Here are news stories from the week that were easy to miss, but may have some lasting impact.
The Black Hole of FX: Investigations, Suspensions and More Allegations
Rigging and manipulation are terms that were traditionally reserved for back-room card games. These days we are hearing it more and more in terms of major financial trading floors. First we had the LIBOR scandal, where major institutions were accused of colluding to control the rate setting for the benchmark interest rate index. To date there have been $6 billion in settlements related to LIBOR collusion. Now come serious concerns that the largest financial market in the world, foreign exchange, may have been rigged. Let’s be clear, the $5-trillion-a-day FX market is far too big for any small group of traders to control. What is being alleged is that the official Reuters exchange rate for various currencies, set at a specific time every day and controlling countless financial agreements, was being manipulated by top traders at the largest financial institutions. Major banks have already started suspending senior staff. Germany’s top regulator added that the scandal is “particularly serious because such reference values are based — unlike Libor and Euribor — typically on transactions in liquid markets and not on estimates of the banks.” If the allegations are true, traders were not simply providing wrong estimates but actually manipulating trades and moving markets in order to skew setting rates.
The Independent: US watchdogs visit Citigroup’s London headquarters amid forex probe
The New York Times: Deutsche Bank Suspends Traders Amid Foreign Exchange Investigations
Off Target: Credit Unions Also Hurt by Cyber Loss
It is estimated that it costs approximately $5.10 to issue a new credit card to replace one that has been compromised. The national credit union association, CUNA, estimates that the recent hacking of the Target Department Stores payment system will wind up costing credit unions around the country somewhere between $25-30 million in replacement costs. While that number is not large when compared to the entire cost of the hacking, it is still a serious cost to some of these institutions and one worth remembering.
Le Volcker? Europeans Consider a Ban on Proprietary Trading
While America may copy fashion trends from Europe, the U.S. is leading the way when it comes to barring proprietary trading at banks. Michel Barnier, the EU’s financial services chief, is drafting plans that would force major European banks to discontinue most proprietary trading by 2018. The plan will be released in the coming weeks but will face serious challenges from leading politicians in Europe. If the plan is adopted, it will impact 29 of the largest European institutions. The American Volcker rule is expected to be implemented by 2015 (with possible extension to 2017), well ahead of Europe, whose prop trading ban is likely to be fashionably late.
If Lawyers are Sharks, Then Litigation Reserves are Chum
Bankers are reluctant to reveal too much detail surrounding the amount of their litigation reserves, but analysts and some investors complain that it is difficult to assess a financial institution’s health without sufficient information about reserves for bad loans and litigation losses. However, it is a serious problem for regulators who are anxious to promote more transparency among financial institutions. While the SEC has issued memos specifically calling for more disclosure around bad loans and investment portfolios, most authorities are hesitant to force banks to disclose the specific amounts they have set aside for litigation. The concern is that plaintiffs will use that knowledge to negotiate a better settlement. In addition, bankers worry that unscrupulous plaintiff lawyers may see a large cash reserve as encouragement to pursue even frivolous claims.
The New York Times: Banks Keep Their Mortgage Litigation Reserves a Secret
The Problem with Banker Jokes? Bankers Don’t Think They’re Funny, the Public Doesn’t Think They’re Jokes.
A recent study by the World Economic Forum shows that bankers are viewed with similar distain as organized crime, terrorism, and dictatorship. That’s right, terrorism and dictatorships! While it has been some time since banks lost their honorable image as stalwart members of the local community, it seems beyond comprehension that the public views them on par with Mafia dons. The study suggests that the public perceives that banks pose a threat to society equal to nuclear power or tobacco. Unfortunately the study does not give a clear solution to improving the image problem. The study does not raise the issue, but I think it reasonable to conclude that people are generally more willing to bring legal action against someone they scorn than someone they esteem. Where’s George Bailey when you need him?