How could a small-time trader of limited means help to almost bring down one of the world’s biggest and most liquid financial markets? Why haven’t any financial institutions, particularly those that specialize in high-frequency trading, been brought to book? And, if the Justice Department’s theory of the case is true, what does it say about the fragility of the U.S. financial system?
.. But the government charges that Sarao tried “to manipulate the market for E-Minis by placing multiple large-volume sell orders on the CME (to create the appearance of substantial supply and thus drive prices down) and modifying and ultimately canceling the orders before they were executed.
.. I’m not sure whether this version of events is plausible, but let’s just assume that it is. If so, that would mean a lone trader sitting in his parents’ West London home was responsible for setting off a stampede on the other side of the Atlantic Ocean that erased trillions of dollars of wealth, albeit temporarily.
Talking Tough With the Banks
the Justice Department has informed Citigroup and JPMorgan Chase that in order to settle they must plead guilty to criminal charges for manipulating currency prices. These would be the first admissions of criminal guilt by American banks in decades.
Two European banks, Barclays and the Royal Bank of Scotland, were also told to plead guilty. But once again, in all four cases, the deals are likely to be structured in ways that minimize damage to the banks, while sparing high-ranking officials from accountability. Prosecutors are expected to pursue the banks’ currency traders for wrongdoing, but not senior executives.
Big Banks and Derivatives: Why Another Financial Crisis Is Inevitable
The world’s scariest story: trading in derivatives
Bad as these scandals are and vast as the money involved in them is by any normal standard, they are mere blips on the screen, compared to the risk that is still staring us in the face: the lack of transparency in derivative trading that now totals in notional amount more than $700 trillion. That is more than ten times the size of the entire world economy. Yet incredibly, we have little information about it or its implications for the financial strength of any of the big banks.
.. Public confidence in banks is now at a record low. According to Gallup, in the late 1970s, around 60 percent of Americans said they trusted big banks “a great deal” or “quite a lot.” In June 2012, less than 25 percent of respondents told Gallup they had faith in big banks.
But it’s not just public confidence. Specialists are equally bewildered. The Atlantic cites:
- Ed Trott, a former Financial Accounting Standards Board member, when asked whether he trusted bank accounting, he said, simply, “Absolutely not.”
- Several financial executives told The Atlantic that they see the large banks as “complete black boxes.”
- A chief executive of one of the nation’s largest financial institutions considers banks “uninvestable,” a Wall Street neologism for “untouchable.”
- Paul Singer, who runs the influential investment fund Elliott Associates, wrote to his partners this summer, “There is no major financial institution today whose financial statements provide a meaningful clue” about its risks.
- Arthur Levitt, the former chairman of the SEC, lamented to us in November that none of the post-2008 remedies has “significantly diminished the likelihood of financial crises.”
- A recent survey by Barclays Capital found that more than half of institutional investors did not trust how banks measure the riskiness of their assets.
- When hedge-fund managers were asked how trustworthy they find “risk weightings”—the numbers that banks use to calculate how much capital they should set aside as a safety cushion in case of a business downturn—about 60 percent of those managers answered 1 or 2 on a five-point scale, with 1 being “not trustworthy at all.” None of them gave banks a 5.
- A disturbing number of former bankers have recently declared that the banking industry is broken, including Herbert Allison, the ex-president of Merrill Lynch and former head of the Obama administration’s Troubled Asset Relief Program, Philip Purcell (ex-CEO of Morgan Stanley Dean Witter), Sallie Krawcheck (ex-CFO of Citigroup), David Komansky (ex-CEO of Merrill Lynch), and John Reed (former co-CEO of Citigroup) and Sandy Weill, another ex-CEO of Citigroup. The Atlantic notes that “this newfound clarity typically follows their passage from financial titan to rich retiree.”
Global banks agree to pay $4.3 billion for manipulating currency markets
ONCE again, a handful of the world’s largest banks have agreed to pay vast amounts of money to settle an investigation, this time concerning the manipulation of benchmarks used in the trading of currencies. American, British and Swiss regulators clubbed together to squeeze six banks for $4.3 billion between them. Yet more fines may be in the pipeline.
The deal announced on November 12th follows a now familiar pattern: regulators release e-mails or instant messages they have harvested that indicate sleazy activity in an important market; banks issue statements that are contrite, emphatic about a commitment to moral values yet vague about what exactly occurred; no one charges any individuals with any crimes and lots of questions are left unanswered ..