Monday, 25 May 2015

I agree with Elizabeth Warren !

Readers of my last few posts on TPP would have noticed my complete disagreement with one Elizabeth Warren - junior Senator from the Bay State of Massachusetts. In this blogger's humble opinion she is a card carrying member of the loony left. And yet, here is proof that even from the loony left, an occasional wise word may arise (granted this is as rare as a bright sunny day in the great state of Oregon, but ..... !)

Her utterance was actually from last year - "The message to every Wall Street banker is loud and clear. If you break the law you are not going to jail", said the good lady. Well, let us pass lightly over the fact that there are no banks on Wall Street and that the New York Stock Exchange is not the same as banks. She has a point, which has been doubly proven in the events of lastweek.

It was a familiar story. Six banks agreed to pay $5.6 bn in penalties for manipulating currency markets. Five of the six admitted to the crimes. And yet, there is not a single banker going to jail. In fact , in all the settlements (LIBOR rigging, abetting client tax evasion, etc etc), the penalties are in billions of dollars. And nobody has gone to jail.

The details of the current forex manipulation case are not the purpose of this post. The  banks formed a cartel and used coded communication in online chat rooms to rig the daily fixes of the exchange rate between the Euro and the US dollar. We won't get into the details. Suffice to say that this is a fraud, and that if prosecution were to be brought against the perpetrators, they would go to jail. Yet this never happens. Why ?

Firstly it is hellishly difficult to prosecute banks. They have access to the best lawyers, tons of money, and their actions are of such a highly specialist nature that proving the fraud in a court of law is extremely difficult, time consuming and expensive.  Secondly the authorities drool at the prospect of these huge settlements and greed wins them over the principle of criminal deterrence.  Thirdly, even though banks agree to these huge settlements, it is far from clear that a criminal act was actually involved - banks are so terrified about losing a case and having their banking license revoked (an automatic consequence) that at the first possibility, they agree on a settlement however outrageous the amount is and however strong or weak the case against them is.

Look at who wins and loses. The shareholders of the bank lose (after all these settlements are being paid out of their profits). Their customers lose - by rigging forex rates they essentially screwed their customers. The winners are firstly the bank management and the actual employees who committed the fraud. Nothing happens the bank management. As for the employees caught in the act, they get fired allright, but simply join another bank or fund house across the street. Worse, they get to keep their bonuses.

This is an outrageous state of affairs. This will keep happening again and again. Fines, even of such gargantuan amounts, mean nothing to them. The bank committing the fraud must be taken to court. The employees who actally did the deed must be locked up in jail. The bank must lose its license and suffer the consequence. Only such a deterrence will prevent such monstrosities from happening again and again.

In this stand I am in the camp of the said Elizabeth Warren, the Tea Party (they are outraged at this too) and The Economist ! Strange bedfellows, eh ?


Sriram Khé said...

No surprise to me at all.
No surprise because of a simple fact that no single party has "the" truth. We tend to align with a political party only because more often than not, a political party might reflect a lore more of our values. Thus, I might identify myself as a libertarian-Democrat, but not as a "moderate-Reublican" because there are plenty about the GOP that I hate way more than I do about the Democratic Party.

On issues like the banking fraud, which have global implications and is not a mere domestic issue, the two major parties have been behaving like the Tweedledum/Tweedledee that they tend to be. Which is why only the two extreme wings of the two major parties meet on this issue, as do rational center-right publications like the Economist.

You note that not a single banker went to jail. Because ... well, suddenly we find out that corporations are not people and you cannot throw a corporation in jail!!! I tell ya, I will believe that a corporation is a person the day a corporation is executed in Texas, or sent to prison in Delaware ;)

Anne in Salem said...

Four unrelated thoughts:

You forgot one aspect of the difficulty in prosecuting banks - finding a jury who understands finance enough to understand the illegality of the actions.

Don't US taxpayers benefit from the gargantuan fines? Doesn't the money go into the treasury? I know $5.6B is a pittance relative to the federal budget, but that covers a lot of Medicare payments.

What is the difference between what these banks did and what China is constantly accused of doing? Is it because it is a government manipulating money vs a private company? If the answer to this is too long for a reply, feel free to skip.

And a joke - No wonder bank fees are so high! Banks have to charge you $35 to use a real live human in order to pay these fines!

gils said...

does anyone read leave alone understand the terms and conditions paper? probably the judge who presides the case have to be a finanace wiz cum law genius of the century to deliver a convicting verdict. but i am surprised that if bank agrees for penalty they are allowed scott free!! the moment they agree for the fine, that very instant their guilt is proved and isnt it pretty easy to zero in on the handful of people who run the bank? they should dissolve the board, arrest all the members and hold them responsible.

Sandhya Sriram said...

I read somewhere that after pleading guilty, the share price of some of these banks actually went up and others went down marginally. this means that the share holder who is paying the fine is ok with this - the share holder is ok for the bank to make money some way or the other. if you are not found, i can cash the money, if you are found guilty, well thats the risk and return model of business. OMG, dont know where the world of business is headed. sometimes, you feel better off to be in a left looney camp.

Ramesh said...

Oh yes; agree that we cannot be pigeonholed into one party. A theme we have discussed before.

Well corporations can be executed even in Delaware. In the case of banks, withdraw the banking license and they are dead. While you cannot throw a corporation into jail, the fraud was committed by bipeds. They can, and should, go to jail.

Ramesh said...

Yes, its almost impossible to find a jury with the specialisation required. And yes, the US government is a big winner raking in all the fines.

You can't compare what these banks did to China. Nations have an obligation to protect their currencies from violent ups and downs. They do this by intervening in forex markets and buying or selling their currencies to achieve the desired effect. Its an open , and in the case of China , a published peg. It may have macro economic considerations globally, and often to China's detriment, but it is not fraud. What these bankers did was fraudulently fudge benchmark rates and then profited from it, often at the expense of their own customers. Perhaps we'll cover this in a more detailed and full post when this topic comes up again in the news.

Ramesh said...

They normally never admit the guilt, bu this time it looks like 5 of the six banks have admitted to wrong doing. Such an admission is part of the settlement and will only be made if the authorities agree to no prosecution. So They can't arrest anybody anymore.

Ramesh said...

It does feel that way, doesn't it. Increasingly morals and values are deserting the business world

gils said...

adapavingala...appo bin laden vanthu naan thaanpa gundu poten..arrest pannakoodathu venumna compensation tharenna avana vitruvangala?!!

Ramesh said...

Unfortunately yes !!

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