1. hearing to review the impact of illegal manipulation of the london inter-bank offered rate on san francisco's finances; to explore options to recover any losses; and to review any interest rate swaps or other financial instruments the city is engaged in that may have excessive interest rates or fees that should be renegotiated. >> chair farrell: thank you very much, mr. clerk. this hearing was called for by supervisor john avalos and cosponsored by supervisor campos. so i will turn it over to supervisor avalos. >> supervisor avalos: thank you, mr. chair, thank you for hearing this item. colleagues, this is an item i brought forward a couple of months ago, looking at the real manipulation that had occurred under the london interbank offered rate. the lie board scandal and what the impact is to san francisco. clearly, we know that there has been real cases of manipulation and scandal and fraud under the

liebore scandal and we want to make sure we're doing everything we can locally to try and recover any losses we've had in san francisco. and this hearing is to explore what those might be and to encourage the city to seek action as well. before i start off, i do have a little bit of humor to add to initiativnrnt this process, goi- initiate the process going back from the report as they reported to the liebore scandal. >> chair farrell: may we have the computer display. >> supervisor avalos: want me to start over again? >> chair farrell: may we have the computer display, please. >> well, however it's pronounced -- >> supervisor avalos: can we start from the very beginning of that section. >> made some mad -- jim. >> the liebore scandal is

spreading like wildfire. public outrage is growing over allegations that for years banks all over the word manipulated what's called liebore,. >> now it's pronounced i bore. however it's pronounced, here's what we know. the british meg bank mar clay made some mad dollar dollars illegally manipulating the so-called liebore which stands for the london interbank offered rate, not to be confused with the european interbank offer rate or euro bore. other than talking about liebore. here's how it works. each one has to tell the british banking association the lowest interest rate at which it thinks another bank would lend it money. how does each bank determine their own rate?

it's a complicated process that involves a multitude of factors like investor confidence, the money supply, the human anus, and yanking things out of it. but mostly just those last two. then -- (cheers and applause). round of applause for the human anus. then that libor rate is used to set interest rates everywhere on earth. of course not everywhere, just places that use money. i believe emperor penguins on the ice shelf are not affected. now here's the wrinkle. the banks that determine libor also employ traders who bet on what that rate will be. they're not supposed to talk to each other but you'll never guess what happened.

>> leaders at banks were conspiring to fudge the data to boost their own trading profit. one part of barkleys would say to another could you submit data that makes us look -- that either is higher or lower than it is to boost our profits. >> personally, i don't see anything wrong with some work buddies doing each other a solid. you know the old saying, you scratch my back, i make the global financial system your bitch. it's all detailed in e-mails between barkley's traders and rate setters like go for 5.36, very important that the setting comes as high as possible, thanks. and, dude, i owe you big time. come over one day after work, and i'm opening a bottle of bollinger. it was unethical to offer a gift

of champagne, but no hookers. admittedly, barclay's fudged a couple of things to pump their profits. what's the point it was just barclay and the u.k., right? >> here's the point it wasn't just barclay in the u.k. >> all right, angry cluster of teeth. so if it wasn't just barclay in the u.k., who else? >> regulators are looking at more than a dozen other banks, and those include citigroup -- >> so what? so citigroup's an american bank. no big deal. >> it's a big deal. [bleep] >> you can't trust anything in banking. >> i knew i shouldn't have trusted those guys. i am never, ever... >> (cheers and applause). >> i am never getting drunk in

the steam room again. >> supervisor avalos: thank you, jeremy. apologies for any remarks that might not have appreciated, but i want to make sure we could actually have some context. this was actually an event that had worldwide significance and certainly was picked up by our news media in the report. as was stated, it stands for london interbank offer rate that leading banks will lend each other when they lend each other money. up to 800 trillion of debt globally are based on liobo. it is the basis of most various rates around the world. during financial crisis a number of banks illegally. ed the libor a proven fact. swidz bank paid 1.5 million in

fines and pled guilty to criminal fraud. barclay has paid 464 million fines. rbs of scottland paid 612 million. these are only fines paid to regulators. investors have not received restitution for their loss. a report from the charitable trust estimate the losses to the u. s. could be 6 million. the city of baltimore is in a class action lawsuit including brokerage funds caused by the manipulation. in january, san mateo and san diego counties filed a lawsuit as did freddie m.a.c., including j.p. chase and others. inspector general of the finance housing agency related that damages could be $3 million. last week, a federal court dismissed the antitrust portion

of the baltimore lawsuit. this does not change the fact the banks have pleaded guilty to criminal misconduct. whether we lost 10,000, or 10 million, as a city we owe it to taxpayers to aggressively pursue this issue to hold the banks accountable. initial reports suggest financial managers were more conservative than other municipalities and we may not be as impacted as others. i would hope that we could use our financial expertise to lead by example on how municipalities can address this fraud. i hope this will be the first step in a bigger process to determine the strongest course of action for the city to protect taxpayers from these crimes. this is also an opportunity to look at the bigger picture of predatory lending practices in municipal finance which i have heard is now a $2 trillion market across the countries. we know that libor fraud is illegal but what about practices while technically illegal are

immoral. why do we continue to do business with banks that we know repeatedly bend and break the law. i want to make sure that we're looking long-term how to protect ourselves as a city, what kind of ways that we can create our own processes but also our own institutions that can help us do our own management of our own dollars. i've talked about moving toward a municipal bank. there is something i'm still pursuing as an office. i think this -- that we have, on such a worldwide scandal based on how banks have manipulated the market means we have to find local measures to address our own financial solvency and am looking forward on it for years to come. there are a number of speakers presenting on the city side. i would like to invite up, first and foremost, gnawedia from the crorl''s -- controller's office of finance who has been helpful in monitoring the city's

finances and the microphone is yours. >> good afternoon, supervisors. [n[nodirector of public finance. thank you for hearing this item and giving us opportunity to present the city's side in terms of how we done the analysis as relates to the libo scandal. mr. clark, could you please turn on the -- thank you. so we have here, with me in the audience, myself, who will be giving the overview, kevin cohen from san francisco international airport, who will speak specifically to the port's portfolio, we have jay -- from the employees retirement system, craig ghetto from the retirement and craig to speak on this item as well. i will do the overview but i want to acknowledge that most of what i was going to present has already been summarized.

next slide please. so what is libo. i think we clearly heard it is the london inter -- rate assumed by lending banks in london. that they could charge if they were to borrow funds from another bank. it is the most quoted rate. it is published under the auspices of the british bankers association, and it's been in place since 1998. it is an index representing the benchmark rate in the london money markets. it is the most widely used benchmark rate for -- interest rates in the world providing basis for establishing interest rates on financial products ranging from commercial loans to -- contracts. it is also considered the most critical benchmark for short-term interest rate and is calculated from many different borrowing periods from overnight, one month, three

months, up to a year and has different -- of currency as the euro, et cetera. the 18 banks that participate in the submission, and the way it is done is that they take the four highest and four lowest are thrown out and the average of the remaining 10 is averaged out and the rate is determined from the average. without some of the banks that participate i won't go through each line item but i will highlight that there are four u.s. banks and canadian banks, three of them u.s., bank of america, citibank, j.p. morgan chase, and there are three japanese banks. so as we saw in the clip that was presented earlier the libber scandal arose when it was

discovered that banks were falsely inflating on or deflating rates to profit from trades or give the the impression that they were more creditworthy than they were. so what they did, in order to show profit, or to show that they were creditworthy. to date, i've highlighted the bank settlements and the supervisor avalos has also called out some of these settlements to date. as of june -- in june 2012 bar clay's paid 264 million to u.k. and u.k. regulators. usb was fined $1.5 billion by u.s., u.k., and swiss regulators in december 2012 and royal bank of disotland was find 612 million by u.s. and u.k. regulators in february of this year. in addition to these three banks, 12 of the 15 remaining

banks contributing to the libber calculation are under investigation by u.s. ande and u.s. regulators, commodities trading commission and the u.s. department of justice. >> supervisor avalos: you have on the beginning of the slide you mention the banks allegedly submitted rates. there actually have been real admission from the banks, right, that they have actually contributed to manipulation. is that correct? >> that is correct. and the deputy city attorney will be speaking -- >> supervisor avalos: as part of the settlement is it correct the banks pleaded guilty or is that -- >> i will leave that to the city attorney. >> supervisor avalos: that's what we have attorneys for. this is also for the city attorney, we have fines that were paid to regulators but in fact investors have not recovered losses at all in

restitution from the scandal. is that correct? >> i believe the deputy city attorney would confirm that. >> supervisor avalos: we'll get to that. thank you. >> thank you. the next slide. thank you. the industry has an idea of the range of time it is debatable and the exact time line has not yet been determined. the time line before you is an illustrative purposes only. and this time line was provided by -- financial advisors, the airport -- adviser. in 2007 bankers and other market participants began expressing concern to the british bankers association about whether libor setting banks reported rates that were true. at the time, libor manipulated to be higher and lower so that the banks could profit from trades. it is estimated that the impact

here, showing as little or none, because they artificially high or low rates could have canceled out the impact so therefore it could potentially have been revenue neutral. in 2008, the wall street journal published an analysis with findings that a number of banks submitted significantly lower borrowing costs for libor than other market measures such as credit default. and during that period we were estimating that it could be as high as 30 basis points. and then what we're calling the late financial crisis is between the period 2009 and '10 where libor continued but to a lesser degree. because this was after the wall street journal report where it was discussed publicly so it's been advised here that the

manipulation was to a lesser degree and as a result the impact was reduced by 10 to 20 basis points. in march 2011 reports began to circulate that the u.s. department of justice, securities exchange commission, and the commodities future tradings commission had launched investigation in the libor setting banks to investigate libor. >> supervisor avalos: that is the extent of what we believe was the duration of the manipulation that -- the city or do you think we can go further than 2007? >> i think the reports have been clear that it started in 2007. i think it's what the concern is, is whether it was beyond 2010 to '11 or '12. so they're still -- it hasn't been publicly determined but

every speciality is deciding on different time periods. >> supervisor avalos: so prior to 2007 there was no reported manipulating people were aware of around the world? >> i don't know that for a fact. we can research that and get back to you. >> supervisor avalos: is there any possibility that we could be at much higher basis points in terms of the magnitude of the impact? >> well i think if you -- depending on where you are in this transaction, typically liobr rates are pretty low. as an example i believe one month was 20 basis points equivalent to 2.0 percent and the 6 month i think was approximately .28%. if you're talking about shift and manipulation in this current environment it doesn't demonstrate to be that much higher. so if it you're looking at that as a back of the envelope calculation what is being proposed here as estimated

impact seems more realistic. but i have heard the range as high in some instances or lower. >> supervisor avalos: thank you. >> uh-huh. this next slide demonstrates the analysis of the financial impact as relates to libor manipulation requires an analysis of the debt side and the investment side of the city's operation. as you can see on the debt side, which showed you the fixed rate and the variable rate. on the fixed rate, libor manipulation was not impacted. we have listed all the city agencies that have a debt portfolio, including the city's general fund, the airport, the public utilities commission, the port of san francisco, and the san francisco municipal transportation authority. we haven't reached out to include external agencies, but

we know that the city college as well as the san francisco unified school district has debt portfolio and would fall under this category and would not be impacted. on the variable side of the house, the department is issuing variable rate indebtedness index to libor may have been impacted. in terms of the airport, if it is backed by -- or index to libor they could have exposure and kevin cohen will speak specifically to the airport's portfolio as relates to that. in terms of the city we have variable rate debt in our portfolio that is not -- is unhedged and it doesn't have a swap. it is approximately $129 million or 5% of the city's 2.9 billion in debt outstanding. and so for purposes of this illustration we haven't included commercial paper program, even though they're considered

variable but we don't feel they're impacted and would make this slide more complicated. and then if you move on to the next side which is the investment side, there's the treasury component, which has the treasury -- and we have -- from the treasurer's office will speak to that as well. and then we have the retirement fund which has employees retirement system fund trust, who jay is here also, who can speak to that. with that, i can turn it over to kevin cohen from the san francisco international is airport to given more details on their portfolio. >> supervisor avalos: thank you for your work on this presentation. you mentioned briefly the city -- add the school district that they don't have investments who have been affected by libor, is that what you said? >> yes. in terms of the debt the 30r8 -- so they wouldn't have been affected but because they're --

all the different entities are they could potentially be impact but on the debt side of the house, no. >> supervisor avalos: very good. thank you. >> thank you. >> good afternoon, chair farrell, members of the committee, kevin cohen, assistant deputy director near capital finance at san francisco international airport. before we move into the airport portion of the presentation i wanted to take a couple of minutes to kind of give you some background on the airport's debt portfolio. the airport currently has 4.3 billion in outstanding debt of what we call airport revenue bonds where the principle and interest is solely paid by the users of the airport. it does not receive any support from the taxpayers of san francisco. in fact, last year, the airport contributed 15% of our concession revenue to the general fund, which was 34 million. that figure has since doubled over the last 10 years to this figure today.

the airport currently held a credit rating of a plus from the three credit rating agencies. in general airports require a lot of capital. we want to ensure the traveling public has a safe, comfortable and inviting facility to travel through on a daily basis. in the upcoming slides i hope you will see the use of financial instruments has allowed sfo to be one of the most competitive airports in the united states with 12 years of growth over the past 12 years, even through the the most recent financial recession. next slide please. so the airport uses interest rate -- manages interest rate risks with the use of swaps but let me give you context as to why the airport is using those mechanisms. in the early 2000 we know living in the bay area that we went through the dotcom bust, 9/11.

the airport opened a new international terminal and facility supporting the new international terminal. the traffic in the bay area for air travel dropped off 25%. so we quickly moved to introduce variable rate debt to our portfolio to better align the debt portfolio with the traffic in the bay area. by doing so what we did was we converted what was then a 100% fixed rate debt portfolio. we then moved 20% of that fixed debt portfolio into variable rate. by doing so it saved the airport about $30 million a year. and by doing that, it relieved the finances and made again put the finances more in line with the traffic that was traveling through the airport. so in doing so what we did is when we entered into the variable rate we then hedged the variable interest rates with interest rate swapped tied to

libor. at that time back in 2007 we entered into approximately $790 million worth of interest rate swaps that again hedged potential rising interest rates over the next 30 years. as -- >> supervisor avalos: can you explain how swap works for those hearing for the first time. >> sure. for example a variable rate bond may reset at 1%, and next week it may reset at 1 1/2%. if you put in an interest rate swap, it will lock it at for example 3%. so even though rates are going up, the airport would never be at risk to pay more than 3% with the interest rate swap. if you didn't have the swap there, and interest rates went from 1% let's say dramatically went to 5%, the airport would have to quickly come up with that difference. and through the city budgeting process, it's not always easy to get a quick appropriation to take care of that spike in interest rates.

so, again, the interest rate swap helps level out and provides an insurance policy that the airport won't have to worry about going above that 3% rate. does that help? okay. so as time went on, in 2010, long-term interest rates stabilized a little bit so we began to move variable rates back in the fixed rates and reduced the airport swap portfolio from $790 million to $580 million and did that again in 2010. we had an opportunity to convert more variable rate back to fixed rate because long-term fixed rates were dropping and we then converted those variable rate bonds and terminated the appropriate swap. today we're down to $483 million in swaps. so how does it work? the impact of libor is if it is artificially set high then the airport receives more from the

interest rate swaps or payments. if libor is artificially low then the airport receives less from the swaps which is one of the concerns with the libor manipulation. in terption of the order of magnitude we haven't done a order of magnitude of how we were affected but back in 2010 we tried to roughly estimate if libor were manipulated 10 basis points for one year, the airport would have paid $371,000 more than it should have. and through a sensitivity analysis we also did that for 20 basis points. the airport would have paid $723,000 a year and for 30 basis points it would be $1.1 million a year. in the prior slide between 2007 and 2012, you could make some assumptions of what do we think the timeframe was in that zone that we would multiply those numbers by. but we have not done an exact

calculation because we don't know exactly what timeframe our swaps were moving up and down. there could have been some times where the the interest rates were being manipulated on the low side and there could have been some times that the interest rates could have been manipulated on the high side, and at the same time those could have canceled. so that has not been discussed. >> supervisor avalos: is there anything that can be discerned looking forward? >> we would -- it would take more research to try and figure that out. >> supervisor avalos: is there an intent to do that? >> we haven't made any -- look into that since 2010 when this first came about. >> supervisor avalos: and why not. >> -- but certainly talk about it. >> supervisor avalos: and why not? is there -- was there discussion about wanting to do that, and the decision made not to? or it just hasn't been a decision about whether to look at that or not? >> i don't think anybody knows the methodology to actually do it, to actually look at the

libor reset every day, to then determine which of the 18 banks did the manipulation, to then determine how that manipulation would affect the libor rate for the airport. our libor is affected on a rate called a one month libor. so this is happening every day and you have to calculate into the one month libor and it would entail a lot of research and we don't know the methodology but it's something we could consult our financial advisers on. so on to the next slide. so as i said, the interest rate swaps have -- was a hedge for the airport. and in fact it actually saved the airport a significant amounts of money. to answer your question that you posed earlier, if you look at the bar chart on the slide we show that variable rde