It’s now five years since the early warning signs of what would develop into the global financial crisis first started to show. Extraordinarily, there’s little evidence that bankers have mended their ways. Indeed, so far this year, we’ve seen five glaring examples that bankers continue to flaunt the rules in their quest for massive profits …
1. Money laundering
This is the current banking scandal, after the UK bank Standard Chartered overnight agreeing to pay $340 million to New York’s top banking regulator to settle charges that it hid more than 60,000 financial deals worth at least $250 billion on behalf of its Iranian client.
But Standard Chartered is far from the only major global bank stung for this activity. Just over a fortnight ago, the giant British bank HSBC revealed that it had set aside $700 million to cover the cost of US fines for laundering the money of Mexican drug cartels. And in June, the massive Dutch ING Bank agreed to pay a $619 million penalty for violating US economic sanctions by moving billions of dollars through the US financial system on behalf of Cuban and Iranian clients.
2. Manipulation of the key Libor interest rate
The manipulation of the London Interbank Overnight Rate, which is used as the reference for an estimated $US360 trillion in global financial deals, is the biggest fraud in modern financial history.
In late June, the British bank Barclays week agreed to pay a £290 million ($US453 million) fine — the largest ever in the City of London — to settle a UK and US probe that revealed the bank’s traders blatantly manipulated their Libor submissions to disguise the high cost of the bank’s own funding and to boost the profits of certain traders. The scandal, which has already led to the resignation of three of Barclay’s most senior executives, is threatening to envelop other large European and US banks.
3. Using their own money for speculation
This was best exemplified by the US banking giant JP Morgan Chase, which has been forced to confess that one of the traders in its UK operations — known as the “London Whale” — managed to rack up losses of $US5.8 billion.
The episode has dented the reputation of the bank’s boss, Jamie Dimon, who was previously considered one of the shrewdest Wall Street bankers. Dimon initially downplayed worries about the trade, calling them a “tempest in a teapot”, although he later admitted his comments were “stupid”.
The bank unwound most of the troubled trades in the second quarter, booking losses of $5.8 billion, but conceded that the final losses could still top $7 billion. It also admitted there had been a “material weakness” in the bank’s internal controls, which meant that the high valuations set by traders were not picked up.
4. Failing to properly protect client money
After last October’s collapse of the commodities brokerage firm MF Global, which saw $1.6 billion in client money vaporise, there were promises that it would never happen again. Incredibly, it has. Peregrine Financial Group, the futures broker, collapsed last month with a $215 million shortfall in its client accounts and its founder and boss, Russell Wasendorf snr, was overnight indicted on 31 counts of lying to US regulators about the company’s finances.
Wasendorf, who attempted suicide last month on the eve of Peregrine’s surprise bankruptcy filing, left a note in which he confessed to stealing hundreds of millions of dollars from customers for nearly two decades.
5. Insider trading
Last October, Raj Rajaratnam, the founder of the Galleon hedge fund, was sentenced to 11 years in prison, the longest-ever term handed down for an insider-trading case. Two months ago, the case had a sequel when Rajat Gupta, a former Goldman Sachs director and managing partner of the consulting firm McKinsey, was also found guilty on four criminal counts of insider trading.
The prosecution accused Gupta, who used to be one of the leading business figures in the US, of using his privileged position to supply insider tips to Rajaratnam, including confidential information on Goldman Sachs. In one incident, Gupta called Rajaratnam a minute after a conference call at which Goldman’s boss, Lloyd Blankfein, announced that billionaire investor Warren Buffett planned to invest $5 billion in the bank. Galleon immediately bought $43 million of Goldman shares in the final three minutes of the trading day, and reaped a profit of nearly $1 million.
What conclusions can we draw from these five incidents? In the first place, bankers are continuing to flaunt the rules, clearly believing that they’re unlikely to be found out.
Secondly, it’s clear that regulators have been far too trusting. In the Libor case, the Bank of England clearly failed to pick to concerns voiced by US authorities about the need to reform the Libor process to reduce the banks’ “incentive to misreport” their borrowing costs. And clearly, US regulators failed to ensure that client funds were properly protected in the cases of MF Global and Peregrine.
The final conclusion is that bankers will continue to deny that anything is wrong with the industry, as Jamie Dimon did this week in an interview with New York Magazine.
“Everyone is talking about the culture, the culture, and all that, and it’s just not true,” he said. “Most bankers are decent, honourable people. We’re wrapped up in all this crap right now. We made a mistake. We’re sorry. It doesn’t detract from all the good things we’ve done. I am not responsible for the financial crisis.”
*This article was first published at Business Spectator
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