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

As previously covered here, Baltimore and a number of other municipal governments are suing Barclays Bank in connection with its LIBOR benchmark interest manipulations. (See: Saturday, July 14, 2012, Will The Empire State Development Corporation (ESD), The MTA, NYC And New York State Sue Barclays Bank?) It therefore seemed logical for me to wonder whether the state’s Empire State Development agency and other state and local governments in New York would also similarly be suing Barclays. Contacting the MTA I found the agency already had on hand a prepared statement to the effect that its legal counsel was reviewing and would vigorously pursue its legal options in this regard:
“The MTA has asked its legal counsel to review its options in relation to the LIBOR scandal, and will vigorously pursue all available legal actions. We are outraged about the apparent market manipulation, and will always do everything possible to protect the MTA.”
(See: 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”.)

In addition, the New York State Attorney General's office is conducting an investigation into the manipulations’ financial harm to New York. That investigation is currently being conducted jointly with Connecticut’s attorney general with the AG’s office confirming that the “joint investigation could soon spread to other states.” (See: New York AG probing LIBOR scandal: Eric Schneiderman's investigation could reveal whether banks violated state anti-trust and fraud laws by manipulating the London Interbank Offered Rate, by Shane Dixon Kavanaugh, July 16, 2012.)

New York Attorney General Schneiderman’s office has released a statement that says:
“Working together, the New York and Connecticut attorneys general have been looking into these issues for over six months and will continue to follow the facts wherever they may lead.”
The above quoted Crain’s article echos my previous columns about Barclays' potential liability, saying the implicated financial institutions could be “on the hook for hundreds of billions of dollars.”

(* Matt Taibbi says that the “scale is just mind-boggling. Every town and municipality in America probably has investment holdings that are pegged to LIBOR. I think The Wall Street Journal calculated $800 trillion of financial products.” $800 trillion of loans and derivatives worldwide was the figure being used in NPR coverage yesterday.)

The Attorney General’s investigation and assessment of “whether New York suffered losses from the alleged rate-rigging scheme by banks” must mean that it is talking with all affected city and state financial agencies. They would have to be in such communication in order to be effective in answering the questions that need to be asked. I’ve contacted the Attorney General’s office with a media inquiry to confirm this but they have so far avoided getting back to me. I won’t take it personally as the Crains’ article indicates that the office also avoided getting back to Crains.

This gets me back to the original question: Is ESD, the state agency that financed the “Barclays” Center (the Ratner/Prokhorov basketball arena), going to be among the growing list of government entities that sue Barclays?

ESD’s press office confirmed to me that the question is in fact “being reviewed by our counsel’s office.” In other words, in that respect they are like the MTA.

I also asked whether ESD would, alongside the MTA, confirm:
• That ESD is similarly outraged about the apparent market manipulation.


• That ESD is similarly committed to do everything possible to protect ESD.
The press office’s response was that ESD “cannot comment further at this time.”

Given the pending opening of the Ratner/Prokhorov “Barclays Center” which will involve a lot of hoopla and PR playing up the Barclays name it is clear why ESD is naturally loath to excoriate the Barclay Bank at this time. ESD probably also has plenty of reason to hope that the “Barclays” is somehow is exonerated or that the bank gets off lightly in terms of the PR price it pays. Is it unfair to think that such hopes would have any possible effect on the vigor with which ESD might pursue this matter or affect the timing of its actions so that any actions ESD takes against Barclays does not coincide with the grand opening of the arena with that name that ESD itself financed?

It must certainly come up in the conversations about the implications of ESD’s actions, as I pointed out in a fly-on-the-wall (wouldn’t you love to be?) comment in my first post on this subject, speculating about the meetings that senior management and counsel at the affected government agencies must be having as they consider their obligations to recover losses for New York taxpayers.

A reader suggested to me that for clarity’s sake I reiterate from my first column the many ways that Barclays may be legally liable to the government financing agencies for the bank's rate manipulations. I am repeating from that column the bullets below. As you review them you see the importance of affirmative good faith assistance from an agency like ESD in order for investigations like the Attorney General’s to be fully effective. (This list is only a starter list):
• The financing agencies may have invested in bank instruments that paid them a lower rate of interest.

• The rate that the agencies received from developers paying loans may have been dragged artificially low.

• The agencies themselves may have paid lower interest rates on their own municipal bond obligations, but even if this was superficially to their benefit it may now make them liable to their bondholders and when sued by those bondholders they may have to legally implead (i.e. sue, or cross sue) Barclays as a result.

• Financial transactions are sufficiently complex these days so that it takes a fair amount of unraveling before all the implications of a manipulation like this can be fully assessed in terms of Barclays likely liability to the government agencies. For instance, even if the rate an agency itself was obligated to pay on its own bonds might have been lowered by Barclays shenanigans the agency (or maybe developers the agencies were assisting) might have ventured into the questionable risk of rate-swapping agreements whereby the net result was a more significant injury.
I have been in touch with other New York government agencies about whether they will be suing Barclays. I will report on my communications with the State Comptrollers Office and the City Comptrollers Office in a follow-up article: I still have some outstanding questions for which I am seeking answers.

One other agency from which I did receive a response of sorts is the New York City Housing Development Corporation. HDC is planning to issue more bonds to finance Forest City Ratner’s proposed Atlantic Yards mega-monopoly (approximately $92 million additional bonds plus providing significant additional subsidy in an unspecified amount) for a building that will structurally and reputationally be a part of the “Barclays” arena. Yesterday, at HDC’s hearing about whether to issue those bonds I testified that before making its decision about issuing such bonds the HDC board should be thoroughly informed about “all the possible lawsuits against Barclays that may or will be brought by HDC and other agencies.” The HDC board includes* the city’s Director of the Budget and Commissioner of Finance. These city officials, though appointed by Mayor Bloomberg, a friend of the banking community, should care about these things.

(* The City Comptroller, John C. Liu, is not on the board but should have jurisdictional review powers he may want to exercise in this regard.)

Will HDC's legal counsel review and vigorously pursue its legal options in relation to the LIBOR scandal like the MTA ‘s? Will it be reviewing the question like ESD’s counsel? The response from HDC Press Secretary Eric Bederman when I made inquiry specifically in reference to the hearing, prior thereto:
“HDC declines to comment on these issues at this time.”
One would certainly hope that HDC would not shirk its responsibilities to protect the taxpayers merely because it would generate bad PR in connection with a Bloomberg-supported building it is financing.

This next building for which tax-empt bonds are proposed to be issued together with the adjoining “Barclays” arena itself and all of the proposed Atlantic Yards are being financed by the coordinated efforts of the ESD, the MTA, and HDC (plus a lot of money from the city itself). I suppose that to be assured that two out of three of these financing agencies are looking at the question of suing Barclays Bank to recover losses from the LIBOR rate manipulation is pretty good. Let’s see how things stand the day of opening ceremonies for the Ratner/Prokhorov “Barclays” arena.

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