Banks are using the latest in technology to catch myriad potential corporate problems. New surveillance algorithms can now listen to phone calls on the trading floor and search for unusual phrases that may indicate an issue. Of course obvious phrases like “take it offline” or “just between us” are quickly flagged, but traders are nothing if not resourceful. However, new software can now detect stress indicating potential lies in a trader’s voice. Additionally the programs can track phrases that are out of place or used repeatedly, indicating that they may represent a code of some sort. (Traders have long used code on the trading floors such as nicknames for customers and slang for trading actions to avoid publicizing their activity to other traders.) If such software had been employed a few years ago, it may well have flagged some of the insider trading and collusion issues that are now costing financial institutions billions. I have no doubt the new systems will catch nefarious acts in the future, I also have no doubt that a few persistent and unscrupulous traders will find a way to circumvent even this newest leap in technology.
The Wall Street Journal: Banks Listen In to Trader Talk
Europe Finds Its Teeth
The European Commission has announced a settlement of €1.7 billion ($2.3 billion US) to resolve allegations that a group of global banks colluded to manipulate benchmark interest rates including LIBOR. In light of recent mega-settlements in the U.S. we may be excused for thinking of the settlement as non-substantive, but the truth is that this is the largest penalty ever imposed by the European Antitrust authorities. The investigation was treated as a matter of collusion, falling under the authority of the Commission. Starting next year the European Central Bank will assume responsibility for bank supervision but will not have direct responsibility for financial markets. So, now that Europe has taken the first bite of the LIBOR apple, the markets are anxious to see what British and U.S. regulators will do next. The investigations are still under way in the UK and US. Perhaps the most absurd facet of the entire LIBOR mess is that the traders involved were hoping to make relatively paltry gains based on the manipulated rates. Generally seeking to improve returns by $100,000, in some cases up to a $1 million, the acts of these traders have now cost their institutions billions. And that’s just the European bite.
The New York Times: Europe Sets Big Fines in Settling Libor Case
Civil Money Penalties Redefined
Civil money penalties can be a strange punishment. They are punitive fines imposed on an institution that has profited from illegal or unethical activity. Traditionally, the SEC has imposed penalties equal to the gains made from the illicit activity. But experts are noticing that the amount of penalties are becoming disconnected from the actual amount of profits and are more a mechanism for inflicting large penalties in nice large round amounts. Recent cases against some of the leading banks have resulted in large penalties ($2 billion related to mortgage securities for example). No one believes that the institution in question actually profited exactly $2 billion from the illicit activity, but it does fundamentally change the expected nature of civil money penalties. This raises the fundamental question: If civil money penalties are no longer tied to profits, shouldn’t we be clear and recognize that civil money penalties are now just another way of imposing fines—unrelated to profits. That’s my two cents—although I didn’t actually calculate the numbers.
The New York Times: Fines, Without Explaining How They Were Calculated
Little Credit Unions Crushed by Big Regulation
Everyone likes credit unions. After all, they are not-for-profit lenders that are owned by their members. Most are fairly small association groups (with a few large exceptions). Credit Unions are regulated by the National Credit Union Administration. The NCUA has traditionally used a light touch—because that was all that was needed. But the age of big regulation has hit even the peaceful world of credit unions, and many are struggling to keep up. Recent mortgage compliance rules imposed by the Consumer Financial Protection Bureau are forcing many credit unions to hire new staff and may be forcing some smaller credit unions to close. Banks have been complaining about the substantial burden of new regulation in recent years, but banks are sometimes less appreciated than their credit union counterparts. Regulating credit unions is not the same as kicking puppies, but potentially shutting beloved credit unions may still cause a public outcry.
China Bars Bitcoin
China has barred financial institutions from executing Bitcoin transactions. What does this mean for the world economy? What does this mean for the world economy? I have no idea. I don’t think anyone else does either. The oddly resilient virtual currency is still near its record highs and continues to garner press and attention. Now that the world’s most populous country has made an official pronouncement, other countries are likely to address the matter. Bitcoin does not appear to be going away but if regulatory authorities should decide tomorrow to impose fees or require disclosures it could shatter the nascent market overnight. And I won’t have to kick myself for not having bought Bitcoins when they first got started.