5 Scandalous Reasons Big Finance Is Trying Hard to Keep a Low Profile
Few news outlets are more sympathetic to the financial services industry than the Wall Street Journal. So it’s interesting when the paper reports from London that “antibanking sentiment here is still off the charts,” leaving the industry “gun shy about flaunting wealth.” That was also true at the Olympics, even though “The games are typically one of the biggest corporate schmoozefests on the calendar.” This is part of what the Journal calls “a wave of banker austerity,” with executives skipping the usual “hired black sedan” and champagne, and even resorting to putting up important clients in mere three- or four-star hotels. Overall, “The City of London’s high-rolling banking industry is rolling as low as possible,” in order to “avoid displays of wealth that will further inflame an already angry public.”
So why is the public so “inflamed” with “antibanking sentiment?” Recent events here and in the UK make it easy to see.
1. Fool me 30 Times, Shame on You
For Britons, at the top of the list stands the LIBOR rate-fixing scandal, in which the UK’s most prominent banks conspired to fix a baseline interest rate that's used to calculate rates on thousands of financial products like mortgages. The scandal continues to unfold, with giants Citigroup and Chase still awaiting charges, among others.
But as is common in episodes where major banks have committed large-scale fraud, in this case involving hundreds of billions of dollars in financial instruments, the most heavily implicated bank, Barclay’s, is not facing legal prosecution, merely a large fine. The New York Times Dealbook described the settlement as “a multimillion dollar financial penalty and modest admission of wrongdoing, but no criminal conviction to affect its operation.” Pretty gentle treatment for a firm whose traders, while working to manipulate the key rate, said in emails while executing the collusion: “Always happy to help;” “For you, anything;” “Done…for you big boy;” and from a more conscientious employee, “I will reluctantly, gradually, and artificially get my libors in line.”
Especially notable in this connection is the conspicuous absence of Bob Diamond, the disgraced ex-CEO of Barclay’s, from the London Games, since Diamond “had been a fixture for years at UK events” and “had been planning to attend several Olympic events as a guest…[but] after the furor surrounding his resignation, he is expected to stay away.” The banks are politically smart enough to keep their heads down when they look bad.
Of course, the LIBOR affair pales in its human impact when compared with other recent banking scandals, like the “robo-signing” scandal in the US. In that scam, thousands of homes, mortgaged during the housing bubbles, were foreclosed upon without the required legal standing or paperwork. The implicated banks, including the four US megabanks—Bank of America, Chase, Citigroup and Wells Fargo—settled the charges with the Justice Department and the states for $26 billion, an impressive figure. However, the settlement does little for the real human families evicted fraudulently, including three-quarters of a million evictees who were foreclosed upon from the finance crisis through the end of 2011, most of whom received a check for $2000 each.
In the fast-moving world of banking scandals, Standard Chartered of London impressively secured a spot for itself when it was accused by a New York regulator of laundering a quarter trillion dollars in Iranian money, in violation of US economic sanctions on the country. You don’t have to support the efforts of the US government to economically strangle Iran to appreciate the disregard for law in company emails cited in the criminal charge, including an executive confiding that the Iranian trading had “the potential to cause very serious or even catastrophic reputational damage to the group.” Standard Chartered settled the charges for $334 million, in hopes it can “avoid admitting wrongdoing.”
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.”
5. Fed by the Fed
Notably, the banks are increasingly dependent on government action for their profits. In recent years, the central bank of the EU and the US Federal Reserve have engaged in a somewhat desperate mode of economic stimulus, “quantitative easing,” where the Fed buys bonds from major banks in order to inject more cash into the banking system, with the goal of lowering interest rates and hopefully increasing economic growth. This bond buying has become a significant profit center for the banking majors, with bond-trading income exploding shortly after each round of (mostly ineffective) monetary “stimulus.” The business press notes that “Big trading banks are particularly well positioned to profit when central banks act aggressively. The firms help make markets in bonds and derivatives. When the banks’ clients see the Fed take bold steps, they feel encouraged and come off the sidelines to buy more bonds. This increases the amount of business that flows through Wall Street, but it also lifts the prices of the bonds that banks hold, creating profits for the traders.”
The ability of the banking industry to sustain its profitability and power despite scandal after scandal – and after crisis after technological disaster -- speaks to its unparalleled power in the modern economy. But beside the social power of the firms to dominate markets and shape perceptions with ad spending, and their obvious political muscle, the banks also make use of their power in a more everyday fashion, in maintaining relatively high retail interest rates in the US. The mortgage-handling banks are benefiting in historically large terms from the growing spread between the low rates they pay to investors they sell mortgages to, and the higher rates they charge the actual homeowner. The Times business section notes that “if the market were functioning properly, the recent drop in the bond rates should have led to a larger decline in mortgage rates for consumers than has actually occurred. Instead, the difference between the two rates is increasing.” One suggested reason: “Mortgage lenders may also be benefiting from less competition. The upheaval of the financial crisis of 2008 has led to the concentration of mortgage lending in the hands of a few big banks, primarily Wells Fargo, JPMorgan Chase, Bank of America and US Bancorp.”
This long record suggests why the finance industry is trying to keep a low profile these days. With banks like these, who needs enemies?