The LIBOR Scandal and the Limits of Prosecuting Big Banks

Last week I wrote an article on the impact of wildly illegal currency manipulation by the world's major banks, and the impact it had on the City of Baltimore, culminating in scenario after scenario of poverty, brutality, and unrest. Now it looks like some of those banks are pleading guilty to felonies over these ruinous crimes. 

boz3.jpgThis week, federal prosecutors moved to affirm what others, in private lawsuits and investigative journalism, have been saying all along, with Ben Protess and Michael Corkery of the New York Times News Service saying the banks

will collectively pay several billion dollars and plead guilty to criminal antitrust violations for rigging the price of foreign currencies, according to people briefed on the matter who spoke on the condition of anonymity. Most if not all of the pleas are expected to come from the banks’ holding companies, the people said — a first for Wall Street giants that until now have had only subsidiaries or their biggest banking units plead guilty.

There is some ambiguity about CitiGroup, which appeared to be in the clear four days ago, with the U.S. declining to prosecute the company. Some articles from today include CitiGroup in the list, but there's no explanation of the discrpancy, and it doesn't seem likely that prosecutors would change their minds without explanation. If it's true that CitiGroup escaped prosecution, then the banks are JPMorgan Chase, Royal Bank of Scotland Group, Barclays and UBS. As Andre Damon writes and as PBI has already reported, the banks

were systematically engaged in manipulating LIBOR (London Interbank Offered Rate), the benchmark global interest rate on the basis of which hundreds of trillions of dollars of financial contracts are valued . . . The investigation charges also had a criminal component, which the Justice Department is now seeking to settle with guilty pleas from the banks. Unlike some previous cases, however, these guilty pleas are expected to come not merely from the subsidiaries of the banks, but from bank holding companies themselves.

Financial regulators have released voluminous records in connection with the foreign exchange scandal, showing how brazenly and openly bank traders discussed rigging currency rates, even as they knew their employers were being investigated for similar activities with regard to LIBOR.

However, the punishments will be light, and won't change anything.

Despite the unprecedented character of the pleas, the actual impact of the admissions of criminal wrongdoing by the banks is expected to be next to nothing . . . In particular the banks are seeking waivers to retain their status as “well-known seasoned issuers,” allowing them to raise credit more easily, as well as the ability to operate mutual funds. The Times reports that “a majority of commissioners” of the SEC are in favor of granting such such waivers.
In fact, for the biggest corporations, being convicted of a felony is increasingly becoming legally irrelevant, and just one element of their normal operations. As the Times points out, the guilty pleas are merely “an exercise in stagecraft.”
One former Justice Department official told the Times that an “underlying assumption” of the Justice Department is that “the bank is not a criminal operation.” But the emergence of scandal after scandal, including the selling of toxic mortgage-backed securities that caused the financial crisis, the forging of foreclosure documents, widespread complicity in Bernard L. Madoff’s Ponzi scheme, money laundering, and tax evasion by Wall Street testifies to the fact that the banks are, in fact, criminal outfits.

And I hate to sound like a broken record, but risky speculations and currency and rate manipulations--legal or illegal--are the cost of municipalities doing business with private banks. As Will Hutton wrote about foreign exchange rigging last year:

If, on top, each sale is rewarded by commission, expect mayhem. Once a single bank gets involved and apparently gets away with a profitable, if dud, product, other banks are compelled to follow suit because their transactional shareholder owners are only interested in short-term profits. It is deplorable, but at least it is obvious. Change the reward system and regulate with more vigilance, and the practice can be stopped. But the kind of rip-off revealed by the foreign exchange rigging saga is much more opaque and peculiar to the structure of contemporary finance.
Even a hawk-eyed customer could not avoid being fleeced and regulation in this area is much harder because the industry structure should never have been allowed in the first place. The forex dealers who constituted “the cartel” in their secret internet chatroom were gathering information about what traders call “order flow” – who is planning a big sale or a big purchase. If there is enough information about how the pattern of orders across a particular market is developing, a trader can anticipate how the price will move over the minutes ahead: all they then have to do is buy or sell ahead of the known order flow, and make a turn, even at the expense of their own client.
The forex scandal was a replica of the interest-rate rigging scandal two years ago, and of the abuse in the derivatives market six years earlier. But these markets in which malpractice became so easy are not acts of God. They have been created by 30 years of “liberalisation” along with the abandonment of the “inefficient” regulatory requirement that those who set the prices for financial assets should not at the same time buy and sell on their own account.
In no other walk of life are you allowed to be both gamekeeper and poacher.

The obvious way to make banking into gamekeeping exclusively is to make banking a public utility with total transparency and strict oversight. Right now, big private banks are hardwired with conflict of interest, and whether they give into that legally or illegally, they will most certainly continue to do so. 

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