Saturday, July 14, 2012

Will The Empire State Development Corporation (ESD), The MTA, NYC And New York State Sue Barclays Bank?

Baltimore is suing Barclays Bank!* The Barclays LIBOR lying scandal is big stuff. The LIBOR rate that Barclays was manipulating (LIBOR stands for”London interbank offered rate”) is such a critically important universally resorted to benchmark rate that there is scarcely a man, woman or entity in the world that was unaffected by the rates that Barclays manipulated. For some people it might be good when interest rates go down (or are manipulated in that direction) but there is always someone on the other side of any such equation (pensioners for example) for whom it is correspondingly bad. And if rates get manipulated up instead the same thing is true vice versa.

(* See also: Baltimore city is among many suing big banks over allegations of rate-rigging For small investors, this could be the scandal that finally breaks their trust, July 09, 2012, By Eileen Ambrose, The Baltimore Sun.)

So here is a tantalizing irony to mull over: Will New York’s Empire State Development agency ("ESD," formerly the Empire State Development Corporation- its name keeps changing to protect the. . .? ) choose to get in line behind the city of Baltimore to sue Barclays? ESD should have a legal cause of action against Barclays given that the ESD is a state finance agency involved in a great volume of complicated financial transactions in which the LIBOR rates must have been key. If ESDC sues Barclays it will be suing the bank whose name has been plastered on the ESD-sponsored Ratner/Prokhorov Nets basketball arena effected by ESD through eminent domain abuse and false-fact environmental reviews. “EMPIRE STATE DEVELOPMENT AGENCY SUES BARCLAYS!”: What a headline!

In fact ESD is not the only municipal government entity that needs to give serious thought to suing Barclays: The Metropolitan Transportation Agency, the City of New York, the State of New York, the New City Housing Development Corporation (about to consider issuing tax exempt bond for a building that will share party walls and infrastructure with the Ratner/Prokhorov “Barclays” arena- HDC public hearing to take public comment at 1:00 PM on the July 18th), the city’s Department of Housing Development and many other state and city agencies including both the city and state pension systems are all financing and investment agencies that probably have more than adequate, various and multiple reasons to sue Barclays over the manipulated rates.

If the MTA sues Barclays it will be suing the bank for which it decided it should name two major New York City subway system stations in Brooklyn (virtually for free, agreeing to take back on the public’s behalf a paltry below-market “$200,000 per year,” a shameful deal locked in for twenty years).

If the City of New York sues it will be suing the bank the has put its name on a project to which the city has given hundreds of millions of dollars plus a multitude of freebies and free passes despite the fact that the arena will constitute a huge net loss for the public.

If New York State sues Barclays it would be pretty much the same as ESD suing Barclays since everything that ESD has done to sponsor the Ratner/Prokhorov nominally “Barclays” arena has theoretically been on behalf of the state.

There are all sorts of ways that Barclays may be legally liable to the government financing agencies for the rate manipulations.
• 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.
Wouldn’t you love to be a fly on the wall in the meetings that senior management and their counsel at these government agencies are now having about their obligations to the taxpayers to sue Barclays and recover losses? The logic explored must be taking some agonizing twists and turns. (Accentuating the irony, bonds issued by ESD to finance the `Barclays' arean may be among the very financial instruments generating a basis for suit!) They may be asking, “should we launch a lawsuit just in time for the grand opening of the `Barclays’ arena?”; “Is someone going to FOIL us about this?”

Can they even believe it is possible to control the timing or the spin with which this unfolds? Here is another thought: It’s not just the government agencies that have reason to sue Barclays; another possible party plaintiff to sue Barclays might be Atlantic Yards developer and mega-subsidy collector Forest City Ratner itself. That entity is involved in plenty of financial transactions, including rate swaps based on LIBOR, that were probably affected.

The crisis is just unfolding with its ultimate scope being evaluated but the many contracts across the world that come into play are worth trillions of dollars in total and the amounts to be recovered overall could ultimately be in the realm of many billions. More?* Who's to say that Barclays itself will remain solvent?

(* 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.”)

Here is a possibility: Say that Barclays does go bankrupt and all that is left to pay creditors is a few cents on the dollar and the distribution of some assets- Maybe Baltimore having been one of the first in line to sue will wind up having distributed to it the naming rights to the New York subway stations and to the Ratner/Prokhorov arena! Maybe then, instead of getting off at a subway stop designated Atlantic Av. - Pacific St. or “Barclays,” the stop that New Yorkers will get off at will perhaps be “Baltimore.” I already observed in an article I wrote about governments that are selling off the right to corporately “brand” public assets that the name “Barclays” on the arena is merely advertisement with no association with its place or moment in time, no sense of history, and that there was consequently no valid reason for government to confer upon it the very special honor of making “Barclays” a place name in the city. If our subway stations and the Ratner/Prokhorov arena get renamed “Baltimore” there will be an exquisite sense of history: New Yorkers and Brooklynites will look at these places and say: “These are places we call `Baltimore’ in memory of a history of pronounced and significant deceit . . . deceits for which many lawsuits were brought”- And they will be right!

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