A recent Forex scandal has rocked high-finance and left five banks with hefty criminal fines. JPMorgan, Barclays, Citigroup, and RBS, have pleaded guilty conspiring to manipulate foreign exchange (Forex) rates while a fifth bank, UBS AG, pleaded guilty to a different related charge. In total, the banks were fined roughly $5.7 billion in the U.S. and around $10 billion globally.
So, what did the banks do wrong in this scandal?
Forex traders in the banks would get together in invite-only chatrooms to share information on customer orders for currency. Using that information, they would come up with a “fix” price or other strategies that would be profitable to the banks, at the expense of everyone else.
For example, one of the tactics included what was called “building ammo,” where one trader would build up a large position in a particular currency. According the BBC, he would then dump it in a short amount of time. The other traders in the cartel would know ahead of time and be able to profit from the sell-off.
The collusion to rig the prices violated the Sherman Act, and it didn’t help that the traders referred to themselves as the “cartel” or the “Mafia.”
The groups would use catchy names in the chatrooms like the “three musketeers” or the “A-Team.”
As U.S. attorney general Loretta Lynch explained, “They acted as partners – rather than competitors – in an effort to push the exchange rate in directions favorable to their banks but detrimental to many others.”
There were other signs of a cartel mindset among the traders, especially in Barclays where one trader who was recently invited into the group was told, “Mess up and sleep with one eye open at night.”
Another Barclays employee was quoted as saying, “If you ain’t cheating, you ain’t trying,” according to Reuters.
Each of the banks received relatively harsh penalties.
JPMorgan will pay $550 million in criminal fines based on involvement from July, 2010 until January, 2013. The bank will also pay the Federal Reserve $342 million.
Citigroup will pay $925 million for involvement from December, 2007 until January, 2013 (at least) and an additional $342 million to the Federal Reserve.
The Royal Bank of Scotland will pay $395 million in criminal fines and a $274 million penalty to the Fed.
Britain’s Barclays will pay $650 million to the U.S. plus a slew of other penalties and settlements totaling $2.4 billion, according to the Guardian. About $1.3 billion will go to the New York state Department of Financial Services, the UK’s Financial Conduct Authority, and the U.S. Commodity Futures Trading Commission.
Likewise, UBS will pay $203 million in criminal charges and $342 million to the Federal Reserve for breaching a non-prosecution agreement over its manipulation of Britain’s Libor rate, which is also partially based on Forex transactions.
Bank of America was also hit with a $205 million settlement for “unsound” practices in the Forex market, but never pleaded guilty.
The fines and penalties were unusual both in size and severity.
Reuters explained that it was the first time in decades that a parent of a major bank was forced into a criminal guilty plea by the Department of Justice. Usually, the department demands settlements for malfeasance, but always stops short of getting the banks to admit any wrongdoing.
The guilty pleas will mean that mutual fund managers and other adversely affected by the price rigging can more easily sue the big banks.
The banks also agreed to cooperate with prosecutors as they go after individual traders and managers in the Forex scams. Several bank employees have already been fired in the scandal.
Nevertheless, some investors see the fines as big wins. Barclays put aside roughly $3.2 billion in preparation for the final sentencing. After news broke that the bank would only pay $2.4 billion, shares rose 3.4 percent. Likewise, shares in the Royal Bank of Scotland rose 1.8 percent.
JP Morgan and Citigroup took small hits in share price,.7 and.8 percent, respectively. They are also in the process of securing regulatory exemptions so that their securities business doesn’t temporarily shut down.
Even though the banks were fined in unusually harsh terms, the fallout from the Forex scandal doesn’t seem particularly bad yet. Do you think they got off light, or did the punishment fit the crime?
[Image Credit: Getty Images]