Browse Tag: libor

16 Banks Sued By FDIC Over LIBOR Rigging

A Washington Mutual in Naperville, Illinois pr...

 

It’s hard to find a commercial property lease or purchase finance calculation that doesn’t touch the LIBOR interest rate in some way. The benchmark interest rate is used so commonly, the total transactions subject to it is estimated in the trillions of dollars.

As I’ve written before, LIBOR lurks in so many corners of commercial real estate, it’s big news when the banks responsible for the rate’s publishing are suspected of rigging the number.

And it’s even bigger news when the US government’s biggest insurer of bank deposits — the FDIC — takes those banks where the US Justice Department won’t: to court. Which is exactly what happened this afternoon:

The FDIC, acting as receiver for 38 failed banks including Washington Mutual Bank, IndyMac Bank FSB and Colonial Bank, claimed that institutions sitting on the U.S. dollar Libor panel “fraudulently and collusively suppressed” the U.S. Libor rate. Also named in the suit, filed today in Manhattan federal court, is the British Bankers Association, an industry group.

The failed banks “reasonably expected that accurate representations of competitive market forces, and not fraudulent conduct or collusion,” would determine the benchmark, the FDIC said in its complaint.

Regulators around the world have been probing whether firms colluded to manipulate interest-rate benchmarks including Libor, which affects more than $300 trillion of securities worldwide. Financial institutions have paid about $6 billion so far to resolve criminal and civil claims in the U.S. and Europe that they manipulated benchmark interest rates.

The cost for global investment banks could climb to $46 billion, analysts at KBW, a unit of Stifel Financial Corp., said in a report last year. JPMorgan Chase & Co. and HSBC Holdings Plc may face a European Union complaint as soon as next month from the bloc’s antitrust chief.

Better late than never — and with TBTF banking’s massive influence over US and international law, “never” was certainly in the cards.

 

 

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Biggest Banks Eyed For Breakup

Goldman Sachs Headquarters, New York City

At long last, the case for “too big to fail” banks is falling apart.

In the wake of the residential mortgage crisis, our industry has for years now struggled with finding the sources of capital its needs to finance the commercial real estate transactions that drive the broader economy.  The role of banks is to allocate that capital to our sector, to manage risk and to both set up and follow rules that promote stability and predictability as that capital circulates into and out of our transactions.

But risk management and rules have fallen by the wayside.

When US Attorney General Eric Holder last week testified to Congress that some banks are so big that DOJ is afraid to bring charges against megabanks, not even the most strident opponent of government regulation could fail to notice that the country’s top law enforcement official was actually giving up on law enforcement, at least when it came to TBTF banks.

The reason given by Holder was the same reason given by the banks themselves when accepting the bailouts: what’s bad for megabanks is bad for the entire economy.

In other words, first, in 2007, the banks in crisis managed to call off the basic rules of the market.  Now they have effectively called off the law itself.

You can’t get much more unregulated than that.

If you’re not a megabank, and you gamble and lose, then you leave the table.  But if you’re JPM Chase, you get a pat on the back and a pile of new chips on a silver platter.  Plus a few handfuls for your own pinstriped pockets.

If you’re not a megabank, and you launder drug money, or even posses the tiniest quantity of drugs,  you are facing hard time in prison.  But if you’re Britain’s HSBC, you can admit to servicing Mexican drug cartels and internationally sketchy, terrorist-associated accounts to the tune of hundreds of billions and then atone for your transgressions with a mere $1.9 billion settlement.

For anybody keeping score, that’s about five weeks’ income for that bank.  Calling that a slap on the wrist is an insult to both slaps and wrists. It’s more like a hug and a wink.

Then there’s something much closer to home.  There’s what out-of-control banking culture has done to our leases.

As I’ve written here before, the LIBOR rate-fixing scandal has cost our industry in untold ways.  By messing with the cost of capital and by distorting the interest rate governing rent increases, the TBTF banks have happily bit into our industry’s margins for no other reason than to cover their derivatives traders.

In other words, once one of our own even manages to with the uphill battle obtain capital to finance a bedrock transaction in the tangible supply and demand economy,  the capital costs have been manipulated by banking in order to ensure the banks win on their derivatives trading, a market that is about as speculative and inessential as it gets.

Breaking Up Isn’t So Hard To Do

In this fight over capital and rules, the case for the existence of TBTF banks grows only weaker.  Mainstream pressure to break up these massive institutions is growing. Our pinstriped friends at JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley are simply running out of wiggle room and the writing is on the wall.  In fact, it’s on the Wall Street Journal itself, which has floated a bank breakup plan called “too small to save”.

When the WSJ is advocating for a power greater than the market to wake up and fix things, you know a profound change is in the air.

Speaking only for myself, the commercial real estate markets could only benefit from this long overdue correction.  I know the industry likes its pinstriped friends. It would like to see them get back to allocating capital and managing risk.  It would like to see them again in the market and under the law.  And so would its clients.

The Stalled Escalator: Rigged LIBOR And Rent Increases

Under Repair

Brokers and landlord reps use of the escalation clause in a commercial space lease is a common one. These clauses provide for increases in rent over a specified period of time. Often, these increases are determined not by actual increases in the landlord’s operating costs, but are instead keyed to an index, such as the consumer price index (CPI) or the London Interbank Offered Rate (LIBOR).

Longer-term office leases so often involve the landlord’s lender that negotiations over lease provisions can seem to be between a tenant and lender rather than tenant and landlord. When a lender is in a position of underwriting the cash flow of a building, it’s that lender’s job to scrutinize closely the creditworthiness of a prospective tenant.

And therein lies the rub these days. The capacity of lenders to scrutinize creditworthiness has been called into very stark question thanks to a continuing series of scandals and financial meltdowns, the latest of which probably directly affects the lease on your table today. The LIBOR number — an interest rate that drives the rent escalation clause math in untold numbers of commercial space leases — looks like it is, was, and continues to be, in a word, rigged by banks. Banks, under investigation for engaging in book-cooking to cover their derivatives traders and to pretend to the wider market that the cost of money is lower than they actually pay, have distorted the LIBOR number to the point that holders of financial transactions that are keyed to it are hurriedly reviewing their portfolios in a hunt for lost money. And there’s plenty to find — LIBOR lives in the beating hearts of $350 trillion worth of contracts according to the Financial Times.

Going Up? No, actually

One argument about LIBOR in commercial space leases is that the bank scandals benefited tenants at the direct expense of landlords using escalation clauses tied to LIBOR. If, as allegations claim, starting in 2007, large banks began underreporting their costs of borrowing in order to stave off a rising sense of panic in the credit markets, that means that during those quarters, commercial landlords using LIBOR indexing in their escalation clauses were left holding the bag on rent — charging tenants less than they would have been due under the lease terms had LIBOR not been corrupted for the purposes of the banks’ charade.

One of the truisms in this business for both prospective tenants and landlords is to protect yourself — to secure your own representation at the deal table or otherwise run the risk of having your interests overlooked. But when our pinstriped friends the bankers are at the same table, offering both sides index numbers that amount to broken instruments designed to cover some derivative trader’s rear end instead of either the tenant or the landlord’s — how do you protect from that?

(Photo credit: Jeremy Brooks)

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LIBOR: How You Probably Got Burned

Interest Rates
Interest Rates (Photo credit: 401(K) 2012)

So did any of the commercial property deals you touched in the past five years or longer use financing?  Let me guess: the answer is yes, of course.  Developers acquiring or improving commercial assets such as land or buildings tend not to self-finance. They often turn instead to our pinstriped friends at the banks for adjustable-rate loans – adjustable, more or less because long-term fixed-rate commercial loans are offered less and less by banks.

Enjoy Your Uncertainty

Why is fixed-rate financing out of favor?  “Too much risk,” mumble our pinstriped friends. That they complain about risk while having recently presided over a disaster of sub-prime, liars loans and the like, well, never mind.

What do the loan terms do to the performance of commercial property? Quite a bit.

Service to these floating-rate loans to a great degree constrains what a commercial space broker can do in terms of flexibility on a lease.  The way a landlord financed an improvement speaks volumes to what a broker or rep can expect to see out of the property even when perfectly matched with ideal tenants.

To put it another way: we on the leasing side of the proposition could do our jobs perfectly, but if the loans up the line are riding an adjustable interest rate — and these days, most are — the perfect tenant and the perfect space far too often have to miss each other because cash flow and debt service raise their heads to address the uncertainty. Uncertainty we didn’t always have to deal with before, but do now.

That’s the role of the banks: to provide capital at interest rates that reflect the market for capital. But as with so many things our pinstriped friends are supposed to be doing, the reality turns out to be very different.

Gosh, This Thing We Sold You Looks Risky: Good Thing We Sell Protection From It, Too

Most variable-rate loans get the varying rate from one of the numbers published daily as LIBOR – the London Interbank Offered Rate. The problem with variable-rate loans, of course, is that they tend to make it impossible to know the total borrowing cost. Which is why our pinstriped friends offer the chance to exchange, at some point down the road, the variable-rate with a fixed-rate that’s higher.  This is called the swap.  It, too, is keyed off of LIBOR.

So the banks, rather than accept the uncertainty of a fixed-rate long term loan, pass along to our industry the uncertainty of floating interest rates, then sell us the protection against floating interest rates.

That’s a lot of dependence on LIBOR.

Wouldn’t it be incredible if it turned out that the constantly-adjusting interest rates our pinstriped friends used to sell us the capital we need, then sell us the protection against the uncertainty of constantly-adjusting rates…were fixed?

By “fixed” I don’t mean “not floating”.  In this case, I mean “fixed” as in a “fixed fight” — a corruption, a cheat, a scam. Rigged. A fraud.

That’s exactly what it looks like today, as the lawsuits and criminal investigations pile up:

More at The Real News

It appears as if the LIBOR interest rate that governed your commercial property’s financing’s variable interest rate as well as the swap used to get a handle on borrowing costs was cooked for years to make member banks winners in their own derivatives trades.

To a broker or developer, this means you got left holding the bag and paid too much for capital.  To a tenant rep, this means you had to settle for less than the best match for space.  To a leasing agent or tenant, it means part of your rent calculations went not to either party but to cover our pinstriped friends.  And the list goes on and on.  It looks like the entirety of our industry — and every other that borrows, which is more of less all of them — has been once again punked by an out-of-control culture in banking.

Because keeping our pinstriped friends in pinstripes is apparently our responsibility, not theirs.