Global banking regulators are touting the $4.3 billion currency manipulation settlement with six of the world's largest banks as an important step in shoring up the integrity of financial markets. But experts are less convinced that the fine will prove to be an effective deterrent to the kind of industry misconduct that has become routine in recent decades.
U.S. securities and banking regulators, along with government watchdogs in the U.K. and Switzerland, on Wednesday announced the fines against Bank of America (BAC), Citigroup (C), HSBC, JPMorgan Chase (JPM), UBS (UBS) and the Royal Bank of Scotland. JPMorgan and Citi were penalized more than $1 billion each. UBS was hit with a $800 million fine while RBS and HSBC will pay $634 million and $618 million, respectively. Bank of America was penalized $800 million by the Office of the Comptroller of the Currency. A separate investigation is the U.S. is being overseen by the U.S. Department of Justice.
How major currencies are valued affects trillions of dollars' worth of daily economic, financial and commercial activities, including the cost of imported goods sold in the U.S. Many Americans also hold foreign stocks or own shares in U.S. companies that are dependent on sales overseas.
"People should be concerned about this for several reasons," said Robert C. Hockett, a professor at Cornell Law School, in an email to CBS MoneyWatch. "For one thing, the alleged malefactors here are charged with trading on confidential client information -- that wrongs clients and rigs the market in favor of insiders in a manner that undermines confidence in the market."
The traders involved in the scheme didn't try particularly hard to hide what they were up to. In one email exchange included in a document released by the U.S. Commodity Futures Trading Commission, two traders discussed whether to include a third in their activities and wonder if he would "protect us." In a separate exchange, another trader asked his counterpart at JPMorgan if they could "join forces." The JPMorgan trader replies "perfick [sic]...let's double team them."
The misconduct was not limited to the private sector. The Bank of England fired Martin Mallett, its chief foreign exchange dealer, after an investigation uncovered emails that indicated that he knew about collusion by the banks in the foreign currency market as far back as 2006. Even so, there was no evidence that Mallett acted in bad faith though he failed to notify his superiors about his concerns.
The foreign exchange scandal comes less than a year after regulators in Europe levied $2.3 billion in fines against major banks for their role in rigging the London Interbank Offered Rate (LIBOR), a benchmark rate that banks use to set the rates on the short-term loans that borrow from one another. In the U.S., banks have agreed to pay tens of billions on dollars for selling bogus mortgage securities in the run-up to the financial crisis.
"A mere six years after the last great crash, and only two and a half years after the similar LIBOR scandal, we find that financial intermediaries are nevertheless still defrauding their clients and harming us all," Hockett said. "The forex market is by far the largest global financial market, with literally trillions of dollars' worth of trades every day. It is almost as if malefactors have been saving the best for last."
What makes the foreign exchange and LIBOR scandals so unique is that they reflect a level of collusion among financial actors that many observers thought impossible.
"Not only did they rig it, but they bragged about how they rigged it," said William Black, a professor of economics and law at the University of Missouri who led the U.S. investigation into the savings and loan scandal in the 1980s, in an interview. The currency manipulation scheme was "the second largest fraud in world history," after the LIBOR scandal, he added.
Although today's settlement leaves open the possibility of criminal proceedings against big banks involved in currency rigging, Hockett and Black express skepticism that prosecutors will follow through. After all, U.S. financial services firms have agreed to pay billions in fines for their parts in the Great Recession, the worst economic slowdown since the Great Depression. As in the LIBOR and the foreign exchange scandals, no senior banker has been charged with any wrongdoing.
"It's no conspiracy theory," Black said. "It is a real conspiracy."