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EU charges eight banks over alleged government bond cartel (reuters.com)
281 points by Jerry2 15 days ago | hide | past | web | favorite | 56 comments



As an ex trader, I'm not surprised. Customers on the buy side have been suspicious for years, but any one of us would not have the pieces to figure it out.

Roughly in the mid 2000s it got very common for people in the trading business to get on chatrooms. Bloomberg is probably the best known, but somehow Yahoo Chat also has a piece in the commodity space.

The chats go on constantly, and I would guess people just didn't think anyone would look through the records. Much like with squawk boxes, who would ever imagine someone listening to the recordings?

Similar cases have happened in FX and LIBOR, and it's quite clear what the incentives are. You might think that some banks are long and some short, thus cancelling out the market effect, but that's not the case. Often the trade that's popular is the same for everyone, so the banks are on one side and the customers on the other. So if you have a small group of banks that in a chatroom, it's quite tempting to collude.

You also have to think about how market making works. It's at heart an information business. If you know customers are going to be buying, you want to get inventory first and sell it to them. It's nice to be the first guy to do that but realistically you won't know what's up all the time. Makes good sense to have friends at other banks.


When I worked in commodities trading about 8-9 years ago, everyone used Yahoo Chat. However, it also popped up a message (as I recall) informing the user their conversations were being recorded for regulatory reasons.


I’m really impressed that chat rooms were used to trade information. It’s something I do in my area of technology and it makes perfect sense in hindsight.

Are the groups an open secret to give legitimacy to the info, or is membership more controlled?


Chat rooms are used as a way to communicate with clients. Clients can inquire about prices and submit orders through chat. They're also used to share market commentary within banks. It's not allowed to have chats between traders at different banks now.


Yahoo and AIM. IB used to allow you to login to either just to keep you trapped in BBG.


Same happens (happened?) with the cryptocurrency market, except unregulated; just some people in a chatroom or voice chat, some with a lot of money to spend, working together to influence the price of a currency and the exchanges. Giving each other advance warning of big trades coming in.


The infamous whale groups on telegram. You gotta be super careful with these, there are lots of scam. Ex: the leader of the group tells everybody to sell at 1pm, but actually himself and other get out just before and you end up the only one still holding the bag.


I think they should be assumed scams period. That is the whole point of the Nigerian Prince fraud aspect - reporting them would be "I got duped while attempting financial crimes!".


Again as usual people were stealing lots of money (not just the banks), and they aren't even named, and they won't go to prison.

These ,,charges'' are part of the cost of doing ,,business''


Traders went to prison for the Libor scandal; why would you think no-one will go to prison for this?


The management and executives should also go to prison, but they don't. This is where the corruption begins, but it's only the "little" guys that get thrown in jail.


‘I was framed by UBS’: Tom Hayes’ letters from prison

Incarcerated former trader blames himself for trusting colleagues and superiors, laments his inability to push his side of the scandal in the press during the trial

https://www.fnlondon.com/articles/i-was-framed-by-ubs-tom-ha...


Too big to jail. I seen Elizabeth Holmes few weeks ago in California. having breakfast with some friends at very luxury spot. Laughting and enjoying her life. No worries at all.


Trump was also speaking down on the stock market bubble and the inflated banking system...until he was elected.


Well. A Warren administration might be less amenable to that kind of treatment of executives in the banking industry.


Which 8 banks?


I work in finance (although on the buy side), my gut feeling is that it's the usual suspects: big investment banks. The people manning the prop desks in these institutions get to know each other eventually as the landscape is fairly small and they all work for/with each other eventually.

This means that cliques along the lines of "I'll scratch your back if you'll scratch mine" form naturally. It's almost impossible to prevent as a lot of the trading happens directly between traders and never crosses exchange boundaries and even then, it's often tricky to prove collusion purely based on the trades. Official trading communication channels are monitored, but this is irrelevant if the deal can be pre-arranged privately off channel.

There are too many conflicts of interest in the entire industry really. It's not in the best interest of the banks to monitor their internals too closely. Sure, there are plenty of theatrics and checkbox-ticking exercises, but really, as long as it is cheaper to pay the eventual fines than to employ armies of auditors and actually give them the motivation and power to enforce the rules, it's not happening.

The internal controls themselves can be fairly annoying too. I remember a 6 month effort to get our legal department to clear a US fund launch because their incentive was to just reject every proposal. They don't directly get to see the benefits of a successful product, but would certainly feel the pain of one that gets into trouble for whatever reason.


> It's not in the best interest of the banks to monitor their internals too closely.

So keep raising the fines. make them proportional to the banks turnover, or their perceived size if it appears that they are trying to disguise profits. The leadership of the banks need to follow the rules too, and make sure that the organisation follows those same rules. Maybe they should be held accountable when that doesn't happen.

As we found out when Health & Safety legislation was enacted which did this, it turns out that when you start holding people personally accountable for their actions (or lack of), then changes start to happen in the culture of the workplace. I walked around a factory recently and they take the health and safety of themselves, their colleagues and their visitors very seriously.


Seems like an effective approach to any fines would be to sum up the estimated profits they made, add in the estimated cost to innocent parties, then multiply it by some number.

Of course that relies on someone actually being held accountable for a change...


Alas, I don't think this is going to happen, because financial accidents are rarely gory so it's tricky to mobilize the masses. If someone gets pounded to pulp by a power hammer, that will get plenty of visceral coverage and politicians will latch on to score easy cookie points for being seen "committing good deeds".

Finance is too abstract for this to work. "Big Bank Co ABC defrauding other institutional clients by XYZ billions" is so far removed from common folk that they can't relate to it. Some politicians will make some token moves, which (as described in another comment of mine) will just end up funneling some money into another special interest group and that's it.


I wish people more readily accepted they human lives have a monetary value of some degree. If you cause a lot of monetary damages to a large number of people then that's going to lead to a cost in human lives. This way people might more readily accept what impact this kind of defrauding has.


> The people manning the prop desks in these institutions

The Volcker Rule (part of Dodd-Frank) prohibits prop trading at banks (with few exceptions). The big banks have been actively discouraging it as well, changing comp structures to avoid rewarding prop trading.

> trading happens directly between traders and never crosses exchange boundaries

All these trades still need to be cleared, no? There's a structure to markets that you're papering over here.

> It's not in the best interest of the banks to monitor their internals too closely.

You may think this, but traders at banks are subject to tons of surveillance. Banks take lots of measures now to catch rogue traders even if it's just because they don't want dirty laundry being aired publicly.


> The Volcker Rule (part of Dodd-Frank) prohibits prop trading at banks (with few exceptions).

Ok, replace prop trading with a fund trading OTC products that the bank runs.

> All these trades still need to be cleared, no? There's a structure to markets that you're papering over here.

They do, and as I wrote in a bit that you didn't quote, it's largely irrelevant because it's not that difficult to hide collusion. Heck, the guys fixing LIBOR did it successfully even with all the controls you claim the banks put in place.

> You may think this, but traders at banks are subject to tons of surveillance.

Yes, there is tons of surveillance. There is (in my experience) fairly little actually effective surveillance. For once, surveillance is never an interesting task. I consider it the same as guard duty. 99% of the time, nothing happens. Humans are not good at catching unexpected outliers. So you automate a lot of the checks, but these either produce too many false positives and thus bury the true problems in the noise, or they can be circumvented.

As I wrote, I consider the root cause to be a problem of incentives and conflicts of interest. No amount of patching with egregious audit and or lawyering will fix this. I consider statements like "but look at all the checks we already do" theatrics.

Look I'm in the industry. I have to complete 5 different training and educational courses every month, spanning from market abuse, to insider trading to fraud. Nobody takes this crap seriously and it is broadly considered a complete and utter waste of time. We have to fulfill a bazillion reporting obligations, but all of it is just a thin veneer of compliance to tick checkboxes. Every year, some chums from KPMG/PwC/<insert alphabet soup> come around, check that there are no obvious problems and rubberstamp everything. They find some token things which get reported and rectified so it looks like they actually do something.

I have friends who work in compliance/audit departments, and even those who want to do their work properly, run into problems because it's tricky to put heat on any group that is making money.

Most people I encounter in the industry are actually honest and hard working. Even though the checks are more or less easily circumvented, the majority of people choose not to do obviously illegal things. But to claim that the current setup is somehow successful at preventing shenanigans is dishonest.


> Look I'm in the industry.

So you’re the only person on HN who works in finance?


> The Volcker Rule (part of Dodd-Frank) prohibits prop trading at banks (with few exceptions). The big banks have been actively discouraging it as well, changing comp structures to avoid rewarding prop trading.

It's not prop trading...I'm just macro hedging which is completely fine


Volcker provides exemptions for trading in government bonds.


Checkbox-ticking folks will be glad to sell you a quasi-legal tax avoidance scheme: powered by PwC, EY, D(&T), KPMG. Recommended by MBB.


Absolutely. The bank - advisor (PwC, EY, etc...) relationship is just as riddled with conflicts of interest. It is in the interest of the advisory firm to find a "creative" solution for their clients (the banks). Otherwise the bank would go to a slightly less scrupulous institution. The theatrics apply again, the bank gets to claim to have been audited by a prestigious consultancy, the consultancy gets paid, the authorities get to shovel the problem under the carpet and the specific individuals in the authorities get a cushy consultancy job after their public service. It is not in the interest of any of these players to change anything, so it is not going to change.


> This means that cliques along the lines of "I'll scratch your back if you'll scratch mine" form naturally.

Problem I have with Econ 101 BS is this. Different industry, in the city I grew up in the four large electrical contractors get busted every 10-15 years for bid rigging city and county contracts. They pay fines, no one goes to jail. I feel like this sort of stuff also goes on with private bids, but it never gets called out.


> A European Commission statement Thursday didn’t identify the institutions being investigated for "a collusive scheme that aimed at distorting competition" in trading sovereign bonds issued by euro-region governments from 2007 to 2012.

https://www.bloomberg.com/news/articles/2019-02-01/tech-s-eu...


There's no good reason why those names should be hidden from the EU population. None. It's a disgrace that governments continue to cater to large corporations and allow them to get away with small fines and "admitting no wrong" (despite receiving the fines for the crime done).


A plausible reason is that it would likely impact their market value as shareholder confidence in those banks is affected by the potential for large fines in the near-future. Since the banks haven't actually been found guilty of anything (yet), they're simply being investigated, it would be damaging to release their names.


The "economy will be hurt" if bankers go to jail is getting a little old, isn't it?

It's also sounds like exactly the kind of thing bankers would like the public to believe and would try to influence media narrative to repeat it.


My point is simply that they haven't been found guilty of anything yet, just charged. If they're subsequently cleared of any wrongdoing, but their market value is tanked by the accusation, they're effectively being punished for nothing.

Innocent until proven guilty and all that.


Here’s one, possible, good reason: the EU has a sort of “whistleblower” defense, where the first company to cooperate in a cartel investigation gets off free. Assuming that bad PR is a significant part of punishment in these cases, it would make sense to delay announcing the culprits here to give one of them time to escape being named.


They still get named in the end but they avoid some of the fine.


As long as they are not found guilty naming them would equal to putting up the pillory. Always a bad idea.


Bloomberg mentioned Deutsche Bank, Credit Suisse, and Credit Agricole were mentioned in a separate bond trading "cartel". Would not be surprised if they were part of the eight.

http://europa.eu/rapid/press-release_IP-18-6895_en.htm


With euro denominated bonds rates, one would question if there was much of a market in the first place that wasn't already stacked…


To play devils advocate. Around that time you had periods where banks didn't know if their competitors were going to be around next month, there were also periods where they didn't know if several major European nations were going to be defaulting on their debts.

In that kind of situation do the normal rules apply? I don't doubt during the banking crisis several 'dodgy' deals were done between the central banks, politicians, and banks. And if it stopped the entire global economy going tits up, I'm ok with that.

Now the devil is in the details obviously, this could just be a case of personal enrichment.


>In that kind of situation do the normal rules apply?

Yes.


Well, the rules also stated that the ECB couldn't buy government bonds and now that's the norm.

Central banks, and some banks, have a political side in it which deals badly with rules. And off course, banks and political institutions are always filled with corruption so just looking at rules text doesn't say much about what is really condemned or not.


So if at the worst extent of the financial crisis it was becoming clear a bank was going to collapse. If the central bank fast tracked through a deal to get that bank sold over a weekend, you would be against that?


I don't know how you could even get that idea.

Upholding the law is significantly more important than saving some company, even if it's a large bank.

If you're going to throw law and order out of the window over saving some shitty banks, then you already have a bigger problem than disagreeable numbers on balance sheets.


It isn't about saving the company, or its share holders.

It's about saving all the savings of other depositors, about preventing a run on that, and other banks, about trying to maintain the banking system.

Banking laws are meant to maintain stability. If they get in the way of that, they should at least be re examined.


"Re-examining" and changing laws is different from not punishing criminals and law-breaking corporations.

You can change the law later as much as you like.

The point is upholding it in the first place and not adding subjective measures like "but it's not a good law!" into the equation when you determine guilt and fines.

Even if you immediately repeal or change the law, you still have to punish those that broke it.


Were the last people to illegally practice homosexuality in your country punished? It is societies choice to decide whether to enforce a law.

I meant 're-examine' very broadly. And the 2 examples I've given so far in this thread have both involved the authorities.


>Banking laws are meant to maintain stability. If they get in the way of that, they should at least be re examined.

I hope one thinks this can be done ad infinitum to maintain stability…


The global financial system is an ecosystem with very few silo-ed actors.

These institutions have settled market rigging accusations in every market that any relevant government can weasel jurisdiction in.

It is personal enrichment, it is common practice, it is a kickback to the government, the normal rules are never clarified fast enough to keep up with the new markets, the rules can be changed if the banks want, settling a decade later isn't a deterrent, imagine what they are doing in 2019 right now that we won't hear about until 2030.

I'm agreeing with you.


I think you have to complete the thought. What kind of scenario are you proposing.

The accusation is that banks were manipulating an index to make their position more profitable at the expense of the client.

I don't see how the potential collapse of some third party (a nation) changes this. Surely you're not saying, hey Bank A ripped of Customer C but that's only because we didn't know if Greece was going under.

You seem to be suggesting that somehow a government might have let the bank do it to save themselves? I am not sure.


There isn't a lot of detail in the Reuters article.

Your comment: "The accusation is that banks were manipulating an index to make their position more profitable at the expense of the client" Isn't mentioned in the article, do you have a better source?

Given that lack of detail, there is potentially a reasonable explanation.

I'm only suggesting this in extremis, your quote above wouldn't pass that test by a long way. 2008 might.

Eg if regulators asked banks to hold off selling Greek bonds for 48hrs to avoid trashing the price, while they sorted out a rescue deal. Trying to avoid at the same time, a domino effect on Italy, Spain, Ireland and Portugal.....

As I wrote in a different comment. The regulations are supposed to bring stability to the market. If the regulations stop doing that, they should be revisited.


> And if it stopped the entire global economy going tits up, I'm ok with that.

Why? Genuinely - why is the corrupt financial system we've propped up worth saving?


Because we are inextricably wrapped up in the financial system? And getting rid of it would cause massive pain, real and metaphorical.

What replacement financial system do you envisage? I cant think of a revolutionary financial system that I'm confident, could be better. And if its evolutionary, why would you chuck out what we've got?


>> And getting rid of it would cause massive pain, real and metaphorical.

I don't doubt the premise, I doubt the scale of the result.

>> I cant think of a revolutionary financial system that I'm confident

This might be true, but it is in no way revolutionary. Defaulting is a very normal routine in every capitalist system. That's why there is always a 'risk' involved when considering investments. After a big default, there would still be the necessity to trade, exchange, and hedge the risks of deals like that. All of this would be valued, given a price- and a risk tag and so on [business as usual -- except the weeds have been rooted out]...

What will be lost is "money" invested in "values" that werent values to begin with.

>> And if its evolutionary, why would you chuck out what we've got?

If it really is evolutionary, you should give evolution a chance and not intervene at the first sight of trouble.

If a gambler has made a bet on the wrong horse, and keeps betting on the wrong horse, with money you provided, wouldn't you be concerned? Instead of funneling even more money to the gambler, you might be incentiviced to find other options.


I was responding to the parents question

"why is the corrupt financial system we've propped up worth saving? "


Yes, normal rules -- i.e. the law -- still apply.




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