The world’s biggest banks just can’t seem to stay out of trouble. Over the past several years, we’ve seen a variety of scandals and wrongdoings by the world of big finance exposed, including the LIBOR situation and the financial collapse of 2008. Yet, the behavior of the big banks just doesn’t seem to change, because here we are again with another huge fine being handed down by regulators.
Last year, Reuters reported that HSBC, Royal Bank of Scotland, JPMorgan Chase & Co, Citigroup Inc, UBS AG and Bank of America have been levied $4.3 billion in penalties for failing to rein in traders who were manipulating the foreign exchange market. After a year’s worth of investigations, which culminated with the fines actually being handed down by regulators, it was found that traders were swapping confidential client information and coordinating trades in an effort to boost profits. The benchmark that was specifically manipulated was used to value holdings by treasurers and asset managers.
“Today’s record fines mark the gravity of the failings we found, and firms need to take responsibility for putting it right,” Britain’s Financial Conduct Authority CEO Martin Wheatley said. He added that banks need to take responsibility for their employees, and ensure that traders are following the rules. It’s expected that many traders will actually be fired as a result of the investigation, and that many firms will increase automated trading as well. There are also some regulatory changes that are expected to come out of the G20 summit planned for the near future.
While Britain’s regulators handed down the biggest penalty, other regulators are expected to lay down their own fines. Reuters says American regulators are likely to issue a $1.48 billion fine, while Swiss authorities are asking for an additional $139 million.
Given the reckless, Wild West-like feeling of the world of big finance, this sort of behavior isn’t exactly surprising, and the billions in fines that are being handed down seem like simply another drop in the bucket. This most recent example of manipulating the market isn’t all that much different from many of the others, in that it is very hard to understand exactly what was going on, from a layman’s perspective. What is important to understand is that these banks have yet again abused their positions to make quick profits. Yes, generating revenues is technically what these institutions are supposed to do, but the issue is that they are doing so with little regard for the rules, and often at the expense of everyone else.
This particular market that was being manipulated averages trading of more than $5.3 trillion every day. Compare that to the fine of $4.3 billion (and any additional penalties that trickle in), and the amount of money that these banks could have possibly made as a result of their bad behavior, and it’s probably not a bad deal for the banks. It does seem that finding out exactly how much was made would probably be an important part of the investigation, but as one Bloomberg article says, the U.K. regulators didn’t want to disclose that information. The FCA apparently felt that “that it is not practicable to quantify the financial benefit.”
But that is the crux of the issue. Not specifically for this scandal, but for pretty much everything that goes down in the world of high finance and the big banks. These institutions only do things that provide them with a profit. If they were not making money, then they wouldn’t engage in certain actions. Since we’re continually seeing these banks and financial institutions engage in completely reckless, unethical and illegal behavior, that means that it’s profitable for them.
With that in mind, it’s probably a fair assumption to think that whatever these banks did make off of manipulating the foreign currency market was a much higher sum than the penalties it’s actually paying for doing so.
This issue is something that many people are already aware of, especially in the wake of the housing market meltdown, global recession, and slew of other financial scandals. Obviously, the perpetrators behind these events had reasons to do so, and those reasons were usually to make immense amounts of money. But here’s the problem: When these banks are asked to pay fines when ultimately confronted by regulators, they opt to do so instead of facing criminal charges.
Since these fines add up to a typically minute amount in terms of overall profits and revenues, why wouldn’t these banks allow their employees to run amok? Think about it this way, if you could steal five cars, but the police only took one back, what’s the incentive to stop stealing cars?
Instead of real penalties that will actually discourage wrongdoing, banks get a slap on the wrist and some tough rhetoric, like that handed down by U.S. Commodity Futures Trading Commission (CFTC) Chairman Tim Massad, who says that the behavior displayed by the big banks in this most recent case is unacceptable. “Integrity of the market place is a paramount concern to the CFTC, and today’s enforcement action should be seen as a message to all market participants that wrongdoing and foul play in the financial markets is unacceptable and will not be tolerated,” he said in a statement.
While that may have the banks feeling bad about themselves for a short time, they will likely get right back to business once the next news cycle hits. A Mother Jones article even recants how some government staff members are completely aware that this system of punishment is broken and useless, and that the banks and traders themselves should face criminal charges.
Remember, these are the same institutions and individuals who crashed the entire world’s economy only a handful of years ago, and only one person ended up going to prison because of it. With so much to gain and so little risk of actually facing real penalties, can you really blame those in the financial world for acting as they do?
Follow Sam on Twitter @Sliceofginger
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