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HSBC, Goldman Rigged Metals’ Prices for Years, Suit Says (bloomberg.com)
231 points by MichaelCORS on Nov 26, 2014 | hide | past | web | favorite | 128 comments

This is fucking ridiculous. Scandal after scandal. How long are we going to put up with this?

In America, the political climate disgusts me. When it comes to the poor and the front-line workers, we're all about the strictest forms of accountability. Drug tests for basic aid. Punitive oversight of educators. But our richest, most powerful institutions are robbing us blind on the regular and getting away with it.

Since ancient history the rich have gotten away with doing as they please, and they always will. The real culprit is democracy's false promise that it can do anything to change this. Ultimately the masses will only take action if food or shelter is at risk.

This attitude is exactly what they are counting on - 80% of the people being oblivious to their crimes and 20% being upset but convinced nothing can be done. There have certainly been times when populist outrage has led to change or consequences for those at the top (in the US, try the 1890s, 1930s, 1960s, late 1980s).

The system also does a pretty good job of ensuring the masses are distracted. E.g. plenty of hype & reporting surrounding things like celebrities, sports, movies, and games.

To contrast that very little substantive reporting occurs on issues that matter. Then when finally a crisis ends (like the cold war) and we can hope to focus on improving justice and social issues we end up entering a new period to distract us like the drug.

More recently we can use the war on terror as a distraction from the financial crisis--note our preoccupation with ISIS instead of a focus on the social issues that are becoming an increasing drag on the US economy.

By coincidence I just read an article yesterday by Chris Hedges titled "The Myth of the Free Press" that elaborates on some of your points: http://tiny.cc/2h4xpx

The problem with populist outrage is that it only changes things when an ambitious leader shows up and takes advantage of the outrage for their own personal gain (dethroning the current ruler and putting themselves there).

Let's face it, humans need somebody to be on top. We don't know how to function otherwise. At least not for very long.

> Let's face it, humans need somebody to be on top. We don't know how to function otherwise. At least not for very long.

What's your basis for saying this? Do you have any way of verifying this claim?

Have you ever heard the term "social primate"? If not, or if you do not accept that human beings belong into that category, there is not much of a discussion to be had.

> What's your basis for saying this? Do you have any way of verifying this claim?

A leader always emerges.

If you know of a counter-example, I'd love to hear it. But even in the smallest experiments I've run (group of friends trying to agree on where to have dinner), a leader always emerges and then consensus is reached.

How about something rather than someone on the top? The idea behind successful governments is system rather than person. Lets extrapolate this and design better systems based on rationality rather than short sighted greed. Then, if people like, they can elect a king who is tall and has a nice smile. He can cut ribbons and attend funerals while the real governance is left to rational systems. Kind of like what happens now, except that I doubt the rationality.

This is true, there is a something on top these days. But even in the olden days there was a something on top. Do you really think a king was able to do everything themselves? Much like a modern CEO they had a whole lot of help and only made the final calls and set general guidelines for things.

Incidentally Swizec, you are speaking to people primarily in the US. They have spent the last 200 years convincing themselves that what you say just isn't so regardless of whether or not it actually is.

Don't worry. Everyone here in Europe (and probably elsewhere too), has been spending the last few thousand years convincing themselves that this just isn't so.

And yet, despite all the overthrown governments, the toppled empires, and flat out revolutions - a leader always emerges. After a few years, the common population is always in pretty much the same boat they were before the revolution.

> Since ancient history the rich have gotten away with doing as they please, and they always will.

That's fundamentally what defines being rich. "Wealth" is just another word for "power", and "rich" just means possessed of substantially more wealth than average.

> The real culprit is democracy's false promise that it can do anything to change this.

Democracy seeks to redistribute some elements of power more equally, and is not completely unsuccessful in so doing in many real world systems. It does something to change the degree to which the rich get away with what they want -- simply by reducing the degree to which they are really rich.

OTOH, its offset often in real democratic politico-economic systems by other elements of the system -- e.g., capitalism -- which have the exact opposite effect.

"Democracy is a poor system of government at best; the only thing that can honestly be said in its favor is that it is about eight times as good as any other method the human race has ever tried." ~ Robert A. Heinlein

If this means anything, it means we should experiment with newer forms of government, not be happy with the best of a bad lot.

How about the intelligent management of the earth's resources? For example, instead of humans wearing gold to impress each-other, we instead use gold for its properties.

look into: (Cybernetic) Resource-based Economic Model.

It is the most efficient and effective use of resources with human concern that I am aware of... anyone with other ideas, I am open to listen and digest.

The developer "class" will be around to automate almost all job functionality as time continues. In this unique economic and functional opportunity that we have, what will we do with the time we have left? Will we create a world designed to support and nurture all human beings to grow their full potential, or will we be short-sighted and manipulative for momentary gain?

Either way, I have no expectations from this current culture.

Bingo. I believe you have nailed it. This is the eventual and (I believe) inevitable answer.

Open the code. Let anyone see how it functions if they care to take the time. Base it on real math. Real statistics. Remove the political sound bites from governance.

Factors the "market" doesn't take into account should be extrapolated and accounted for. What is the cost of a barrel of oil really? What about when it ruins a fishery or aquifer and heats up the planet? What about the fact it is a resource that is not renewable? So we are passing a burden to future generations in that they don't have the resource anymore. Not to mention a possibly ruined fishery. The market doesn't care about these things, and thus we get problem after problem (not to mention wars).

Governance of resources by nice hair and teeth and political soundbite and cronyism is ultimately a stupid way to do things and I can't imagine it will win the evolutionary battle of systems.

Implying many governments aren't currently run by technocrats.

> How about the intelligent management of the earth's resources?

I would agree with an AI managing the world's resources; we have proven ourselves unable to do so in an intelligent manner.

> we should experiment with newer forms of government...

This is so very true but almost certainly undoable without a some form of help from the rich and powerful.

For example, one positive (or negative depending on which side you're on) thing about depleting oil resources is that much of the Government financing relies on tax dollars collected from hydrocarbons. And thus little oil would effectively mean lower available budgets, lesser means/control etc. Especially for totalitarian Governments that are considerable more expensive to operate.

Unless of course entrepreneurs like Elon Musk solve the energy problem for them. :)

Think he may have stolen this from Winston Churchill.

"Many forms of Government have been tried and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all-wise. Indeed, it has been said that democracy is the worst form of government except all those other forms that have been tried from time to time."

Speech in the House of Commons (11 November 1947)

He is paraphrasing Winston Churchill, whom apparently was echoing an unattributed aphorism. http://richardlangworth.com/worst-form-of-government

Yes this a million times. The only change that I could see happening is if basic needs are met for all people across the board - such that food and shelter are never at risk.

"The real culprit is democracy's false promise that it can do anything to change this. Ultimately the masses will only take action if food or shelter is at risk."

Democratic Constitutional Republic, not a pure democracy. The entire existence of the American System was against the European oligarchy and for the establishment of American aristocracy (the founding brothers weren't saints, they were monied land-owning aristocrats).

The real problem is that the oligarchs in the City of London have continually subverted the American System and entangled us abroad (triple entente, anyone?), and have corrupted all our branches of government. The American Constitution, if we actually followed it, provides mechanisms to deal with problems such as this. Namely, the idea of equality under the law. Ah, but the justice system is corrupt to, up to and including SCOTUS.

Please stop conflating democracy with our Constitutional Republic, and also stop vilifying a system that is not in it's proper state, eg, you essentially imply that democracy is a fad because it's been shown to not work, when if fact it has worked in some cases so well that it became a threat to the oligarchs and they actively subverted it.

Our problem is the oligarchs, not the system itself.

The point of the branches is to prevent corruption. Saying “if we actually followed it” is like saying cyanide would be healthy “if it wasn't lethal.”

There is no intrinsic, “proper state” of a constitutional republic. If the Constitution did not permit the current situation, then it did not prevent it. Thus it has failed.

"If the Constitution did not permit the current situation, then it did not prevent it. Thus it has failed."

This will be the justification used to dismantle the idea of American national sovereignty then. I see your point and am trying very hard to understand, but I always understood that the constitution was something that needed protection, hence the various oaths of office, not that the constitution was expected to simply stand on it's own structure.

It was designed such that the various branches of power would cancel each other out. The bankers realized they could buy all the branches, including the fourth estate, and I think it is the people who are sworn to defend the constitution who have failed, not the constitution itself.

Your outlook scares me that it may be more widespread than I previously realized.

Yep, inequality sucks in the US but it's still one of the best places to live in the world. Why risk your middle class lifestyle by rioting and protesting when you have enough to get by?

Until we become a despot I don't see things changing very much.

A 2014 UN study on the happiest populations* doesn't even include the US in the top 10 (it scored #17). All of the countries in the list have some form of a mixed economy (ie. not full on socialism, but a much stronger social support system in place than the US).

So, there isn't even that much experimentation required to get a better system in the US. Rather, I'd say American's have thoroughly been indoctrinated against social support constructs that you only have yourselves to blame (you only need to look at how underfunded the public school systems, police, college are).


I'm not arguing against the idea of mixed economies, but I don't find the argument that a bunch of countries produce happy citizens and the same countries have mixed economies very compelling. For instance, you don't mention the inverse. How do mixed economies due on the unhappiness scale? Is there some bare standard of mixed economy (for instance the US does have a mixed economy with a social support system at many levels)? Is there something else that is more related than their economic model for happiness?

I personally look at that data set and find it telling that those are all small countries by population size, wealthy and have lots of mineral resources per capita. For instance, are people in Iceland more happy than people in Corpus Cristi, Tx (which gets routinely rated as a happy US city and is bigger than Iceland).

You are right, my conclusion was linking happiness with mixed economies, that was not from the report--the link is intuitively obvious to me, but likely hard to prove.

I've seen a study in the past showing the relationship between happiness and financial income. It showed that happiness largely peaked when you had enough money to support your basic needs and do a few extra fun things. Any additional income didn't do much to help people feel happier.

So, my conclusion based on that was that a mixed economy where everyone's basic needs are largely met seems like a good way to keep it's population basically happy. The study seemed to validate that somewhat.

In contrast in the US where the growing bottom percent of the population faces stress over basic needs, and many in the middle class are one health care diagnosis away from bankruptcy seemed like a good indicator that the current American economic system is not ideal, and has a clear direction that it could take to solve these issues.

From the looks of it, it seems like the amount of racial homogeneity appears to be well correlated to the happiness quotient. Maybe that is the bigger factor in happiness. And a more homogeneous society might be one that tolerates more socialism. Another interesting question is what is cause and what is effect here. Does the amount of happiness of a society determine what kind of economic structures the members prefer? Or does the nature of the economic structures drive happiness? And how close are they coupled? And what makes happiness the right metric to optimize for, compared to say contentedness, or equality?

And in what sense are US schools underfunded?


If you look at the numbers closely we see that 12% less is put into the public system in the US than the OECD average. This pattern is true of most things in America, you put more dollars into health care and education than other countries, but most of that ends up in private systems. So, if you have money you get the best education or healthcare in the world. If, you however you don't fit into that bucket what you get is far less.

My experience from those that I know in the US (middle class) either have their children in private schools, or they choose where to live based on which neighbourhoods have a good public school. This behaviour, as far as I am aware, is unheard of in those countries in the top 10.

Regarding the questions you raise, some can be answered if you follow the link to the original report.

What bothers me the most about your response is to completely discount a well researched report because it doesn't answer all possible questions. Sure, maybe race plays a role. But, if you want to answer that you need to ask different questions than this report did.

What you need to do is look at the report as a whole and reflect on it. Sure the US may have the greatest GDP, but in so many other factors lags behind other countries, is optimizing for financial return really what we as a nation need to strive for?--That is the takeaway that you should contemplate, not nitpicking over answers that the report didn't set out to address.

I guess I'm old-school. Asking questions doesn't discount anything. If people can't ask questions, it seems like conversations become boring one-sided monologues. Your mileage apparently varies.

The folks who think that the US is one of the best places to live in the world are usually folks who've never stepped outside of the US.

I've lived in several US states, a variety of European and Asian countries, and have travelled broadly - and the US, I put on a par with post-soviet Russia in terms of standards of living - and in terms of cultural attitudes.

It's amazing how similar the two are, to someone external to both worlds.

The US is a big place and it really depends on the regions that you lived in. Much like you can't judge all of China based on Beijing or Shanghai. For example, there are regions in China that are predominantly Muslim.

That said, it also depends on what you view as downsides to living in a place. For example, South Korean isn't considered backwards by any means, but you do have mandatory military service, which the US does not have (to the point that even a Korean born & raised in another country might be forced into service when going back to Korea to visit relatives).

In the US, I lived in (in descending order of time spent there)

Illinois, Chicago and rural. Virginia, several locations. New Jersey. New York. LA, Norcal. Ohio New Mexico

Which I'll grant isn't "everywhere", but is a decent sample of East, West, Midwest, and various shades such as "mountain man" and "rust belt" between.

Fully aware, I've been to Xi'an and parts of China most folks don't even know exist - driving across large swathes of the planet is one of my favourite hobbies. Driving west to east across Russia is great, as you barely notice the change as you go, as it's HUGE, but you couldn't mistake, say, Ulan Ude for Novosibirsk in a million years.

Conscription is a potential downside, yes, but I look more at things like "do the people seem fundamentally happy, or neurotic and really messed up?". In the US and Russia, the latter applies. In the US, they all take prescription meds. In Russia, they drink until they don't care any more. Not symptoms of healthy, happy societies.

I don't know where I actually would say is "better" - most of the places I've been to where I've gone "this is nice" have been devoid of humans. We have a knack for turning things to shit.

Really depends on where you live I guess, the US is huge compared to european countries. I live in a pretty progressive area in the Midwest and have a pretty high standard of living.

Middle class people generally aren't risking their status by rioting. I'd have to imagine that the sort of people firebombing random businesses and police cars probably don't feel like they have that much at stake.

As far as risking status by protesting, by that logic, no one should have boycotted segregated institutions. "Separate and unequal, but adequate", would have been the mantra.

Where does one find out what the promises of democracy are?

Well, except that one time in France.

At least one of the trigger was food shortage, or the fear of food shortage. The first riots were "bread riots". Hence the infamous apocryphal quote by Marie Anotoinette "If they can't have bread, let them eat cake".

Obviously, the only time a riot become a revolution is when you have a perfect storm of food shortage, social inequality, increased literacy, etc.

Which is why we need an anti-rich society. Eat the 1% and redistribute their wealth. I can only hope that a distributed post scarcity society and technology base can render their money worthless.

Simply put, we prioritize economic health above justice. American citizens, as a population, literally love money above all else.... All the people in existing contracts need to do to justify continuing is raise a fear of economic instability as power changes hands. All of a sudden, the rich are literally "too large to fail" as they ARE the goddamn economy. Only the poor can afford to go bankrupt, according to our government.

Our government literally makes a mockery of justice out of attempting to prop up our economy.

Maybe this time they'll fine them at least 10 weeks of profits!

Possibly 10 weeks of interests on the profits (of those 10 weeks). I am a bit pessimistic.

As long as working for a bank is the number 1 way for ex-politicians and regulators to make a few million quickly nothing will happen.

This is how the Regulatory Capture has come to be. None of those out protecting consumers from the finance industry are doing what really needs to be done, because they know that their next job is likely to be at one of the institutions they are investigating.

I believe it was This American Life that recently did a podcast that went into depth on this issue.

And you can't blame them. Look at this guy: http://www.politico.com/story/2014/03/peter-orszag-citigroup...

He went from making probably around 200k (my guess) to 3 million+. I would probably sell out for that money too.

The pay differential between banks and the rest is just too much.

Let's take this a different direction for a moment... Why is it that the IT industry screams that they have a labor shortage when salaries are flat. With million dollar salaries in finance you would think that industry must have a severe labor shortage.

They just pay out more of their (large) profits than tech business do. eg as if Google paid 100% bonuses every year as they are so profitable, rather than retaining cash, paying shareholders and paying executives a lot mainly retaining cash though).

> I would probably sell out for that money too.

It's good of you to admit that, but I have to ask: why? Why is 3 million so different from 200k as to be worth being willing to set aside ethics / become antisocial?

Two reasons:

- Do this for one or two years and you are pretty much set for life. That's pretty tempting

- I don't think the bankers think of themselves as antisocial or non-ethical.

If you're making 200k a year and manage your finances well you could retire pretty early, anyway.

This fresh scandal isn't even being reported on in most of the MSM. Even if it was, it is hard for people to connect the abstraction of a banking scandal with the economic problems they face.

I don't see a way out of this through any of the legitimate channels.

What I find amusing is how anti-tax activists are generally unconcerned with this kind of behavior which acts in-effect like an "invisible hand" tax on the entire metals market.

Do you really think your life will be better if they stop doing things like that?

It's not even about fixing this one issue. Or improving my life.

It's about enforcing fairness, and not continuing to signal to the rich and powerful that really, they can get away with anything. That their wealth and power doesn't place them above the law.

And I believe that in the end, when abuses like this start getting punished in a meaningful way, and moves are made to prevent further abuse, all our lives WILL actually improve.

That their wealth and power doesn't place them above the law.

Except it always has and I don't see why that would change as long as there is scarcity in some form.

What it comes down to is cost/benefit of enforcing "fairness" or "equity." If someone has a lot of resources and they are using them to employ people or otherwise keep institutions that people rely on running - even if they are in the long term toxic institutions - there is momentum to not disturb that system in order to shield the people downstream from layoffs and disorder etc...

This is actually our democratic system in action, where the lawmakers and enforcers are put in place by voters, who respond to jobs, social investment and stability in their regions. Even if the people who are the mechanisms for those benefits are assholes and crooks, on par as long as there is relative stability and growth it is better to keep their actions from disrupting the ecosystem.

Arguably it will eventually be too corrupt to stand and crumble, but if the way that capital and goods are allocated is through a private consumer-producer mechanism with state power applied to maintain or promote this system, this is the inevitable result.

In the end, the majority of people aren't so dedicated to the value of fairness/equality that they are willing to risk their livelihoods on it.

I agree with your statement that wealth and power has always made men who hold them untouchable to anyone but the people with more wealth and power.

That shouldn't mean we need to accept this. We can try new solutions, move the status quo. We probably won't succeed, but at least we have to try?

Yeah, we could do with a few of the guilty doing time. The JP Morgan folks would be a start -


Do you really think, if the accusations are true, fixing this problem wouldn't improve things?


Corruption, and the sense of entitlement it gives powerful people when they can get away with it, certainly does (in the long term) make a difference to every person on the planet when it is kept under control.

Technically, manipulating commodities prices to build higher profits will drive prices up for consumers making them poorer.

Wow, a new level of sociopathy has been reached here.

What problems qualify as "my" problems versus someone else's problems? Also, if there is nothing wrong with the world, why are you defending your opinion here? Doesn't doing so imply that you perceive opposing opinions as flawed or inaccurate enough to be worth debating? If so, whose problem is that?

> There is nothing wrong with the world.

You need to go travelling.

Mmhmm, tell me, where can I sign up for your newsletter?

Well, I would have more money. I don't know if that's enough to have a better life but I don't think robbing someone and then saying you’re going to be happier without needing to clean that junk is a reasonable defense.

No, you would not. You'll have more money when you become financially literate. Until then, no amount of "justice" is going to put more money in your pocket.

Where do you think the billions in profits from from manipulations like this come from?

In this specific case it's hard to quantify but my personal losses are easily more than 10$ which is not exactly meaningless fractions of a cent.

It sounds like the actions went something like this: Modern Settings places a large order for 100k oz platinum from BASF. BASF buys mined platinum stock at price Y and takes 1 month to produce the refined platinum order. BASF doesn't want to be exposed to price movements with platinum that swing +/-20%. (if the price of platinum drops, BASF doesn't want to make thinner margins on a product they've already produced)

Therefore, BASF calls up their friendly bankers, Goldman and HSBC, to reduce BASF's exposure to platinum price swings through derivatives. BASF hears both banks' proposals over respective dinners. The conversations between the teams range from difficulties with the business, the client that BASF is dealing with, and what could be done to make everyone's job a little easier.

The relationships get cozy over time and BASF starts an open flow of information about who's purchasing what metals so Goldman and HSBC can 'just handle' the derivatives BASF should buy. Unscrupulously, the banks start trading on the information on when large orders will be placed on which metals markets and get discovered insider trading.

I think you are right in describing this as insider trading rather than price-fixing; and it brings up the issue of what to do about the general problem of insider trading.

When there are many routinely violating a law which is very broad, it is generally seen as an argument in favor of getting rid of the law, especially when the law is of dubious or debatable benefit to the public. This is one argument in favor of the legalization of narcotic drugs, and it seems to be a good argument in favor of the legalization of insider trading.

If insider trading were legalized, then BASF's customers could either make discretion an explicit condition of their purchasing contracts, or else sell their information (to futures market participants and analysts). This would raise the table stakes for participating in markets like this, but it is not clear that there would be any substantial negative impact to the efficiency of the market; the additional transparency and increased flow of information might even improve the liquidity of the assets, and smooth price fluctuations through better predictions in then futures market.

I am not the first to make these points, but I would be very interested to hear what HNers think of them.

It's my understanding that insider trading is basically not illegal in commodities, even on paper.

The above sounds a little bit like front-running[1], though, which is far more likely to be illegal if the banks were serving as broker.

[1]: That is, accepting an order and then trading for yourself based on the fact that you received the order before you fill the order.

I'm not sure getting rid of insider trading laws makes markets more fair. The incentives are still unchanged and the situation is still unchanged.

For example, let's take two worlds: one with illegal insider trading and one with legal insider trading.

With illegal insider trading: Banks learn about BASF's customers and front run derivatives to make money off the ensuing price change.

With legal insider trading: Banks learn about BASF's customers and front run derivatives to make money off the ensuing price change.

The two situations are the same but in one scenario the bad actors go unpunished. I think a better solution analysis would include upstream and downstream market participants, their goals/interests, and analyze the incentives for each institution and individual.

How exactly is this insider trading? Insider trading is a fairly specific concept, and it doesn't seem to be relevant here (for example, this informal description is clear enough and doesn't apply: http://www.sec.gov/answers/insider.htm).

When a company trades with a bank to manage its risk, it gives information away by telling the bank that it wants to trade. That is not "insider" information at all. What it gets in return depends on how the company negotiates the price; it could get nothing at all, in which case it's a bit of a failure on its part. The bank is under no obligation to not use that information to make guesses about the market situation. That information is valuable to the bank, and the bank might even offer discounts to the client to get the client to trade with it first.

If the company believes it leaves money on the table by disclosing the information about its order flow, it's free not to deal with the bank. What you're describing is mostly market-making, there's no insider trading here.

P.S. Another thing this is not is front-running. If you come to me wanting to trade, I trade with you, complete the trade, then decide for myself that you're clever and you probably know where the price will go, then trade for myself, that is not front-running because of the order in which those things happened. If you "leave money on the table" by disclosing to me what you know about the price and I take advantage of that, conventional market theory says it's kind of your own fault, regardless of how unhappy you are about it. There are things you can do to not disclose such things, such as trading with many dealers at once. In fact, the skill of trading without moving the market is really valuable.

Umm, the site you linked appears to say exactly the opposite. Here's what is says:

> Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security.

Here is an example it gives of insider trading:

> Employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded;

Isn't that exactly what the parent is describing? The banks used nonpublic information given to them to provide other services.

As far as I can tell, I interpreted that page correctly. When a company approaches a bank to make a trade, there is no relationship of trust and confidence between them (unless there's some specific legal promise that says otherwise). Why do you think there is/should be? That page gives examples of people in such relationships: corporate officers, directors, employees, friends of employees, etc, who use a company's private information to trade for themselves.

But when a company (rather than some privileged employee), approaches a bank, and reveals that it wants to make a trade, it has no special relationship with the bank.

Another thing is that the meaning of "securities" is quite specific, and doesn't cover commodities. I don't think this would be insider trading even with securities.

Yet another downside of very broad interpretations of insider trading is that if someone invests time and effort into studying market conditions, the resulting research is non-public, yet they would be perfectly justified in trading on their own non-public information. It is only specific cases of non-public information obtained through privileged access that are insider trading.

A bank having access to a company's order flow by having that company reveal the flow to them is not engaged in insider trading, it's just doing a good job of participating in the market and studying market conditions. Someone else who wants to buy/sell the commodities from the bank gets a better price as a result. If the bank didn't have a good idea of the market conditions, it would offer worse prices to compensate itself for the uncertainty.

This is a great example of what Nassim Taleb would call "lack of skin in the game"[1].

It's a wonder that we don't see more of these crimes, given that the rewards (if they don't get caught) accrue to the parties responsible, while the punishments (if caught) are suffered almost exclusively by everybody else. The people who made the criminal decisions do not suffer when the corporation is fined/santioned, it's shareholders, innocent employees and society at large who do. In other words, there's very little disincentive against this behavior.

What we really should consider is adding personal criminal liability to corporate officers who are found to either commit or condone financial crimes, as far up in the call stack as it can be proven.

1. http://www.amazon.com/Antifragile-Things-That-Disorder-Incer...

Fraud is fraud. I understand that it is possible for officers of corporations to face jail if found guilty of fraud.

My understanding is the lack of will (or resources) for entities like the DOJ/SEC to investigate and punish those responsible.

> According to the complaint, the four companies participated in twice-daily conference calls to set global price benchmarks for platinum and palladium, which also affected derivative products based on the precious metals.

I was bond trader so I don't know the specifics of the platinum and palladium markets, but my guess is they are pretty illiquid. A significant portion of it is likely traded off-exchange so discovery of the true value of the commodity is a huge issue. It sounds like these four companies see a lot of flow in one form or another and thus have a better idea of what the true market price is. They also probably have significant counter party exposure to each other through derivative contracts. Meeting twice daily to compare notes and settle on a price to adjust margin, etc. It doesn't sound very nefarious. It just sounds like a bunch of market participants trying to figure out the right price. And of course they use this information to make money for themselves - that's how a market making operation works.

Now you could make the argument that regulation should push more of this type of trading onto an anonymous Exchange where price discovery is available to everyone and this drives down the information advantage that insiders have. The Government pushed that with swaps to various degrees of success. Hopefully they continue to do more of it.

You are probably right about the market being not that liquid, but it's not like illiquidity is a requirement, just take a look at the lawsuits for rigging the interest rate and FX benchmarks.

As it happens, the libor rate rigging was due to illiquidity. Specifically, illiquidity in the uncollateralised loan market.

This happened because the broker-dealers stopped believing that their counterparts would still be afloat in 3 months. They required collateral and that gets funded on a daily basis.

As such, the usual flow of longer term loans dried up and so the rate setters effectively had to make up the numbers. The scandal was that swap traders and management influenced their rates, not that they were made up.

I agree with you on the fx rigging though. The allegations are, as i understand it, that there was collusion such that front running became viable.

It's unfortunate, but these days when I hear about rapid price fluctuations my "knee jerk" reaction is:

1) Who HAS the market in 'X' cornered, and is working to drive prices up so they can unload their shares.

2) Who is WORKING to corner the market in 'X' by driving prices down.

The fortunate thing (I think) is that removing barriers from access to data will eventually make schemes like this all but extinct. It will no longer be how rich people get richer. It will be how crooks end up in jail.

I wonder whether this is just a speculative suit based on past performance with the LIBOR scandal, or whether they actually have some sort of smoking gun. The article doesn't really mention either way.

I found this link, which seems much more informative: http://www.reuters.com/article/2014/11/26/us-platinum-pallad...

Unfortunately, it's still not clear to me if there's a smoking gun, or if this is all just part of a general move away from manipulatable benchmarks.

I'd have to imagine they have something. It explicitly mentions twice-daily meetings, so there must be some insider knowledge of what went on.

Besides, the collective lawyer-power of these banks is no joke. You don't go against them unless you have them dead-to-rights.

As an aside, if they DO have this kind of info, it will have to set off international investigations of the LIBOR scandal type, no?

> It explicitly mentions twice-daily meetings, so there must be some insider knowledge of what went on.

Not at all.

"The fixing process is governed by a set of Rules for the Administration and Conduct of The London Platinum and Palladium Market Fixings (the Fixing Rules).The current version of the Fixing Rules, made under Article 74 of The London Platinum and Palladium Fixing Company Limited’s Articles of Association, became effective on 29 July 2014.

Pursuant to the Fixing Rules, representatives of the four members of The London Platinum and Palladium Fixing Company Limited (the Company) dial in to a secure conference facility to determine the single trading prices for platinum and palladium at 9.45 am and 2.00 pm London time on each London business day. The price for platinum is determined first, followed by the price for palladium."

That's a quote from here: http://www.lppm.com/contentitem.aspx?cid=19

And it refers to how (at the moment) the price of platinum and palladium is officially reported. The allegation is not that the twice-daily meetings occurred, it's that the results of those meetings was rigged.

Given that there are only 4 members that decide on the price, it seems like it's rigged by design.

There has been some interest in creating laws against insider trading for commodities, but such laws don't exist, and this case is just a class action of jewelers angry about manipulation on an obscure metal commodity. The LIBOR scandal was a price fixing operation (most or all banks that could set the rate were colluding for collective interest), and the levels of impact are different worlds. The LIBOR scandal was a blatantly criminal action of an almost incalculable scale, and it has had little impact, so what does that say about a class action for legal trading activity?

These years are a boon for financial education: we are getting to learn everything: derivatives (including swaps, by the way), forex, the libor, the meaning of a Ponzi scheme (thanks to Madoff), insider trading, and now front running.

I say: these years will be taught in law schools and in finance masters for ever. History in the making.

If one is paying attention, one can get quite an education on finance. It's just that there are few of us actually paying attention.

I'd go back to Enron/healthsouth as the begining of the modern education, but yeah, I definitely agree.

There's something 'regular citizens' wrestle with that the elites never seem to: a sense of moral duty.

Actually I'm sure that elites feel a sense of moral duty, for example to their family members and friends. That's a problem we all have: Extending our ethical intuitions to everyone. It's much easier to act ethically with respect to the person right next to you, harder to act ethically to the person on the other side of the planet. But consider also that an egalitarian ethics is a much easier sell to working people, whereas an ethics of nobility is a more natural fit for the ruling class. There's a lot of power to that old idea that economic conditions determine systems of beliefs. Anyway, my point is that it’s not that elites don’t have morals, they just have different ones.

Seems like 'regular citizens' have a problem then...

This doesn't even mention the issue with them delaying aluminum deliveries to raise those prices.

Probably because 1) the alleged actions were completely different and 2) that didn't actually happen.

(To be clear: It was not alleged that Goldman delayed aluminum deliveries to raise the price of aluminum. The allegation was that Goldman paid people to store metal in warranted warehouses that had slow withdrawals, which had the side effect of raising the premium which metals in non-warranted warehouses command over metal in warranted warehouses. Not only is it not clear that this happened, it's also not illegal—the lawsuit was thrown out. Plus, the actual price of aluminum was actually falling over this period, and nobody thinks Goldman's actions influenced this price.)

If you'd like to read a lot more about aluminum markets than you probably want, this article is pretty good: http://www.bloombergview.com/articles/2014-09-03/the-goldman...

Because it's not clear that was done to affect aluminium prices, as a judge recently agreed. Rather it's more likely they delayed aluminium deliveries because they were in stupid contracts that meant they got more money the longer they took to deliver.

Without commenting on the merit of the recent suit I'll just point out that an illegal scheme to rig aluminum prices might look the same. These are smart people. It would be ridiculous to expect to find incriminating emails with subjects like: Fwd: Fwd: Re: Our illegal scheme to rig prices and make mad bucks LOL or contracts with clauses that spell out the entire details of a scheme in a simple manner.

Intent does matter in terms of whether something is illegal price fixing. If you have some other scheme to make money that involves buying or selling a lot of aluminium at particular prices, and you also have some aluminium holdings that mean you profit from the price movements that you yourself caused, that's... shady, but generally not actually illegal.

And we generally do tend to find such emails, even in Goldman. It's a big company that does all its business in writing.

It's not just precious metals. Remember the aluminum price manipulation from these guys last year? http://thedailyshow.cc.com/videos/aa0rnb/john-oliver-s-arcan...

Shocked, I say. Shocked.

+ insider trading isn't illegal in commodities -- is that the issue here?

This appears to be a case of front running, which is illegal in the commodities market.

Why? Its like banks never crossed the line to get more profits in the recent history?

This is sarcasm. Its a direct quote from the movie Casablanca (one of the all time classics).

When ordered to shut down a bar, the police captain uses the excuse that illegal gambling is taking place in the bar. But the Captain is a frequent patron of the illicit gambling.

The exact quote is roughly

"Shocked, I say. Shocked to find that gambling has been going on in this location."

"Your winnings sir."

"Thank you."

Ow, you got me. I am ashamed to admit I missed most american classic movies. Thank you for the reference, its on my list now.

"The exact quote is roughly"


It was sarcasm, of the drier variety.

And, also, of the well known variety.

Take every single penny back and 10 times more. Put everyone involved in prison.

This is a law suit. It's unclear to me what's "unlawful" in this case. Did they violate any regulation of the market for these metals?

What kind of crazy hijinks are the banks going to get into next?

I expect no change from any elected official, even though my elected official is Liz Warren...

Every time some huge scandal like this is broken (LIBOR, aluminum fixing, mortgage default swaps) I openly wonder how long it's going to be before people start wrecking things out of anger.

If the SEC weren't yellow-bellied cowards they might actually do something about this. Too bad regulatory capture and good old bribery and corruption are rampant.

Legalize insider trading. You can't prevent it.

Legalize insider trading. You can't prevent it.

Why can't we first try actively prosecuting the individuals who take part in these frauds?

That seems to be the one action missing from the recent banking scandals.

By definition it wouldn't be fraudulent if it was legalized.

One interesting point is if it was legal, it would be in the open, and market forces might intensely force it out. You vs your ex- and future- coworkers in the regulatory agencies is pretty easy to outsmart, you vs every other player is harder to outsmart.

Another interesting point is in the olden days when stocks were traded by telegram and fractional prices and computers were human females with arithmetic skills, an abstract false market where we pretend there's no insider trading is simpler and simpler was computationally required. In 2014 thats not a valid argument anymore.

20 firms with 20 slightly false insider modified prices are just going to result in slightly wealthier arb players and slightly less false prices.

Rather than not knowing who will get screwed when by insider trading but there being a long term average cost to the economy of X making it all public would result in a known predetermined measurable and predictable cost of perhaps X/10 or X/100.

There are a bazillion different forms of insider trading, and this discussion would be somewhat separate from the classic trade secret brokering, where stocks trade hands before a confidential public announcement.

Insider trading is not fraud. If someone is merely trading based on insider knowledge (that is, they aren't also being fraudulent about it), there is no deception. A person ought to be able to dispose of their property when and how they see fit. Moreover, we should actually want insider trading to happen more often, since prices transmit knowledge, and more knowledge earlier is a good thing for markets.

This is why some people, myself included, believe insider trading is a victimless "crime" which should be decriminalized.

On the contrary, as Ambrose says (De Offic. iii, 10): "In all contracts the defects of the salable commodity must be stated; and unless the seller make them known, although the buyer has already acquired a right to them, the contract is voided on account of the fraudulent action."[0]

It is altogether sinful to have recourse to deceit in order to sell a thing for more than its just price, because this is to deceive one's neighbor so as to injure him.[1]

It seems to me, generally in the case of publicly traded securities, that you may assume that your counterparty in any trade has access to all the same information you do in making their decision to buy what you are selling or to sell what you are buying.

However, this assumption no longer holds if you knowingly make use of insider information in making a trade. In this case, it is more likely than not that the counterparty to your trade does not hold the same information that you do, and hence executing such a trade can rightly be called fraudulent.

An obvious exception would be that you can make the same trade, off-exchange, with someone you know personally and to whom you can privately relate the relevant insider information before making the trade. Is this the type of circumstance you meant when you said "merely trading based on insider knowledge... there is no deception"?

[0] http://www.newadvent.org/summa/3077.htm#article3

[1] http://www.newadvent.org/summa/3077.htm#article1

The point is that all investors should have equal access to information. Of course some investors are more able to fly a surveillance helicopter over a warehouse than others, but there's an equality in principle there: anyone with the money can hire their own helicopter.

If one investor has a friend inside the company and another doesn't, that's different. That's not a difference in resources, that's a difference in how the company itself is treating its investors. It's inequitable on the face; more pragmatically, it makes it much easier for the rich to exploit their advantages if they can just walk up to company officers and bribe them, which exacerbates inequality. Anything the company tells one investor, it is and should be obliged to tell all of them (and all at the same time).

I don't have much of an opinion one way or another about insider trading laws. That said, I think the single biggest benefit to removing them would be destroying this fictional notion that all investors have equal access to ALL potential investor relevant information. This is simply untrue and anyone investing with the idea that it is true is deluding themselves.

Insider trading laws don't try to make everyone have equal access to information, they try to make everyone have equal access to a very constrained subset of information, because any legal scheme that tried to do more than that would be destined to fail.

Legalize [crime]. You can't prevent it.

First of all insider trading is largely legal in the commodities market, and secondly this case doesn't appear to be about insider trading, but about front running which is something different.

If you open source all contracts and all internal and external communication of banks then I am for legalizing insider trading because it can't exist.

The US government has the resources necessary to fight any fight they want to.

The US government does not have the will to fight this particular fight.

Ie. regulatory capture.


Not only you can't prevent it

There are many crimes that can't be 100% prevented, whether burglary, rape or murder.

Why should we give up on entirely?

It may sound counter-intuitive, but I think access to the raw data in markets can. A good example can be found in a movie called "freakonomics". Purely based on analysis of data, data scientists can PROVE (statistically this would mean almost 100% chance that the numbers don't add up) that something is being rigged.

So you don't really need a confession or even to investigate anyone in particular. All you need is the data.

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