As reported by USA Today, five major banks accepted a plea bargain to criminal charges from the Department of Justice, and agreed to fines totaling $5.5 billion to settle charges for manipulating foreign exchange rates.
Why should we be mad about that? Media people showed very little interest in this story, because they’re preoccupied with police chases and street demonstrations. Perhaps reporters don’t understand the potential impact of what the big banks have done.
Predictably, the DOJ is flexing its muscles, taking bows and crowing about the size of the fines. Nevertheless, the first reason to be mad (or at least disgusted) is that the DOJ fined the banks, and not the doers, the executives who made the trades or approved of the entire operation. That means that the actual perpetrators are untouched, and the shareholders of each bank are stuck paying the $1-billion+ fine.
A conspiracy to share trade information is simply insider trading by giants. By comparison, Martha Stewart served five months in prison for covering up an insider trade worth about $45,000. But the traders and executives of the five giant banks colluded on trades for six years, netting billions, possibly trillions in profits. Yet they received no jail time, and no personal fines.
To compare further, Stewart’s transaction had virtually no impact on the world, other than getting some DOJ lawyers mad enough to be vindictive. The giant banks, however, probably had highly paid teams of lawyers from both sides, bargaining 24 X 7. As always, lawyers on these matters earn about $1,000 hourly while bargaining to protect crony capitalism.
The impact of this criminal conspiracy is probably much greater than the DOJ announced. We’ll probably never know details, because the plea bargain almost certainly included a non-disclosure agreement. But we do know this: Trading in foreign exchange (FOREX) markets averages $5.3 trillion per day. It is by far the largest marketplace in the world, at about 30 times the value of trades on the New York Stock Exchange. The world’s largest global banks handle the vast majority of these trades. Citicorp, JPMorgan Chase, Barclays, Royal Bank of Scotland and UBS, all charged with criminal actions, may be the biggest players in this marketplace.
How does all of this work?
For a simple picture of the FOREX marketplace, begin by understanding that everything imported to the US from another country requires a foreign currency exchange. For example, Walmart might purchase ongoing shipments of clothing made by a Chinese company for $50-million. They must pay the Chinese company in Yuan, and therefore must trade 50-million US dollars to an equivalent value in Yuan. By the same process, the Chinese might purchase 1,000 automobiles from a European manufacturer. They must pay in Euros, and therefore convert their Yuan to Euros. Each of these transactions is handled by a third party, often one of the five banking giants fined by the DOJ. The banks receive a fee for their service, but can capture greater profits. They can buy or sell futures contracts, for their clients, (e.g. Walmart) or themselves, based on the exchange rate at any given future date.
Continuing with the Walmart example of $50-million in payments to the Chinese supplier, their payments will usually be due months after they make a deal. That means that the actual number of dollars that they pay to the Chinese company will depend on the exchange rate at the date of their payment. Exchange rates change many times every day, and often have wild swings that can hurt either the paying company or the receiving company. If any bank can collude with others to artificially fix the rate at a pre-determined level, they can make a handsome profit by “betting” on the level by owning the future contracts at each of their predicted levels.
What does this all mean?
The real size of the criminal profits on these deals can be so large that they can create inflation in our prices at Walmart, or anyplace else where we buy things made outside of the US. The number of transactions tainted over five banks cheating for six years may not even be known by the banks themselves. Teams of auditors would probably need years to measure the impact on the US economy.
Newly appointed Attorney General Loretta Lynch is probably too new in her job to have directly investigated details of the conspiracy. she called the banks actions “brazenly illegal behavior engaged in on a near-daily basis.” She said, “The traders’ actions inflated the banks’ profits while harming countless consumers, investors and institutions around the globe — from pension funds to major corporations, including the banks’ own customers.
That’s why we should be mad. White collar criminals may have indirectly cost each of us thousands of dollars. They rigged the game. Yet they skated. None of them even had a personal fine. Did our political leaders protect the middle class? Isn’t this scheme reminiscent of the packaging of junk mortgages that nearly cratered the US economy and left it crippled since 2007? Shouldn’t these people receive serious jail time? That’s why we should be mad as Hell!
My book “The Victory that Wasn’t” offers a fictional alternate history that includes a different kind of US president, and better outcomes for all Americans. It’s available on Amazon at http://amzn.to/1GUL8oX