Tue, May 26, 2015 - Page 9 News List

Criminal bankers have brazenly milked the free market system

Conflicts of interest and opportunities for price rigging must be outlawed in favor of an economic model that delivers economic and social good

By Will Hutton  /  The Observer

The world’s biggest banks had been steeling themselves for months before the US Department of Justice’s rulings on manipulation in the foreign exchange markets. Last week’s announcement was, if anything, less tough than expected; £3.7 billion (US$5.5 billion) in fines were levied on top of those announced last autumn, to bring the grand total to an astounding £6.3 billion. Crucially, the banks also admitted that what they had done was criminal.

US Attorney General Loretta Lynch declared that foreign exchange traders had exhibited “breathtaking flagrancy” in setting up a group they called “the cartel” to manipulate the market between 2007 and the end of 2013. The fine was “commensurate with the pervasive harm done. And it should deter competitors in the future from chasing profits without regard to fairness, to the law, or to the public welfare,” she said.

Put bluntly, the world’s most prestigious banks had brazenly and systematically ripped off their clients. It was the crime of the decade. Yet the markets had been expecting worse. Only a month ago, Deutsche Bank had paid a record £1.6 billion fine for manipulating and rigging prices in the currency and money markets. If this was the benchmark, thought the markets, the fines for other banks would be higher. As it was, £3.7 billion seemed almost modest and the share prices of Barclays, RBS, Citigroup and JPMorgan rose sharply in relief.

The hope in the banking world is that the worst may be over. The combination of modestly increased regulation, stronger internal compliance and clawing back pay and bonuses if there has been malpractice — together with genuine determination at board level to root out criminal practice in dealing rooms — should begin to make a difference.

Yet will it be enough? Our grandparents, less in hock to today’s ruling doctrines — that markets can be presumed to be infallible and egoism is always beneficial — were wiser about how to organize markets than today’s economists and regulators. It is striking, despite record fines and the sacking of the Bank of England’s head of foreign exchange operations, who knew about the collusion but never drew it to the authority’s attention (on the grounds that whistle-blowing was not part of his duties), that the British approach is still softly, softly.

Bank of England Deputy Governor Minouche Shafik expressed her horror at the casual “misconduct” among traders and the language they used to justify what they did in a speech to the London School of Economics last autumn. (Shafik is in charge of the fair and effective market review that will propose changes to the foreign exchange markets.) She conceded that no one can talk any more of a few bad apples — the barrel is rotten.

However, while recognizing that deep change was necessary, her proposed areas for potential remedial action are largely technical. Tonally, her comments reminded me of the infamous Bischoff report into the banking system in 2008-2009, which, despite the narrowly averted banking collapse, recommended as little as possible should be done to reform the City.

In fairness, Shafik spoke before last week’s admissions of criminality. The US Department of Justice has raised the stakes. What everyone has to confront is that the banks have been party to an organized, global criminal conspiracy to defraud their clients. Traders colluded in secret online chatrooms to time the buying and selling of huge amounts of foreign currency to benefit each other.

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