A series of recent revelations, not necessarily individually dramatic in themselves, but taken as a whole, begin to define a completely new interpretation of the level of criminality which has infected the financial markets.
The financial crisis opened a Pandora's box of troubles, and among them was the emerging realisation that market practitioners may have been engaging in certain activities, which when viewed through a cynical perspective, might have been construed as criminal.
As more and more facts emerged, it became clearer that what at first might have been called a cynical perspective, was rapidly becoming the only realistic interpretation of the situation. The most important financial markets had become a byword for organised criminality, operated by a gang of men and women to whom the concept of truth and fair dealing had long since ceased to have any meaning.
As each case was uncovered, the more it became obvious that the financial markets were being operated by a group of organised criminal groups, men and women who had formed a series of interlinking social networking, web-driven, communications venues, and who have been using each other to generate financial situations from which one side or other, or indeed, mutually, could profit.
The interesting observation was that in many cases, these market practitioners were working in different financial houses, yet they all appeared to know each other well. To a great extent, we should not be surprised, these markets are small, and local, and the players in this criminal game know each other very well. It pays to make good contacts with others of a similar 'bent', when you set out to manipulate a market, you never know when you may need them!
What is emerging is a recognition that these financial markets have been irresistibly infiltrated by organised criminals - the very phenomenon which we have fought to avoid for so many years, has finally become the reality.
Floyd Norris, who writes the High & Low Finance column for the Friday Business section of the New York Times, has covered the LIBOR scandal in great detail. His words are scarily percipient.
"...The LIBOR market, we now know, was a fraud. There were few — if any — real trades backing the indicator.
A Reuters report states that U.S. and European regulators have fined Dutch lender Rabobank $1 billion (623 million pounds) for rigging benchmark interest rates, making it the fifth bank punished in a scandal that has helped to shred faith in the industry.
Rabobank said on Tuesday it would pay 774 million euros to U.S., British and Dutch regulators after 30 staff were involved in "inappropriate conduct" a scam to manipulate the London Interbank Offered Rate (Libor) and its Euribor cousin - benchmarks for more than $300 trillion of financial assets
Chief Executive Piet Moerland resigned, saying he was shocked by language revealed in emails exchanged by staff involved over six years to 2011. He acknowledged it would arouse indignation, both within an institution founded as a cooperative and among the public at large.
"Such behaviour is entirely contrary to our core values, of which integrity is the most important," he said.
The scandal surrounding the interbank rates that underpin the demands of global finance has prompted authorities to fine five institutions $3.7 billion to date. They have also charged seven men with criminal offences amid a sprawling, global inquiry that has laid bare the failings of regulators and bank bosses.
Dutch Finance Minister Jeroen Dijsselbloem said Rabobank's "shameless fraud by financiers" was far removed from the cooperative ideals of the lender's founders.
Germany's Deutsche Bank, has yet to reach any regulatory settlements.
Deutsche, Germany's largest bank, set aside an extra 1.2 billion euros on Tuesday to deal with potential litigation costs, while UBS in Switzerland was told to hold extra capital to cover looming liabilities.
In March 2011, Rabobank had told the British regulator its Libor-related systems and controls were "fit for purpose".
The FCA said it had found over 500 instances of attempted Libor manipulation, directly or indirectly, involving at least nine managers and 19 other individuals based across the world.
"Rabobank's misconduct is among the most serious we have identified on Libor," said Tracey McDermott, head of financial crime at the FCA. "This is unacceptable." ( Well, that's one way of putting it, I suppose! Ed.)
The U.S. Justice Department agreed to defer criminal charges against Rabobank for two years, and drop charges if the lender complied with demands to cooperate in investigations.
Although it said no executive board members had been aware of or involved in the misconduct, the board had voluntarily forfeited remuneration worth a total of 2 million euros.
UBS has faced the largest Libor penalty to date. It was ordered to pay $1.5 billion last December and two of its former traders have been charged with taking part in an alleged multi-year scheme to rig rates.
"I wish I could say that this won't happen again, but I can't," noted Gary Gensler, the chairman of the U.S. Commodity Futures Trading Commission (CFTC). "Libor and Euribor are not sufficiently anchored in observable transactions.
"Thus, they are basically more akin to fiction than fact."
Rabobank has showed just how international a fraud this was. The authorities said the fraud was carried out by more than two dozen traders and managers at the bank’s offices in London, New York, Utrecht, Tokyo, Singapore and Hong Kong. The bank’s chairman resigned.
Such a huge market created ample incentives to cheat. Sometimes traders wanted to influence the rate so that their derivatives positions would benefit. Other times banks knew that a lot of loans they had made had interest rates that would reset on a certain day, based on a particular Libor rate. Then they wanted to push that rate up, if only for one day.
At Rabobank, the people who submitted the Libor number each day were not even trained to determine what the real market rate was. If there was no request from someone at the bank to push rates up or down, the submitters were told to just repeat the previous day’s number.
The Libor scandal has now prompted regulators to scrutinise benchmarks across other financial markets, from crude oil and swaps and gold to the $5.3 trillion-a-day foreign exchange market, in an effort to stamp out misconduct. Citigroup and JP Morgan confirmed they were working with regulators, while Barclays has suspended six traders amid yet another regulatory probe into possible rigging of the foreign exchange market.
Barclays, which is still punch-drunk from a £290million fine for its part in the Libor rigging controversy, is understood to have taken action after being contacted by regulators.
Barclays has reportedly suspended six traders as part of an internal investigation into alleged price fixing within foreign exchange markets. The bank suspended the group, which includes its chief currency trader, in the last 24 hours, according to a report by the Financial Times.
None are thought to have been formally accused of wrongdoing.
In its Q3 results, released on Wednesday, the bank said it is co-operating with the regulator in regards to its foreign exchange trading activities.
"Various regulatory and enforcement authorities have indicated they are investigating foreign exchange trading, including possible attempts to manipulate certain benchmark currency exchange rates," Barclays said.
"The investigations appear to involve multiple market participants in various countries. Barclays Bank has received enquiries from certain of these authorities related to their particular investigations, is reviewing its foreign exchange trading covering a several year period through August 2013 and is cooperating with the relevant authorities in their investigations.
According to the Bank for International Settlements, global foreign exchange activity rose to £3.3 trillion a day this year. Perhaps not surprisingly, London accounts for the bulk of currency trading, with 41% of global turnover in the market, followed by the United States, which has a 19% share, Singapore with 5.7%, Japan with 5.6% and Hong Kong with 4.1%.
Royal Bank of Scotland is also believed to have suspended two traders as part of the investigation, news which came as US banking giants Citigroup and JP Morgan confirmed they were working with regulators as the global probe deepened, and now, HSBC have confirmed that some of their former employees (no longer employed at the bank) have been identified in an investigation.
Both Barclays and RBS declined to comment on the suspensions, but have confirmed they have been drawn into the investigations. Barclays said alongside its trading update on Thursday that it was also co-operating with enquiries from various authorities and was reviewing its foreign exchange trading activities, over a period of several years to August this year.
It first emerged in June this year that regulators were looking into allegations that City traders had rigged foreign exchange rates to boost profits.
Interestingly, the allegations are believed to involve traders tipping off friends at other banks about foreign exchange deals they were about to make, allowing the other firm to benefit by buying currency at the original price, before the big purchase pushed the price up in the market, a practice known as “front running”, pushing through trades before and during a one minute post-trade window.
RBS said in its third quarter results yesterday that it had been contacted by the UK’s Financial Conduct Authority and other authorities. “The group is reviewing communications and procedures relating to certain currency exchange benchmark rates as well as foreign exchange trading activity and is cooperating with these investigations. At this stage, the group cannot estimate reliably what effect, if any, the outcome of the investigation may have on the group.”
Ross McEwan, RBS chief executive, refused to comment on the case, but said it will “come down very severely on anyone we discover has been breaking the rules”.
What all this frenzied regulatory information requesting and these related investigations reveal, more clearly than any findings may later be allowed to demonstrate, is that the world's financial benchmark markets have been controlled and managed by organised criminal elements for many years.
The very fact that these traders can behave in a way which demonstrates such inter-related conduct, coupled with such a cavalier disregard for the possible outcomes of their activity, identifies a level of criminal dysfunction which has developed far and beyond the reach of any regulatory imagination.
These markets have been allowed to get to these criminogenic dimensions because their practitioners have operated in an atmosphere of regulatory anomie - as far as they were concerned, there were no rules - because that is the message that years of regulatory neglect and failure has inculcated.
I have been a regulator, back in the early days. I know how hard it is to go after the big players and enforce your will on them, but it has got to be done, and they have to be brought to heel. Otherwise they will know that you can't walk the talk, and they will just ignore your worst threats, and carry on flouting all the rules.
This is the climate of 'anything goes' which is inevitably created when the worst that can happen to a bank, even after the most egregious criminal conduct is identified, is that it gets a fine. The regulators do not and never have understood that fines, no matter how big, are simply not an effective punishment. The banks don't care about them, because they always fall on the shoulders of the shareholders, and as long as no-one in senior management gets called to account, and stuck in the dock, then nothing will ever happen.
Oh a few small traders will be relocated to other houses and fitted in to other teams and allowed to carry on trading, and after that, it's business as usual!
How can the UK Government continue to insouciantly maintain that everything in the regulatory garden is rosy and that all is for the best in the best of all possible worlds? Maintaining this fiction is the worst kind of complicity! It tells the markets what they want to hear!
These markets have lost any credibility they might ever have hoped to possess. Why would anyone be willing to put their savings into this mafia-run sink, in the hope that they might get something in return? These are among the most important markets in the world, and if these are run by the crims, then what hope do the rest of us have.
This is such a serious problem and the potential for the investment markets so severe, that I believe it has now reached the stage where it is a political resignation issue. Ultimately, these markets are regulated by agencies, but in the UK, those financial agencies all have to answer to the Treasury, and if George Osborne cannot demonstrate that he has the guts and the clout to kick the crooks out of these benchmark markets, then he had better resign, and let someone else in to do the job.
I am terribly serious about this. Osborne will know what is being alleged in these markets, and he will know that the vast bulk of this dirty, shoddy business is being run through London. He needs to grab hold of Boris Johnson, who is so keen on trumpeting the integrity of the London Markets, and the DoPP, and the SFO and tell them that they have got to put a halt to this climate of crime, once and for all, whatever it takes.
It means that heads are going to have to roll in EC3, some firms will have to go the wall, but the Politicians have got to demonstrate some guts to put an end to this shameless criminality.
They have got to be made to realise that they are paying the price for years of regulatory shilly-shallying, for cosy regulatory capture, while the chaps at the top of the gilded pile took it in turns to regulate their mates, in a cosy cabal which sent all the wrong messages to the spivs and wide-boys on the trading floors.
If they can't do the job, then they had better get out of the way and let the Americans take over and do it, because my contacts in the USA tell me that the US regulatory agencies are simmering with regulatory indignation, and are looking for scalps.
When announcing the CFTC’s enforcement action that requires UBS to pay a $700 million penalty for unlawful conduct related to LIBOR, Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler made the following simple statement;
“...Falsely reported LIBOR and other benchmark rates undermine the integrity of markets and shake the public’s trust in our financial system. These rates are at the absolute core of our economy. Banks must not falsely report rates to protect their reputation, or try to manipulate benchmarks to increase trading profits.
“Regrettably, with the announcement today of the CFTC findings against UBS, we have yet another blatant example of what bad actors can do when a benchmark rate's underlying market becomes virtually nonexistent.
“I believe that to ensure that a benchmark rate is reliable and has integrity, it should be anchored in real, observable transactions. When a benchmark is separated from real transactions, it is vulnerable to misconduct.
“Benchmark rates should be an honest reflection of market prices. Whether taking out a student loan, a small business loan or a mortgage, or putting savings in a money market fund, the American public depends on the honesty of benchmark rates.
“The CFTC will continue to use vigorously our enforcement and regulatory authorities to protect the public, promote market integrity and ensure that these rates are free of false information and manipulation.
“We are committed to the ongoing international efforts to develop benchmark rates that best serve the public as honest and reliable reflections of the underlying markets to which they refer..."
Now, when will George Osborne come out and say something like that?