Again, Wall Street Avoids Punishment For Illegal Behavior
Two days after Bank of America had its $1.27 billion dollar fine for intentionally lying in contracts with Fannie Mae and Freddie Mac voided by an appeals court, we now have Citibank avoiding criminal charges in illegally manipulating the daily interest rate, or ISDAFix, for large numbers of derivative contracts. Essentially, Citibank traders were entering bogus bids in order to manipulate the prices of various derivative contracts in their favor. Email exchanges among the traders make the intent of the traders quite clear, with one trader stating he was “proud of himself” for moving the price of one of the contracts in the direction that would help the bank’s trading position. In addition, this behavior was not just an infrequent event, but went on continually for up to 5 years.
Citibank was also one of a number of banks that implemented this same strategy to manipulate the LIBOR rate, a critical financial benchmark that determines rates on a wide variety on business and consumer loans around the world. Most people who had student loans, variable rate mortgages or home equity lines of credit would have the interest rate set at LIBOR plus a certain percentage. So this was not just “inside baseball” in the financial services sector – it effected many millions of loans around the world. And yet, as of late last year, only one person had been convicted of a crime in relation to this scandal. Yes, the banks have had to pay billions in fines, but for them, that is simply part of the cost of doing business; or, to put it more realistically, a minor cost to paid for illegally making profits. I plan to do a full post on the LIBOR scandal in the future because its breadth is simply stunning and the willful ignorance of the regulators is, even after all we now know, shocking.
In any other industry, all of these traders, their managers, and their firms’ executives would be behind bars under the RICO statute. But, because this is the financial industry with its huge political power and the regulators’ fear of prompting another financial crisis, the criminals once again escape punishment. And, until that changes, we will probably see similar behavior by these firms again in the future.