Some additional reading:
Quote: "They also got together in chat rooms to, essentially, lay off some of their client risk to one another prior to the fixing. That laying off of client risk, again, looks a bit conspiratorial, but it probably made markets more efficient, and is not obviously bad or illegal. Then they went beyond that efficient laying off of risk, trying to move the price in their favor. They seem to have made some money doing this, at the expense of their clients, but my suspicion was that they were "tinkering at the edges of real supply and demand," optimizing how they made money trading their combined customer order book rather than truly rigging the FX market."
This is an alternative viewpoint:
Quote: "Although there was some behaviour that was clearly on the other side of the line, the regulators also made clear that lots of the practices involved were not intrinsically criminal; this was an investigation into a grey area, not a straightforward case of lying. Of course, the industry has less than zero claim to the benefit of anyone’s doubt, and people will be instantly suspicious of claims that “it’s more complicated than that”, so maybe I can explain what went on in the FX market through the medium of a series of examples..."
Some examples of what these traders discussed in the chat rooms, from the Barclays consent order (https://s3.amazonaws.com/s3.documentcloud.org/documents/2084...)
One particular chat room, referred to by the participating traders and other traders as the “Cartel” included FX traders from Citigroup, JP Morgan, UBS, RBS and Barclays who specialized in trading the Euro.
One Barclays FX trader, when he became the main Euro trader for Barclays in 2011, was desperate to be invited to join the Cartel because of the trading advantages from sharing information with the other main traders of the Euro. After extensive discussion of whether or not this trader “would add value” to the Cartel, he was invited to join for a “1 month trial,” but was advised “mess this up and sleep with one eye open at night.”
On one occasion, a Barclays FX trader explicitly discussed with a JP Morgan trader coordinating the prices offered for USD/South African Rand to a particular customer, stating, in a November 4, 2010 chat, “if you win this we should coordinate you can show a real low one and will still mark it little lower haha.” After the JP Morgan trader suggested that they “prolly shudnt put this on perma chat,” the Barclays trader responded “if this is the chat that puts me over the edge than oh well. much worse out there.”
On June 10, 2011, the Barclays trader stated explicitly in another chat that “we trying to manipulate it a bit more in ny now . . . a coupld buddies of mine and I.”
As the future Co-Head of UK FX Hedge Fund Sales (who was then a Vice President in the New York Branch) wrote in a November 5, 2010 chat: “markup is making sure you make the right decision on price . . . which is whats the worst price i can put on this where the customers decision to trade with me or give me future business doesn’t change . . . if you aint cheating, you aint trying.”
Sounds like fraud, but if some administrative body decided fraud was legal, that really makes it so... And don't look at that small book governing your nation laws, it's irrelevant anyway.
The clients (which are also large financial entities) are generally not screaming about fraud, they're just getting a deal that isn't as good as they thought.
Large financial organizations have a vested interest against strict regulation of the financial system, and certainly executives have a vested interest against the prosecution of executives, regardless of whether they (pr rather, their shareholders) got screwed or not in this particular case.
These concerns include but are not limited to:
* risk tolerance
* direct and indirect costs (fees wages etc) associated with other methods.
* speed and/or predictability of transactions
* how this particular bit of business fit into an overall hedging strategy
* partnership considerations with the bank
These all factor into why a client would choose one option over another, even if the chosen option looks like a lower gain.
By analogy: this week I chose to have the dealership replace a broken mirror on my vehicle, rather than wait a day and have a nearby mechanic do so for $100 less. This choice was not the least expensive option, but it was the lowest hassle option. In terms of dollars it wasn't the most profitable transaction. In terms of spent time, it was still not the most profitable transaction. In terms of my risk tolerance and hassle, it was a good decision and I'm fine with it.
I'm not persuaded by your analogy in which you compare a one-time transaction relating to an infrequent type of event to a systematic conspiracy to deceive clients and competitors alike in transactions that occur frequently.
Hell for all I know, the clients could have been flat out told: "look this whole thing is market manipulation, we're getting you profit consistency and stability that you could not otherwise get, albeit at a lower rate than individual transactions". I regularly choose index funds over picking stocks for the reason of lower risk albeit at lower profit potential.
I'm not saying anyone did anything right or wrong. I was just discussing a particular point that seemed relevant. It is possible that there was wrong-doing, that there was market manipulation, and that the clients still chose reasonably and in their interests despite that.
Going back to my analogy, just because I made the decision the way I did, does not mean the dealer is or is not involved in deceptive business practices, gouging or other scummy tactics.
I'm not sure that increased penalties, sending execs to jail, or more regulation will fix banking. If the banks are "too big to jail/fail" then maybe we should make them smaller...
What makes you think that the people involved in the disruption of the banks won't partake in the same shenanigans? Do you think "bankers" are inherently evil, while their replacements will be inherently good? The Bitcoin world says otherwise. "Tech people" are stealing people's money left and right.
>If the banks are "too big to jail/fail" then maybe we should make them smaller...
Sure, and then we'll let all the pseudo-government-controlled banks in say, China, or even Canada do all the large-scale banking business globally.
The business of banking is vastly larger than cheqing accounts and ridiculous ATM fees that people like us deal with day to day and complain about. That's why the industry is heavily regulated, and why the banks are so large, and why the local credit union in Podunk isn't underwriting the Facebook IPO. It's also why some SV startup isn't going to ride in and up-end the industry without itself becoming some financial behemoth that needs to be regulated.
Right, but until recently the various functions of finance were embodied in different institutions. Due to pressure from the banks themselves and from the threat of competing banks in Europe the Gramm-Leach-Bliley Act was passed in 1999. This allowed banks to get much larger than they were before and to operate as insurers, commercial banks, and investment banks simultaneously, which they were previously prevented from doing.
Now, I agree with you that these are reasons SV startups won't "disrupt" the banking industry. (Nor do I think this is desirable, but that is another topic.) However, the idea that it is good to have massive consolidation of bank functions into one large corporation is not immediately obvious to me.
This a million times.
As regulation increases, you make sure only the big guys follow it to their satisfaction.
And of course in the end there will be a lot of "hows, ifs, buts" falling through the cracks.
Some regulation of course is needed, but it seems the best regulation is not giving anyone the advantage to be the dominant player.
Finally, the pattern of laws has been deregulatory, not vice versa. Enron was able to engage in fraudulent trade in energy derivatives because the derivatives market was deregulated.
I don't know where you are getting this story (ideology, I suspect), but it is deeply wrong.
Over regulation is a problem exactly because it builds too big to fail corporations. It eliminates competition due to regulatory capture
"Enron was able to engage in fraudulent trade in energy derivatives because the derivatives market was deregulated."
Fraud is fraud.
> I don't know where you are getting this story (ideology, I suspect)
Yes, my ideology is opposed to having idiot bureaucrats stifling progress while regulatory capturing incumbents to their friends. See: Tesla vs. Car dealerships, Uber vs. taxi monopolies, this: http://www.motherjones.com/kevin-drum/2013/10/heres-why-your...
Yes, and lack of regulatory oversight (i.e., law enforcement) produces fraud. We saw this with Enron and later with Countrywide, AIG et al. The line seems pretty clear to me - we deregulated the derivatives market (via the CFMA), Enron makes use of the lack of oversight to perpetuate fraud.
>Over regulation is a problem exactly because it builds too big to fail corporations. It eliminates competition due to regulatory capture
You'll have to spell this out for me, because I just can't see it. Regulatory capture is not "over regulation", it is the opposite, at least in the case of finance - it is the regulatory apparatus failing to do what it should (regulate) because the power lies in those being regulated (e.g. the NY Fed's kowtowing to Goldman).
How do you think you make banks smaller ? Hint: it's through regulation.
The GFC and all the problems it has caused was due to a lack of regulation. It's almost always a good thing. And the highly regulated nature of the Australian financial system is the main reason that it survived the GFC with zero casualties. Capital requirements, lending practices, public disclosure etc. These are aspects of the banking sector which need MORE regulation not less.
I think it's safe to save the scandal for a little longer.
More broadly, executive control is more complete than you suggest. Delegated powers can be audited and controls used to ensure the integrity of the decision-making process. Communications can be monitored, and usually are in banks. Not enacting such controls, or not enforcing them strongly enough, could be seen as negligence.
So ? You just join a chat room on your 4G phone or iPad.
Regardless banks are no different to every other enterprise. The firewalls just capture the URLs and white/black list against some subscribed set. They aren't monitoring every bit of traffic that goes out. Except for maybe PCI compliance e.g. checking for 16 digit numbers passing through the firewall.
2. It isn't necessary after Sarbox.
3. It doesn't matter because they haven't been sued with Sarbox. They've been caught red-handed breaking plenty of other laws.
We have this long distance trucking company. And the shifts are really long. Like say 36 hours of straight driving. So it's common for drivers to take amphetamines to stay awake. Management doesn't do drug tests. If someone takes excessive breaks they are told by low level management to think hard about the problem and see if they cannot come up with some kind of solution wink wink nudge nudge. If the problem doesn't disappear the driver is fired.
After routine testing it is discovered that 40% of drivers usually use amphetamines with an addition 20% saying they have tried it.
In this case, yes I think the CEO should go to jail.
What do you have to say to that?
"The CFTC and OCC orders for Citi have no profit figures at all. So we have one case of Citi making $99,000. The FCA order covers conduct over a six-year period, though that might be a bit generous. Figure 250 trading days a year and you get $150 million of profits for Citi if every single day was as "impressive" and "lovely" as the day singled out by the FCA as, one assumes, a particularly egregious example of manipulation. That's not the case: The CFTC order, for instance, recounts a fixing in which "the Citibank trader reported that he was 'hosed.'" The manipulation was not foolproof, and fools abounded. But take $150 million as an upper bound, and Citi paid about an order of magnitude more in fines than it made in manipulative profits."
Also, don't forget that those banks have huge privilegies (gov backing, FED money, gov bonds dealership etc) in exchange for which they provide a fair market and services. For instance, in theory those banks should have a lot of their privilegies removed as the result of this case. I can assure you that they are extremely happy to pay only the ~$6bn to keep those safe.
Here's an article from May 2006 about the debate over whether the market needs best execution regulations imposed upon it:
The cynic in me reckons at best he'll get a fine, a suspended sentence and we'll never know who he was. Not exactly justice.
I am sure there is more detail on this out there that I don't have time to research, but the linked article is still bullshit.
Also, the "paid by ..." is a very-very interesting topic. Due to their sheer size and market share, they set the price for banking services. They don't even need to collude, but since there are not too many global banking conglomerates, they naturally have a sort of cooperation and competition, which basically leads to similar prices. (Though a bit different price structure, but that's irrelevant for a sizeable enough basket of financial products and sample of consumers.)
So, it's quite impossible to force them to eat the fines, because for that you'd need a bank that wasn't on in this "market optimalization", but is large enough to absorb/caputre the market share if the culprits rise prices. But there doesn't seem to be. (And local smaller banks are already doing as good as they could to charm customers away from the big ones, so it's unlikely that they'll help keeping prices down.)
However, if it's shareholders, that's not a problem. They should exercise some responsibility when voting with their money. And while we're at that, the same goes for taxpayers and customers too.
Unchecked, cheating by bankers distorts the market equilibrium and creates a bubble. The easiest example to see/understand for me is the pretend real-estate value on banks' books during the housing/mortgage bubble.
We had a chance to deflate the bubble completely, but by failing to prosecute the individuals, we only did it partially. Without criminal prosecutions, this is going to happen again soon.
With criminal prosecutions it would still happen again, but we would be insulated/innoculated for at least one generation of bankers and bank managers.
We had an opportunity at that time to
For example, the prosecution of Aaron Swartz seemed gratuitously disproportionate.
Quote: "For all the muted response to Wednesday’s news, Donaldson Capital Management LLC’s Greg Donaldson expressed concern that criminal charges may now become routine. “Once you cross that line and admit you’ve done something bad, you open up Pandora’s box,” said Donaldson, chairman of the Evansville, Indiana-based firm that manages about $1.1 billion. “This settlement just moved the goal post.”
If convictions become too commonplace, the government may have to pursue even tougher penalties. "
No wonder the public yawns at this though. Here's Zerohedge listing all confirmed rigged markets:
Libor - interest rates: http://www.zerohedge.com/news/shocking-details-barclays-epic...
ISDAfix - swaps: http://www.bloomberg.com/news/articles/2013-04-14/banks-drop...
Platts - oil prices: http://www.zerohedge.com/news/2012-10-09/libor-gate-comes-cr...
JP Morgan / BP - FX: http://www.zerohedge.com/news/2014-12-30/rigging-triangle-ex...
WM/Reuters - FX: http://www.zerohedge.com/news/2013-06-11/wmreuters-busted-la...
High-Frequency Trading - equities: http://www.zerohedge.com/news/2013-06-11/hft-stock-manipulat...
UBS - gold: http://www.zerohedge.com/news/2014-11-09/another-conspiracy-...
It is a farce to call this a criminal act when waivers remove all punishment beyond a fine.
Certainly, the intent of these is not to spur in-depth intelligent conversation.
Likely the reason this article is upvoted is that it truly boggles the mind that after years and years of blantant fraud and rigging there is yet one banker to go to jail and instead the politicians, judiciary, regulators and central bankers happily cover for, or even join in on the manipulation and rigging.
If markets were to be un-rigged and allowed to function, banks were to stop getting hand-outs and fraud started to be persecuted, this would only be a good thing for 99.9% of people involved in the finance industry.
Maybe this knee-jerk "anti-finance" climate you speak of would even disappear.
On the other, you want to prohibit all discussion of news that might somehow reflect negatively on certain people involved with some kinds of finance.
Is that right?