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Bankers mending their ways? No, they’ve gone wild

It’s now five years since the early warning signs of what would develop into the global financial crisis first started to show. Extraordinarily, there’s little evidence that bankers have mended their ways. Indeed, so far this year, we’ve seen five glaring examples that bankers continue to flaunt the rules in their quest for massive profits …

1. Money laundering

This is the current banking scandal, after the UK bank Standard Chartered overnight agreeing to pay $340 million to New York’s top banking regulator to settle charges that it hid more than 60,000 financial deals worth at least $250 billion on behalf of its Iranian client.

But Standard Chartered is far from the only major global bank stung for this activity. Just over a fortnight ago, the giant British bank HSBC revealed that it had set aside $700 million to cover the cost of US fines for laundering the money of Mexican drug cartels. And in June, the massive Dutch ING Bank agreed to pay a $619 million penalty for violating US economic sanctions by moving billions of dollars through the US financial system on behalf of Cuban and Iranian clients.

2. Manipulation of the key Libor interest rate

The manipulation of the London Interbank Overnight Rate, which is used as the reference for an estimated $US360 trillion in global financial deals, is the biggest fraud in modern financial history.

In late June, the British bank Barclays week agreed to pay a £290 million ($US453 million) fine — the largest ever in the City of London — to settle a UK and US probe that revealed the bank’s traders blatantly manipulated their Libor submissions to disguise the high cost of the bank’s own funding and to boost the profits of certain traders. The scandal, which has already led to the resignation of three of Barclay’s most senior executives, is threatening to envelop other large European and US banks.

3. Using their own money for speculation

This was best exemplified by the US banking giant JP Morgan Chase, which has been forced to confess that one of the traders in its UK operations — known as the “London Whale” — managed to rack up losses of $US5.8 billion.

The episode has dented the reputation of the bank’s boss, Jamie Dimon, who was previously considered one of the shrewdest Wall Street bankers. Dimon initially downplayed worries about the trade, calling them a “tempest in a teapot”, although he later admitted his comments were “stupid”.

The bank unwound most of the troubled trades in the second quarter, booking losses of $5.8 billion, but conceded that the final losses could still top $7 billion. It also admitted there had been a “material weakness” in the bank’s internal controls, which meant that the high valuations set by traders were not picked up.

4. Failing to properly protect client money

After last October’s collapse of the commodities brokerage firm MF Global, which saw $1.6 billion in client money vaporise, there were promises that it would never happen again. Incredibly, it has. Peregrine Financial Group, the futures broker, collapsed last month with a $215 million shortfall in its client accounts and its founder and boss, Russell Wasendorf snr, was overnight indicted on 31 counts of lying to US regulators about the company’s finances.

Wasendorf, who attempted suicide last month on the eve of Peregrine’s surprise bankruptcy filing, left a note in which he confessed to stealing hundreds of millions of dollars from customers for nearly two decades.

5. Insider trading

Last October, Raj Rajaratnam, the founder of the Galleon hedge fund, was sentenced to 11 years in prison, the longest-ever term handed down for an insider-trading case. Two months ago, the case had a sequel when Rajat Gupta, a former Goldman Sachs director and managing partner of the consulting firm McKinsey, was also found guilty on four criminal counts of insider trading.

The prosecution accused Gupta, who used to be one of the leading business figures in the US, of using his privileged position to supply insider tips to Rajaratnam, including confidential information on Goldman Sachs. In one incident, Gupta called Rajaratnam a minute after a conference call at which Goldman’s boss, Lloyd Blankfein, announced that billionaire investor Warren Buffett planned to invest $5 billion in the bank. Galleon immediately bought $43 million of Goldman shares in the final three minutes of the trading day, and reaped a profit of nearly $1 million.

What conclusions can we draw from these five incidents? In the first place, bankers are continuing to flaunt the rules, clearly believing that they’re unlikely to be found out.

Secondly, it’s clear that regulators have been far too trusting. In the Libor case, the Bank of England clearly failed to pick to concerns voiced by US authorities about the need to reform the Libor process to reduce the banks’ “incentive to misreport” their borrowing costs. And clearly, US regulators failed to ensure that client funds were properly protected in the cases of MF Global and Peregrine.

The final conclusion is that bankers will continue to deny that anything is wrong with the industry, as Jamie Dimon did this week in an interview with New York Magazine.

Everyone is talking about the culture, the culture, and all that, and it’s just not true,” he said. “Most bankers are decent, honourable people. We’re wrapped up in all this crap right now. We made a mistake. We’re sorry. It doesn’t detract from all the good things we’ve done. I am not responsible for the financial crisis.”

*This article was first published at Business Spectator

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  • 1
    lindsayb
    Posted Wednesday, 15 August 2012 at 10:50 am | Permalink

    Why would they mend their ways? Despite breaking numerous laws and being caught doing it, none of the big offenders have been jailed or personally fined for their crimes.
    If we steal from them, we go to jail.
    If they steal from us, they get a slap on the wrist, and get to keep most of the money they stole.

  • 2
    Karen
    Posted Wednesday, 15 August 2012 at 11:19 am | Permalink

    LindsayB - spot on - without adequate punishment there is no deterrence.

    We are yet to see one wall street banker go to gaol over the sub-prime mortgage fraud inflicted on the world, recession/depression and untold misery the world over.

    We live in a sick world.

  • 3
    Altakoi
    Posted Wednesday, 15 August 2012 at 11:38 am | Permalink

    I can’t see how these salaries and bonuses, the houses, yachts and planes that were purchased with them etc are not seen as proceeds of crime. These guys haven’t got an assault or dangerous driving charge and just happen to be rich, they are epid fraudsters who are rich solely as a result of their crimes. Repatriate the funds, send them broke even if you don’t sent them to the big house.

  • 4
    tinman_au
    Posted Wednesday, 15 August 2012 at 12:22 pm | Permalink

    I think part of the problem with any of these systems is the regulator and the folks being regulated are all in the same “club”. A lot of them probably do dinners together, and if they crack down too hard, once their tenure at the regulator is over, they’ll probably be in for quite a hard time.

    That and the fact that ethics aren’t pushed enough these days in education. An ethical person is seen in some ways as a “boy/girl scout”, and someone that will do whatever it takes (including borderline ethical acts) is seen as a “Cando”.

  • 5
    lindsayb
    Posted Wednesday, 15 August 2012 at 12:45 pm | Permalink

    @tinman_au
    Correct that the regulators and regulated are part of the same club.
    You can also add the political class to this group. It doesn’t matter which political party you vote for, they are all recieving money from the banksters and a host of other “regulated” industries to the detriment of people worldwide.
    Historically the endgame of the lawlessness of the ruling elite is revolution.

  • 6
    Stevo the Working Twistie
    Posted Wednesday, 15 August 2012 at 1:23 pm | Permalink

    Surely the market will fix it? Won’t it? Elvis and the Easter Bunny both told me it would.

  • 7
    Bill Williams
    Posted Wednesday, 15 August 2012 at 1:29 pm | Permalink

    Karen, while all the points you make are correct, blaming the bankers is a bit like blaming unsupervised children who raid the refrigerator for all the chocolate. While you do point out that regulators have been “far too trusting”, the behaviour of the bankers is proof that the neoclassical economic model is a highly unsatisfactory mental model for managing the behaviour of markets. The”self regulating” financial market model is just as naive as the idea of self-regulating children. Markets need clear, well tended boundaries. Banking regulators (especially in the US but also in many other countries who placed faith in the neoclassical economic model) overtrusted all kinds of markets and abdicated completely their responsibility to watch and manage market behaviour….especially in financial markets.

    Negative outcomes resulting from overtrusting markets are not limited to financial markets. Here in Australia we have made enormous sacrifices at the holy altar of economic rationalism. After the Liberal Party sided with the Labor Party to destroy the single desk for wheat marketing, we allowed one of the worst behaving giants of global capitalism to take over the former Australian Wheat Board (AWB Ltd). [If you have any doubts about that wonderful testimony to the power of the free market try googling “Cargill” with “anticompetitive”, “fined” or “antitrust”…..or alternatively analyse the price and volume of Australia’s wheat sales since the single desk was destroyed]

    In Australia we worship markets so much that we try to create them, even where they don’t naturally exist. The creation of a water market separating water rights from land rights had devastating consequences including increasing net water usage in an already fully allocated system, and the near destruction of the Australian wine industry due to the glut of wine resulting from all the extra vine plantings. Just because irrigators and economists agree that creating a water market was a good idea, doesn’t necessarily make it so.

    We very nearly allowed the sale of the Australian Stock Exchange to the Singapore Stock Exchange……which could have been bought in turn by a Chinese state owned company.

    We freely allow citizens and companies from other countries to invest in Australian assets…..even when Australians do not enjoy the reciprocal investment right in the country sourcing the investment. Any criticism of the naivety of this kind of policy making is howled down by neoclassical high priests as absolutely heretical disrespect for their economic ideology. Even people like Simon Crean can be heard to blather on about the need for consistent foreign investment policy. Common sense tells us that we might not trust all of our friends to look after our children. Reciprocal trading rights seems like a far better mantra than so called “free trade”…..free trade is fine as long as it cuts both ways.

    Our neoliberal economic intelligentsia seem have most Crikey readers convinced that the creation of a carbon market is the best way to reduce carbon emissions….although thankfully most Australians are probably smart enough to sack the government that has tried to convince us that “Mummy knows best”….even though Bob Brown warned us all that a carbon market would be a “bonanza for big polluters”.

    Australians live in a wonderful environment of denial and hypocrisy with respect to our regulated Labor market. Would we allow an Australian to work for $100 per month in a a 7 days per week factory sweatshop? Of course not. Would we allow companies who do just that virtually unrestricted to access to the Australian market to sell products made by such a harshly treated workforce. Absolutely…..and if you inside our homes you will see that we all buy them, too.

    Of course the neoclassical economists are right to argue that too much regulatory intervention in markets is a bad thing, but they forget that too little intervention can also be catastrophic.

    One more thing, Karen, is the short term time horizon of your view of the Global Financial Crisis. You argue that the “early warning signals” of the Global Financial Crisis started to reveal themselves in 2008. That’s probably the reason that not a single neoclassical economist predicted the 2008 crisis. You should read more about the 1997 Asian Financial Crisis (even Wikipedia’s version will do). The early warning signs for that crisis were probably identifiable in 1994-5. The western response to the Asian Financial Crisis was probably more “quantitative easing” than most nations admitted to……and the resulting flood of cash sowed was the catalyst for the current financial crisis.

  • 8
    chpowell
    Posted Wednesday, 15 August 2012 at 1:36 pm | Permalink

    RICO: http://en.wikipedia.org/wiki/Racketeer_Influenced_and_Corrupt_Organizations_Act

  • 9
    Scott
    Posted Wednesday, 15 August 2012 at 2:03 pm | Permalink

    In my opinion, a lot of this comes down to the tertiary education in Finance.

    I completed a finance degree from a leading Australian university and didn’t have to complete even one credit on ethics (it was an elective). The closest I got to it was in one subject (Corporate Financial Analysis) where there were bonus points awarded in assignment/exams for ethical responses in answers. Things get better when you get to the CFA however (which is a non-compulsary industry certification) where Ethics makes up a considerable portion of the syllabus/exams. But not a lot of finance professionals go for that, due to the programs difficulty and time required to complete.

    Make ethics compulsary in the education of finance professionals and you might see better results. That said, malpractice occurs in every field and industry. In law enforcement, unions and politics, you get corruption. In medicine and the military, it results in lives lost. In Finance, it’s millions of dollars stolen from shareholders and investors. Nature of the beast.

  • 10
    jeebus
    Posted Wednesday, 15 August 2012 at 2:20 pm | Permalink

    All banks should be regulated tightly as public utilities working in the interest of their depositors.

    Banking should be boring, and financial innovation should centre on ways to provide greater convenience to their customers - services like EFTPOS and netbanking.

    When you let wizards take over the financial system, great sums of money will appear through sleight of hand, then vanish again without a trace.

  • 11
    John Bennetts
    Posted Wednesday, 15 August 2012 at 2:58 pm | Permalink

    I can’t understand why it is that, despite the GFC and the other rorts, some of which are mentioned in the article, the deposit-holding side of banking has not been divorced from the casino side of banking.

    To the list I would also add the three main ratings companies, Standard& Poors, Fitch and Moody’s. How and why they have not been broken up despite their failings is beyond belief, yet the credit rating agencies remain embedded within the casinos.

  • 12
    zut alors
    Posted Wednesday, 15 August 2012 at 10:31 pm | Permalink

    Jamie Dimon said: “It doesn’t detract from all the good things we’ve done.”

    Name one.

  • 13
    Michelle Imison
    Posted Friday, 17 August 2012 at 11:27 am | Permalink

    Karen - it’s ‘flout’ (the rules): f-l-o-u-t. Not flaunt. That means something entirely different. Look it up, or get a decent sub-editor. Please.

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