by Filipe R. Costa
When I woke up one morning last week and read the news on the banks’ forex fines, I thought to myself that I should call my foreign exchange broker at one of those London offices in order to get some extra information about the exact price at which were are willing to fix EUR/USD at 4 p.m. that afternoon.
I dropped the FT into the bin realising I no longer need to spend hours on the internet digging for information on price targets, directions, technical indicators, news, etc. All I need is a phone and a good contact at Citi, JP Morgan, RBS, UBS, HSBC, or Bofa. Any one will do as it appears they share information between them. Barclays may also join the party, but we just don’t know yet, so don’t give them a call. And of course don’t spend a boring hour watching Mario Draghi answering journalist questions on its monthly press conference, as he is as blind as you regarding foreign exchange.
The above six banks agreed to pay record fines – amounting to $4.3 billion (£2.73 billion) – to settle allegations made by financial regulators in the UK, Switzerland, and the US that they attempted to rig foreign exchange.
Traders at these banks were swapping information regarding each bank’s net position in various currencies in order to maximise their global profit when fixing the price for foreign exchange at 4 p.m.. Of course, besides being a breach of the duty they have to clients, many contracts are settled based on that rigged fixing, which means the banks’ profits are someone else’s losses. The FCA in the UK imposed fines amounting to $1.7 billion (£1.1 billion) and were the largest ever imposed by a UK regulator. If you traded in foreign exchange between 2008 and 2013 you most likely were affected by a rigged market.
But, it is not only in foreign exchange that banks excel at rigging.
As we know, they are also very good at setting Libor rates on their favour. And they are also very good at creating safe securities out of junk assets, as mortgage-backed securities are good examples of. The banks were at the heart of the sub-prime crisis that led to the collapse of Lehman Brothers and to a real economic crisis around the world. They were also the main reason why Spain had to ask for bailouts funds, as they collectively failed to evaluate risks properly when lending funds to their customers. We save the banks at all times, as they are too big to fail, just making them even bigger, to the point we lost control over them.
Making money is a risky business, and risk is something people in general don’t like.
So why not tweak the rules a little bit (in particular if we can)? That was exactly what some dealers have allegedly done for years without the banks noticing it. It remembers me of Yasuo Hamanaka, aka Mr. Copper, who cornered the market for the metal for over a decade, making billions for his employer. Everybody knew about him. But in the end he went to jail and his employer alleged not knowing anything about his misbehaviour – they never do (as long as it is profitable).
But while the forex case is settled, financial markets continue to climb as if nothing had happened. The banks pay the fines and eventually put aside a few more billion for the next settlement and then for the next, and so on. Being flexible still compensates, as record fines are lower than record profits. This case is just another blow for an industry that is the patient zero for many of the current problems we have and it is a concern for all those who trade in financial markets, who no longer know what fair prices are.