The already battered reputation of banks took an expensive new hit yesterday when the European commission slapped a record €1.7bn (£1.4bn) fine on six firms – including the bailed-out Royal Bank of Scotland – for colluding to fix key interest rate benchmarks.
Joaquín Almunia, the European competition commissioner, warned that further fines were on the cards as three more banks, including HSBC, and one broker have refused to settle the long-running investigation by Brussels.
He revealed that the authorities were in the process of unmasking a fresh scandal in the currency markets that could further damage the industry and add to the vast sums banks have had to pay for their mistakes since the financial meltdown.
“This will not be the end of the story, neither for interest-rate derivatives nor for the manipulation of benchmarks,” Almunia said. “One of the areas where we have received information that we are looking at very, very carefully is forex [foreign exchange].”
The latest fines – the first levied on a financial cartel by Europe since the banking crisis began – take the total penalties for rigging Libor and other key interest-rate benchmarks to £3.5bn.
Research by the London School of Economics (LSE) to be published next week will put a total of £100bn on the costs of misconduct for 10 major banks, including RBS, Barclays and Lloyds Banking Group, in the five years to the end of 2012. That total has now risen by £30bn, according to an analysis for the Guardian by MSCI ESG Research.
Rolling Stone provides a useful round-up of some of the problems.
Bloomberg covers US federal Judge Jed Rakoff’s recent speech to New York securities lawyers where he set out some theories. It is good that someone is pondering the remarkable absence of the application of law in this area.
From the Financial Times:
A global investigation into the alleged manipulation of foreign exchange markets gained pace on Wednesday when the UK’s financial regulator ramped up its probe and the Hong Kong Monetary Authority joined the regulatory effort.
The UK’s Financial Conduct Authority said it had started a formal probe, following a preliminary investigation launched in June after receiving complaints alleging that banks attempted to manipulate currency benchmarks.
The FCA has already informed a handful of banks that they are part of the investigation, people close to the situation said.
Its investigation is to focus on seven or eight of the larger operators in the multi-trillion global currency market, the people said. These market leaders include banks such as Citigroup, Deutsche Bank, JPMorgan Chase, UBS and Barclays.
As Richard Murphy asks, isn’t it time we said that the world’s major banks were systemically corrupt?
Barclays is facing court action in the US as energy regulators attempt to force the scandal-hit UK bank to pay a $470m (£330m) penalty for allegedly manipulating power prices in California.
The US federal energy regulatory commission (Ferc) said it had filed a suit seeking an order to affirm its previous demand for civil penalties from the bank and four of its former traders.
The potential penalty was announced a year ago, but Barclays insists it has not broken any laws in the way it traded electricity prices in California over two years to December 2008.
Ferc’s intended penalty, which comprises a $435m fine and a handover of $35m profits to low-income households, is even larger than the £290m that Barclays paid last year for rigging Libor.
The BBC’s economics correspondent, Stephanie Flanders, is to join the heavily fined investment bank JP Morgan. It is a shame she chose to join a bank with such an extensive record of law breaking. At what point is it fair to say that such an organisation is institutionally corrupt? It is certainly too big to fail and so needs to be broken up.
QE has become the weapon of choice by these governments because it is the only way in which recovery – however slow and anaemic – could be generated without changing the economic model that has served the rich and powerful so well in the past three decades.
This model is propelled by a continuous generation of asset bubbles, fuelled by complex and opaque financial instruments created by highly leveraged banks and other financial institutions. It is a system in which short-term financial profits take precedence over long-term investments in productive capabilities, and over the quality of life of employees. If the rich countries had tried to generate recovery through any other means than QE, they would have to seriously challenge this model.
John Lancaster provides a nice summary of the stuff we know about.
Matt Taibbi in Rolling Stone looks at why Standard & Poor’s claims of integrity, independence and transparency are perhaps not worth very much.
In the case Boca Raton Firefighters and Police Pension Fund v. Bahash, the Second Circuit ruled that the plaintiffs suing S&P could not make a fraud claim based upon the company’s reassurances in its Code of Conduct of its “objectivity, integrity and independence.”
Moreover, the Court said, plaintiffs could not make a claim based on a public statement by S&P touting its “credibility and reliability,” or another saying, “[S&P] has a longstanding commitment to ensuring that any potential conflicts of interest do not compromise its analytical independence.”
Why, you might ask, could one not make a fraud claim based upon those statements? Because, the Second Circuit ruled, those statements were transparently not meant to be taken seriously. The following passage is a summary written by S&P’s own lawyers describing the Second Circuit ruling (emphasis mine):
The Second Circuit affirmed the district court’s dismissal of the plaintiffs’ claims in their entirety, finding that the statements concerning the “integrity and credibility and the objectivity of S&P’s credit ratings” were exactly “the type of mere ‘puffery’ that we have previously held not to be actionable.”
More from that same memo from S&P’s lawyers:
The Court found . . . that “generalizations about [S&P’s] business practices and integrity” were “so generalized that a reasonable investor would not depend on [those statements]. . . .”
Because S&P’s statements about its objectivity, independence and integrity are the sort of vague, general statements that courts both within and outside this Circuit have found insufficient to support a fraud action, the Government’s first “alleged scheme to defraud” fails.
Joris Luyendijk, in The Guardian:
“The reality is that global high finance is de facto a set of interlocking cartels that divide the market among themselves and use their advantages to keep out competitors. Cartels can extract huge premiums over what would be normal profits in a functioning market, and part of those profits go to keeping the cartel intact: huge PR efforts, a permanent recruiting circus drawing in top academic talent; clever sponsoring of, say, an ambitious politician’s cycling scheme; vast lobbying efforts behind the scenes; and highly lucrative second careers for ex-politicians. There is also plenty of money to offer talented regulators three or four times their salary.
Capitalists have an expression for this, and it’s “market failure”. Here is the source of so many of the perversities in modern finance, and the solution is not only to denounce those who can’t resist its temptations, it’s to take away those temptations. That probably means smaller banks, smaller and independent accountancy firms and credit-rating agencies, simpler financial products, and much higher capital requirements.”