Wednesday?HDC declined to provide me with a confirmation that any substantial losses suffered by HDC or its bondholders would not reduce available housing subsidies.
The Metropolitan Transportation Authority
The Metropolitan Transportation Authority (MTA) is another agency that, as a public authority, is technically distinct from the city itself. Nevertheless, its financial health and finances do interrelate with the city’s and, once again, NYC Budget Director Mark Page is on the MTA’s board to represent the mayor.
The MTA’s spokesperson previously confirmed to Noticing New York that the MTA’s legal counsel was reviewing options in relation to the LIBOR scandal, and would “vigorously pursue all available legal actions” and “do everything possible to protect the MTA.” Following up on the mayor’s assurance of “de minimis” NYC losses I asked whether the MTA could confirm tha any losses that the MTA or its bondholders may suffer as a result of the Barclays Bank LIBOR scandal will be “de minimis”. The MTA’s spokesman responded by saying, “the Mayor speaks for the City of New York” and then, observing the above noted distinction that the MTA’s public authority status makes it a technically separate financial entity, stated, “The MTA is a separate entity under the State of New York, and our debt is not a part of the City government’s debt. The City’s debt portfolio and the MTA’s debt portfolio have different characteristics.” Rather than confirm that losses will be minimal the statement provided by the spokesman is that, “The MTA is continuing to analyze the matter and is not yet ready to make a pronouncement about the extent of any potential loses.”
Bloomberg possibly did not mean to include the MTA in the big picture of whether New York City’s LIBOR losses will be “de minimis” but if he did, the absence of substantial possible losses in this bigger picture is not something the MTA is willing to confirm.
Agencies Providing Substantial Subsidized Financing to Atlantic Yards and “Barclays” Center
New York City, HDC and the MTA constitute three out of four of the local government entities providing substantial subsidized financing to the “Barclays” Center and the Atlantic Yards mega-monopoly in a variety of ways: tax-empt bonds, land value write-downs, deferred collection for purchase prices, direct cash, exemption from paying real estate taxes, etc. The forth such agency financing the “Barclays” Center and the Atlantic Yards mega-monopoly is Empire State Development the state agency (and public authority) that is the eminent domain-abusing mega-project’s lead sponsor.
Empire State Development
Following up on the mayor’s minimizing characterization I asked ESD whether it was willing to confirm that any losses that it (or other agencies for which it serves as umbrella) may suffer as a result of the Barclays Bank LIBOR scandal will be “de minimis”? I couldn’t get such a confirmation from ESD either. ESD’s spokesman responded that ESD stood by its previous response that “The matter is being reviewed by our counsel’s office and we cannot comment further at this time.”
I did not ask either the MTA or ESD whether substantial losses, if they occur, would affect the level of funds at their disposal to subsidize and finance New York City projects but it is a pretty safe bet that the MTA, ESD and HDC would all be affected in this regard if they incur substantial losses.
New York State Comptroller
The New York State Comptroller is similarly situate to the New York City Comptroller, given that the New York Sate Comptroller has responsibilities with respect to investment and management of the state pension fund. As I noted above, pension funds are usually among funds most quickly cited as likely to have sustained appreciable losses as a consequence of the rate manipulation.
When I first inquired about whether the State Comptroller was looking at suing Barclays over LIBOR manipulation the spokesperson for the State Comptroller provided a statement that The Comptroller's Office “is monitoring the situation as it unfolds. Until there is a determination as to the extent of the effect that any manipulation actually had on rates and the time period it occurred it is premature to make an assessment regarding the direct or indirect impact on the state.” When I asked for confirmation that the office was in touch with or reaching out to communicate with other state agencies (including any of those it supervises and regulates) about this subject I was told only that, “We will disclose information relating to LIBOR at the appropriate time.” One of the agencies over which the State Comptroller exercises oversight is ESD, mentioned above.
When Bloomberg went public with the fact that he envisioned the city would sue about LIBOR I asked whether the Comptroller would, given that fact, confirm like the MTA and ESD that it had counsel looking at the possibility of suing Barclays Banks in connection with the LIBOR rate manipulation scandal. They weren’t willing to do so.
And I asked whether the Comptroller could confirm that any losses for any of the other funds for which the Comptroller has responsibilities (including the state pension fund) will be de minimis. The office was not willing to do so.
Has the State Comptroller’s Office been contacted by legislators wanting assurance that that office is monitoring possible state losses and ready to sue as appropriate to protect state interests? I don’t know; they wouldn’t tell me that either.
State Attorney General’s Office and State Comptroller
In actuality, maybe I didn’t need to go to the State Comptrollers office to get these confirmations that they weren’t giving me. I haven’t yet been able to get the New York State Attorney General’s Office to exchange communications with Noticing New York about the LIBOR scandal, but Attorney General Eric Schneiderman was on the Brian Lehrer show yesterday talking about exactly this. Brian Lehrer asked Schneiderman about the Wall Street Journal’s report that Schneiderman was investigating whether New Yorkers have incurred losses as a result of the LIBOR rate manipulations (at about 12:20 in segment). Lehrer asked Schneiderman whether the state pension fund was a possible victim or what else might have lost money due to the fraud. Schneiderman said, “Anyone could have lost money” due to the artificiality of the rates (at different times rates were manipulated both up and down for the benefit of the bank) and said that it was a “broad investigation” and that “there are a lot of agencies that are involved” and said that it was a global issue with investigations all over the world. Prompted by Lehrer he said that figuring out who to sue was one of his challenges (there are fourteen banks involved.)
Schneiderman did make the point (as we will get to in a moment) that “the damages on this are tricky to assess.” Schneiderman didn’t specifically say he was in touch with the State Comptroller’s Office. Has Schneiderman been in communication with the Sate Comptrollers’s office about the pension fund while putting together his assessments? It is probably a sound instinct to think that he was.
What is true vis-à-vis the State Comptroller, the state pension fund and losses is likely also to be true vis-à-vis losses and the City Comptroller and the city pension fund.
New York City Economic Development Corporation, New York City Industrial Development Agency, New York City Capital Resource Corporation and Build New York City Resource Corporation
I asked the city development agencies functioning in consolidation with the New York City Economic Development Corporation (also the New York City Industrial Development Agency, New York City Capital Resource Corporation and Build New York City Resource Corporation) whether they had legal counsel looking at the question of suing Barclays Bank in connection with the LIBOR rate manipulation scandal, given that the MTA and the Empire State Development agency have now confirmed that they have legal counsel looking at the possibility of suing Barclays Bank in connection with the LIBOR rate manipulation scandal and given that Mayor Bloomberg said he considers it is possible the city will be suing.
I also asked whether EDC (and NYCEDC, NYCIDA, NYCCRC) could confirm that any losses suffered by EDC (and NYCEDC, NYCIDA, NYCCRC) or bondholders of the agencies due to LIBOR manipulations would be de minimis?
I received an interestingly qualified and technical response from their spokesperson about how and why the agencies would not be “directly” impacted:
“New York City Economic Development Corporation does not borrow and it has very few loans outstanding, all of which are at fixed rates of interest. New York City Industrial Development Agency, New York City Capital Resource Corporation and Build New York City Resource Corporation are conduit issuers. As conduit issuers they are not directly impacted by the questions relating to LIBOR quotations.”It takes some financial bond structuring knowledge to understand the technical concept of “conduit issuer” being invoked here. What it means is that even though a government agency is the issuer of bonds for purposes of gaining the privilege of issuing bonds that are triple tax-empt (from federal state and city income taxes) the issuer structures that bond issuance as a non-recourse transaction pledging no more than the asset being financed (and its revenue) and allowing the agency that is technically the issuer to stand at a remove from the transaction, intending that it not itself be liable for payment on the bonds and theoretically insulated from any possible losses that may be incurred in connection with the transaction. In other words bond proceeds go to a developer and the developer agrees to pay back the bond holders and the “issuing” agency stands conceptually on the sidelines as a somewhat passive witness to that money going back and forth. Ergo, there is the idea that the “conduit issuer” is incapable of having “direct” losses. (Even though it stands conceptually on the sidelines the “conduit issuer” usually receives fees for lending its tax-empt status.)
Here is a legal nicety, a distinction with no practical difference: You can have two “conduit issuer” structures that are for all intents and purposes identical but in one case title to all of the financed assets and revenues would be held by a bond trustee, but in another title would be held by issuing agency but pledged to a trustee. In the first situation it would be easier to make a technical assertion that the “conduit issuer” was incapable of sustaining a direct a loss.
None of this is to say that a “conduit issuer’s” bondholders would not be sustaining losses if LIBOR was manipulated, nor that the developer wouldn’t sustain losses which might result from losses on invested bond funds, losses in connection with the project loan rate, or losses from a swap derivative intended to lay off risk. And this is not meant to say that even a “conduit issuer” would be immune from resulting lawsuits or absolutely free to ignore obligations to sue to make sure that the its bond resolutions and indentures were contractually honored. Indirect losses could involve incurring legal fees to protect bondholders. In a collapsing transaction the issuer might also find its fees don’t get paid. Some “conduit issuers” might hope that all losses associated with protection of its bondholders would be shouldered by the bond trustee and/or the outside professional who structured the transactions: But would that be the case?
One last thing: The implication that LIBOR has no possible influence on the determination of a fixed rate of interest might not be entirely correct.
Difficulty of Making a Quick Assessment (Like Bloomberg’s) of the Level of Damages
One of the reasons no one (other than Mayor Bloomberg) is jumping up to furnish assurance that LIBOR losses will be minimal is because it is so complicated to sort out where LIBOR losses will fall and how to calculate them. One thing that’s true is that any one entity may at the same or different times have experienced both benefit and losses in connection with LIBOR manipulations (and remember again that rates were also manipulated both up an down). Where there is both benefit and loss it can be argued (along the lines of Bloomberg’s own argument in this respect) that things should be considered a wash or at least netted out. Alternatively, a party might find that it is incumbent for it to be both a defendant party in one or more lawsuits where it incurred benefit and a plaintiff party in lawsuits where it incurred losses. (Conduit transactions might actually complicate and preclude treating as a wash or netting out benefits and losses that have thus been legally compartmentalized.) In other words, it’s potentially very messy and difficult to sort out, but recognize at least that whether one is a plaintiff or defendant lawsuits just aren't fun.
Yesterday, some of the difficulty in assessing where the losses were was discussed on a Brian Lehrer show segment in which Matthew Goldstein, the editor in charge of Wall Street Investigations for Reuters, was being interviewed about pending arrests in the rate-fixing scandal (including NYC Barclays traders). (See: The Brian Lehrer Show:Will the LIBOR Scandal Lead to Arrests? Wednesday, July 25, 2012.)
At one point in this discussion (10:15 in the recording) Brian Lehrer somewhat paraphrased Bloomberg’s expression* of his minimizing “wash” theory:
I think Mayor Bloomberg has said that with the different kinds of banks and investors here it may be a net wash for New York with those who gained and those who lost from the manipulation. On the other hand, we have Attorney General for new York State Eric Schneiderman coming on later in the program and reportedly he’s investigating at least the possibility of filing civil suits against some banks because I guess the New York State pension fund would have lost money if these interest rate rates were, you know, manipulated below the market.
(* It could be that Brian Lehrer was listening to his home WYNC when the station broadcast the story quoting Bloomberg, but if he wasn’t I’d like to think Lehrer was reading Noticing New York: As WNYC didn’t post the Bloomberg story on the web the only place it is available on the web is in Noticing New York’s republication of what I consider an important story.)Around Lehrer's paraphrasing, Goldstein had some assessments of the “wash” concept and its complexity, when asked by Lehrer who the victims were (at about 8:50 in the recording):
I may be somewhat different from some of my other journalistic colleagues. I’m not convinced that there were a lot of victims.- Or, it’s difficult to identify the victims because obviously there were pension funds that invested in some of these sorts of interest rate sensitive securities that were tied to LIBOR but if LIBOR is being manipulated on one level you may have benefitted on another level. I mean keeping LIBOR low can actually help someone getting a loan, you know a lot of loans are tied as a benchmark. So I think that in terms of the dollars and cents of who got hurt we will definitely see litigation but there will be a deeper analysis: OK maybe you got hurt on this transaction but did you get helped on another? . . .Hot topic that the LIBOR fraud is, on today’s Brian Lehrer show the benefit vs. harm possible wash came up again in another segment (See: July 26, 2012, The Brian Lehrer Show: Washington Grills the Banks, Thursday, July 26, 2012.) where it got a less endorsing assessment from Wall Street Journal economic policy reporter Damian Paletta (at about 14:00 in the recording):
. . . You don’t want to have a system where people can game the system even if the actual harm to investors may not be in, individual things, large; it’s the idea that there is a select class that can sort of change the rules as they want. . .
. . . people have been arguing this and those cases are working though. I just think at the end of the day it will be difficult to identify - - And I’ve talked to other lawyers on this and they can argue it on both sides- - and I would expect an attorney general to be aggressive in pushing it – but, you know if a pension fund were also involved in doing some sort of borrowing that it needed or some sort of leveraged loans that it invested in it could have benefitted. I think the litigation is going to be an interesting analysis behind how it actually all plays out.
Paletta: There are a lot of cities who have filed lawsuits because they feel like they have really gotten screwed and quite frankly a lot of these cities are in really tough financial shape right now so the impact on them might be pretty severe. So I think it’s going to take time for us to kind of find out who the victims are here, because this is a little bit strange how the LIBOR impacts everyone’s life, but there’s definitely folks on either side of this and I think it’s going to take some time for it all to sort of shake out.Given what a mess this is you can see why government officials are not providing assurance that manipulation losses will be minimal. While the losses will, in the end, need to be calculated, Attorney General Schneiderman also made clear in his interview yesterday that there will be crimes he can criminally prosecute whether or not substantial losses get identified.
Lehrer responded: No matter who the victims turn out to be it was still people at the top of the biggest banks deciding that for their own purposes they were going to manipulate interest rates, and lie about interest rates and cover up what the true interest rates should have been. .not thinking about the 99% or even their other competitors; in the 1%.
Still, the question raised here is whether Mayor Bloomberg went out on a limb to trivialize the possibility of New York City losses as a result of the rate manipulation. Bottom line, I think it’s clear that he did. Quite rightfully, other government officials are not backing him up (even though there is plenty of reason for them to want to if they could).
Maybe when the “Barclays” Center arena opens in the fall and Bloomberg has the urge to attend it we will have the spectacle of a number of government agencies simultaneously suing Barclays Bank for substantial losses. Maybe we won't yet have gotten to that stage and there won’t yet be many New York government agencies suing Barclays. Maybe the defining clarity of that moment will only come from Barclays traders being criminally prosecuted for self-interested rate manipulation. Rather than make a rushed assessment, let's just wait and see.
Below, in reverse chronological order is all of Noticing New York's prior coverage on this topic:
• FRIDAY, JULY 20, 2012, “Barclays” Center Opening Pending, Bloomberg De-Minimizes Envisioned New York City Lawsuit Against Barclays Bank. Is He Out On A Limb?
• THURSDAY, JULY 19, 2012, “Barclays” Center Opening Pending, Will Empire State Development Sue Barclays Bank?: ESD Says The Question Is Being Reviewed By ESD Counsel’s Office
• TUESDAY, JULY 17, 2012, Will The MTA Sue Barclays Bank Over LIBOR Rate Manipulation Scandal? MTA Says It Will “Vigorously Pursue All Available Legal Actions”
• SATURDAY, JULY 14, 2012, Will The Empire State Development Corporation (ESD), The MTA, NYC And New York State Sue Barclays Bank?