US taxpayers ripped off in LIBOR scandal

Some rob you with a 6-gun, some with a fountain pen.

If you aren't already, you will soon be hearing plenty about pension obligations causing budget shortfalls for municipal governments. You'll hear a lot less about the criminals who rigged the London Interbank Offered Rate, or LIBOR. But their crimes may cost American taxpayers billions of dollars.

Here's why: LIBOR is used to set the terms for interest rate swaps, which many state and local governments entered into. Reuters explained:

States can also make the case that rate rigging harmed state finances by lowering returns on financial contracts with banks, such as interest rate swaps which help small governments manage the cost of their debt. If Libor is artificially lowered, the state receives smaller payments.

Some cities are already suing. Baltimore is leading a class-action suit in federal court against the banks that conspired to lower the rate. Oakland walked away from its swap contract and refused to pay the penalty to Goldman Sachs.

And the Chicago Sun-Times reports:

An international banking hoax may have cost Illinois taxpayers millions of dollars...Illinois and area government agencies that used interest rate swaps, financial agreements designed to manage exposure to fluctuating interest rates, are checking if they lost money on swaps contracts, which were often tied to the LIBOR interest rate, due to manipulation. Further, public pension fund investment portfolios, which account for billions in assets, likely received less interest on retirees’ money. 

“This is as big a mess as you can get,” says Dale W.R. Rosenthal, assistant professor of finance at the University of Illinois at Chicago, who adds that Illinois and local government agencies may have lost millions because of the LIBOR controversy.

Massachusetts, Connecticut and New York are also investigation. And in Wisconsin,

The Community Bank & Trust of Sheboygan, Wisconsin, filed a RICO lawsuit in May against mega-banks' manipulation of interest rates, naming Bank of America Corp., JPMorgan Chase, Citigroup, and others, for their rigging of LIBOR, and demanding compensation for damages ... the Sheboygan bank claims that the low-rigging of LIBOR lost Sheboygan $64,000 in interest income on $8 million floating-rate loans in 2008 (if the LIBOR rate was depressed by just 80 points that year).

Stay tuned.