The global banking community, despite heavy regulation and constant scrutiny, continues to draw fire from politicians, regulators, and pundits, alike, and for good reason. Responsibility for the Great Recession lays prominently upon the shoulders of these bank-sters, a phrase coined during the past decade to poignantly describe the situation at hand. High crimes and misdemeanors may be the insinuation, but not a single banker has gone to prison for his acts during the 2008/2009 time period.
Yes, Goldman Sachs and the like have been assessed huge fines, but these are but a pittance compared to the outrageous profits and damage to the global economy that these financial institutions have perpetuated. A great deal of new law has been enacted in the process, Dodd-Frank for example, to drive home the point that major changes are required to prevent a re-occurrence of bad habits in the future. Unfortunately, these greedy bank-sters are back to their old ways, perhaps in a different venue, but still deriving enormous gains that threaten another global financial collapse.
There is a problem, however, for the banking establishment this time around. Legal authorities are adamant that prosecutions will occur, and many are already in process. Regulators have stepped up their risk testing regimens, and central bankers are already warning that a liquidity crunch, much like the one six years back, is already on the near-term horizon. When the selling starts, market liquidity will be nowhere to be found.
Why did the last banking debacle reach such levels of dysfunction?
The roots of the last problem began with well-intended market manipulation more than a decade ago. After a recession followed the meltdown of the Internet entrepreneurial craze, the threat of a similar meltdown following “9/11” was more than politicians and central bankers could accept. Both stepped in to bolster the wavering housing industry with low-interest rates and accommodating lending policies. Goldman Sachs began packaging “mortgage-backed’ securities for sale, and, when initial sales were formidable, the bank-sters were off to the races.
A totally unregulated OTC market in these securities was born, and soon a hefty OTC swap market sprang up overnight to allow investors to hedge their bets. The only problem was that pricing was more formula driven, since demand was heavy and market forces seemed constrained to work within two standard deviations of the mean, a statistical requirement for the efficacy of the global trading casino. Housing prices, however, were not escalating, since household disposable income had flat lined. Low credit standards had already increased risk parameters well beyond the breaking point.
But banks continued to push the process and their trading departments, ignoring the abundance of red flags that appeared along the way. The profits from selling and trading these securities had become their drug of choice. There was no turning back, since the practice required enormous leverage that would be difficult to impossible to unwind. When the first bank tried to de-leverage, the dam broke wide open. Greed caused a tsunami of sorts, as liquidity disappeared. Sellers found no buyers. Valuations dropped like lead balloons, as did the solvency of many banks. Forced consolidations ensued. Government bailouts kept “too-big-to-fail” institutions from closing their doors.
Have bankers changed their ways?
Most independent observers think not. Bankers truly believe that they have created a new economy with their global bond trading exploits. They have taken low-cost funds from their respective central banks, money meant for more risk taking with small and medium-sized enterprises, and poured it offshore into emerging markets where returns are higher. The result is a $11 trillion carry-trade overhang that may cause the next financial avalanche, sooner rather than later.
But the antics of bank-sters do not stop there. The press has already told the stories of many rogue traders that have caused billions in losses, but the pressure on trading departments to deliver more profits has resulted in historic attempts to rig several major investment indices, including Libor, Oil, and Forex benchmark fixings. Law enforcement officials are not sitting on their hands this time in the U.S., the U.K., or Germany for that matter. As was reported recently, the more recent and flagrant forex manipulations came about as follows:
“The fraudulent act relates to manipulating key fixing rates that occur at specific times of the day. These rates are then used by money mangers the world over to value their individual portfolios. The “fix” is determined by market activity in a brief window of time. If you can influence that activity for personal gain, then greed wins another battle with the public and the regulators. According to insiders, top traders were sharing major buying or selling information in chat rooms before execution in order to sway the market action. The obvious targets would be the more exotic, less heavily traded pairs, where a large buy or sell order at the right moment might easily broaden spreads due to low liquidity.”
How have the wheels of justice been rolling of late? Here is a summary posted in a recent article on the web:
- Royal Bank of Scotland was fined a total of £399 million including £217 million by the FCA and £182 million by the US Commodity Futures Trading Commission (CFTC).
- HSBC was fined £389 million including £216 million from the FCA and £173 million from the CFTC.
- Swiss bank UBS was fined a total of £503 million including £234 million by the FCA, £182 million by the CFTC and £87 million by the Swiss regulator FINMA.
- America’s Citibank was hit with penalties of £420 million including just under £225.6 million from the FCA and £194.6 million from the CFTC.
- JP Morgan Chase was fined £417 million including £222 million by the UK regulator and £195 million from the CFTC.
- However Barclays, the third British bank expected to be fined, said it was ‘in the interests of the company to seek a more general coordinated settlement’ with more investigations from other authorities still to come.
What is this? More fines and no individual prosecutions? Again? At least in the case of forex price manipulation, “30 traders have been sacked or suspended but none have been arrested.” There have been dozens of arrests related to the other scandals (Oil, Libor, and such), but gathering the evidence has been a difficult and time-consuming task. A new wrinkle has also appeared. Defendants’ attorneys are attempting to throw out these cases based on jurisdictional grounds alone, and so the beat goes on.
Forex traders are often warned against choosing an offshore broker, since it is extremely difficult to enforce your legal rights in a foreign jurisdiction. It appears that our major global banks have taken this issue to a higher level. Greed, however, has increasingly become a virtue among Wall Street bankers, but trading is a zero-sum game when growth is constrained. A day of reckoning can be the only outcome under these conditions. Unless and until a few of these “too-big-to-jail” bank-sters are put behind bars, the herd mentality of bankers will more than likely continue on its present course.