The Sunday Magazine

Making the banks pay

In the aftermath of the 2008 financial crisis we all had one question in our minds: How many leading bankers are going to jail and for how long?The answer of course was a) none and b) not applicable. The matter of why nobody went to jail has never been successfully addressed or answered.Things went a bit differently in this program's favourite...
In the aftermath of the 2008 financial crisis we all had one question in our minds: How many leading bankers are going to jail and for how long?

The answer of course was a) none and b) not applicable. The matter of why nobody went to jail has never been successfully addressed or answered.

Things went a bit differently in this program's favourite little corner of the world, Iceland. A year ago, the former CEO and Chair of one of the biggest failed banks in the country both went to jail.

The sentences were five years and five-and-a-half years. Interestingly, the chief prosecutor was a former small town policeman who knew a crook when he saw one.

It was said by some that there are a few banks and businesses which are too big to fail. But two events, one in Canada and one in Europe in the last month or so, carry hope to those who thirst for justice and fairness and honesty in the ranks of high finance and big business.

In early November, six of the largest banks in the world were fined a total of $4.3 billion for trying to rig the rate of currency exchange. The banks are JP Morgan Chase, Citigroup, UBS, HSBC, the Royal Bank of Scotland and the Bank of America. The banks must have known the fines were coming, because they earlier had set aside large dollar reserves to pay them.

The currency traders thought of themselves as true buccaneers. They called themselves "the players" and the "three musketeers." They were fined for trying to manipulate foreign currency markets to make extremely juicy profits for the traders themselves - in the hundreds of thousands of dollars.

It's all very confusing but it goes something like this. There are about 180 currencies in the world being traded every day to the tune of say $5 trillion U.S. The foreign exchange market is in London. In finance-speak, it's called the Forex. Every day, at exactly 4 p.m. London time, all trading in currencies stops for sixty seconds. In that one minute, a rate is set for 21 major currencies. It's a kind of yardstick to measure one currency against another. 

The setting is called The Fix. And the bankers were, in effect, fixing The Fix. By using proprietary information, a trader could, in those 60 seconds, buy a currency low and sell it high or vice versa or other nifty tricks. They called it "banging the close." 

It is unlikely anybody will go to jail this time; but the huge fine has put other banks on notice: the regulators will bite you big time if you fiddle the currency rates. And the other bit of hopeful news was a Supreme Court of Canada decision on November 13 which established honesty as a cardinal element in contracts. The ruling is, according to many lawyers, ground-breaking.

Canada has lagged behind other countries in defining what constitutes good faith in business contracts. With the unanimous ruling by the Supremes, if you now lie or cheat in a contract you can be sued. What a concept. Maybe in the corporate world, the banking world, maybe the good guys are starting to win. Or maybe it is all about self defence.

After all, as Henry Ford put it, "It is well enough that the people of the nation do not understand our banking and monetary system for if they did, there would be a revolution before tomorrow morning."

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