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?

With a significant amount of New York City government hoopla about to be unleashed with respect to the opening of the “Barclays” Center (i.e. the Ratner/Prokhorov basketball arena for the Nets) Mayor Bloomberg may be going out on a limb to minimize the story about how NYC could be suing Barclays Bank at pretty much the same time. Baltimore and other municipalities are suing Barclays Bank for its rate manipulation in the LIBOR scandal, but Bloomberg is taking the position that New York, a much bigger city than Baltimore, the financial capital of country and a leader in doing government financing in terms of both scale and complexity is only likely to have “de minimis” losses because of Barclays . . . but Bloomberg is nevertheless envisioning that NYC may very well be participating in lawsuits against Barclays.

The story about the Mayor’s consultation with his budget director Mark Page was on WNYC yesterday evening. Noticing New York is providing WNYC's entire story below since it is not otherwise available on the internet:
Mayor Bloomberg says the city may have lost money due to rate tampering by large banks. But he doesn't believe the losses were large. Mark Page, Director of the Office of Management and Budget, briefed the Mayor this morning on the city's potential exposure. The city has swaps agreements on construction bonds, linked to a key interest rate that may have been manipulated.
Cut to clip of Mayor Bloomberg himself:

“If the rate went down some city debt would be adversely impacted, and some city debt would be favorably impacted. If there are class action suits, we'll join em, but it would be a de minimis amount of money.”
It's the first time the Mayor has spoken on the subject since Barclays Bank admitted it tampered with the benchmark London Interbank Offered Rate, or LIBOR.
Is Bloomberg paying attention to Noticing New York’s inquiries about what government agencies will be suing Barclays? Bloomberg’s quick and dismissive assessment of the lawsuit situation comes just two days after the New York City Housing Development Corporation (“HDC”), a Bloomberg-controlled financing agency and one of the biggest municipal bond-issuing agencies in the country, declined to comment when Noticing New York inquired if that agency would be suing Barclays (quote: “HDC declines to comment on these issues at this time.”)

On Wednesday HDC held a hearing respecting its proposal to issue bonds for a building that will be structurally and reputationally a part of the “Barclays” arena. HDC is proposing to issue approximately $92 million in additional bonds, secured by the new building, to finance Forest City Ratner’s proposed Atlantic Yards mega-monopoly. It also plans to provide the Forest City Ratner building with a significant amount of subsidy in addition to those bonds but did not publicly disclose what the amount of that subsidy (or even a ballpark figure) would be before the hearing being held to take comment on the financing (and the amount is still unknown). Noticing New York provided testimony at the hearing opposing the issuance of those bonds.

The mayor says the city may be suing Barclays. At the same time HDC, a city agency accountable to Bloomberg through his appointees, is mum about whether it will be suing Barclays but earlier Noticing New York stories covered the fact that the counsel for two of the other agencies financing Atlantic Yards and the “Barclays” arena, the MTA and Empire State Development, are considering the possibility of suing Barclays. That means that at least three out of four of the principal financing agencies for “Barclays” arena block are looking at suing Barclays Bank. Despite HDC’s being mum on the subject it is probably four out of four. And the New York State Attorney General is investigating Barclays together with the Connecticut Attorney General, perhaps soon to be joining with other states’ attorneys general as well.

Here is Noticing New York’s prior coverage to date on the above (in reverse chronological order):
• 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?
It’s clear why Mayor Michael Bloomberg wouldn’t want to play up a possible city lawsuit against Barclays. Whatever the losses to the city occasioned by Barclays Bank's misconduct, the city has invested a flabbergasting sum in the “Barclays” arena itself. Hundreds of millions of direct New York City cash subsidy has so far been given to the Atlantic Yards mega-monopoly and the Barclays arena (replacing properties that were actually taxpaying and plans for more) will also be off the city tax rolls so the cost to the city of just the arena is up close to around one billion dollars. No matter how conservatively you calculate the net loss it is in the hundreds of millions of dollars.

Further, in writing about this before I raised the question about whether city assessment of the situation might be affected by how much Mayor Bloomberg is “a friend of the banking community.” In connection with previous “Barclays” arena promotion hoopla Bloomberg saluted Bob Diamond, the Barclays president who recently resigned because of the LIBOR scandal as his “friend.” (See: Tuesday, July 03, 2012, Flashback to March 2010: Mike Bloomberg calls Barclays' Bob Diamond "my friend"- which includes a video of Bloomberg’s statement of affinity.)

Is Bloomberg going out on a limb with his `de-minimizing’? Was the city Budget Director Mark Page able to make this assessment so quickly? Did Bloomberg mean that it was just specifically the city’s loss he could consider minimal or did he mean the city and all of its bond financing agencies such as HDC (Mr. Page is on HDC’s board as one of Mr. Bloomberg’s representatives) and the New York City Economic Development Corporation? Remember the 2008 financial crisis when no one could figure out or know for certain where all the losses would be and what their amount would be because the interrelationships were so complicated? There are similarly complex and tangled interrelationships to be assessed here.

If you begin to search the internet you will see what starts to pop up and how frequently:
• The New York City Executive Report on the City’s 2011 Budget, Message from the Mayor with Mark Page’s name on it

• Look at the same Executive Report for the city’s 2010 Budget.

• The City Comptroller's Comprehensive Financial Report for the fiscal year ending June 30th 2008 has this kind of language in it about NYC financial risk mitigation:
“In its August, 2004 basis swap, the City’s variable payer rate is based on SIFMA and its variable receiver rate on a percentage of LIBOR. However, the stepped percentages of LIBOR received by the City mitigate the risk that the City will be harmed in low interest rate environments by the compression of the SIFMA and LIBOR indices.”
• HDC has bonds where LIBOR comes into play. It could very likely be the majority of HDC's bonds that do.

• Here from April 2010, generated by Barclays Bank itself, is a Barclays Capital Trading and Distribution Commentary about the municipal market. It warns “The views and recommendations in this commentary are the short-term views of the Barclays Capital Municipal Trading Desk.” It notes that Barclays “will price a New York City Housing Development Corporation weekly VRDN next Friday.” The price for these “Variable Rate Demand Notes” was probably keyed off Libor. Elsewhere in this document it evaluates market interest rates this way: “The stronger economic picture and expected govt debt supply next week weighed on treasury yields. Libor swap yields rose over 5bp in the 3y-7y sector for a second consecutive day. SMA Ratios dropped in response, however, activity was much lighter than yesterday.”

• State agencies which issue bonds to finance projects in the city also keyed such bonds off LIBOR as a benchmark for all sorts of things. Here is just one $131,105,000 Dormitory Authority of the State of New York financing. DASNY is a big issuer of bonds so there are more. . . many, many more.
Despite Bloomberg’s `de-minimizing’ this doesn’t look like the story is going to end here. Noticing New York will also be doing some follow-up on where the New York State and City Comptrollers are in overseeing these matters and possibly bringing their own lawsuits, particularly with respect to the city and state pension funds.

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