5 Scandalous Reasons Big Finance Is Trying Hard to Keep a Low Profile
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Indeed, this type of fraud is increasingly prevalent among the financial sector, with banking giant HSBC accused of laundering Mexican drug cartel money, along with cash from Saudi banks with terrorism ties. ING Bank recently spent millions settling a charge that it also bucked international sanctions to move Cuban and Iranian money. These above-the-law moves, while possibly helping the peoples of these countries against the suffocation of their economies by the US, no doubt add to the “inflamed” feelings of the general public.
3. One Nation Under fraud
The power of the financial sector is such that the SEC, whose job is to examine financial firms and prevent or punish fraud, has become notorious for avoiding punishing firms for lying, even when dealing with repeat offenders. While financial law allows serious penalties for fraud, including large fines and restrictions on business practices, the SEC allows “waivers” for these offenses and has granted them quite liberally to the largest US banks. Chase has settled six fraud cases since 2000, with settlements that run into the hundreds of millions of dollars, but has argued before the SEC that it has “a strong record of compliance with securities laws.” Notably, the SEC justifies settling these cases and issuing waivers by referring to promises from the firms not to violate the law in the future. Yet when the firms are taken back to court for their next act of fraud, their recidivism rarely brings a stiffer penalty, as any mere human would likely receive.
In fact, of these waivers issued by the regulator, nearly half go to repeat offenders, “Wall Street firms that had settled previous fraud charges by agreeing never again to violate the very laws that the SEC was now saying that they had broken.” This includes other industry giants like Bank of America and also Citigroup, which racked up so much fraud it finally did get sanctioned. The ability of the megabanks to weasel out of sanctions for widespread fraud are a third reason industry’s keen to stay below the radar.
4. High-Speed Glitches
Further undermining confidence in our financial cornerstones are the recurrent “glitches” in large computerized stock trading systems that have lead to horrifying market swings. May 2010 saw the stock exchange lose literally trillions of dollars of value in just several minutes, only to recover again within another 20 minutes. August of this year began with a similar out-of-control development on the market, as retail trading company Knight Capital Group had a “technology issue” with its brand-new automated stock-trading system. While it was supposed to react to trading by others, the computer system instead placed giant orders to the point that millions of erroneous trades were made, often at inflated prices, such that Knight ended up having to seek new equity partners to stay afloat.
Computer algorithm-based trading strategies like those used by Knight are another product of regulatory loosening over the last two decades, to the point that half of stock trading is now handled by such “high-speed” firms. To compensate for the increased instability such deregulation has brought about, the Securities and Exchange Commission maintains “circuit breakers” to cut off trading if the price of a particular stock behaves erratically. Unfortunately, these countermeasures are not activated until 15 minutes after the beginning of trading, whereas Knight’s algorithm began runaway trading immediately.
The upshot of course is to make finance in general and equity trading in particular more suspiciously viewed by the public. As the Times put it, the chaotic computer trading was “the latest black eye for the financial markets…drawing renewed attention to the fragility and instability of the nation’s stock markets.”