Hands in the Cookie Jar: The Banks Again!
By Shlomo Maital
The banks are at it again! If you loved the LIBOR scam – British and American banks conspired to fiddle the LIBOR London Interbank Offered Rate (of interest), to move it in directions favorable to their trades and to make profit — now comes the FOREX scam. Again, the banks (RBS, Barclays, UBS and Citigroup) have their hand in the cookie jar.
Here is how it works. London is the world’s biggest foreign exchange market. Daily, $5 trillion changes hands in the world forex market, of which fully $2 trillion changes hands in the London market. This means that the total US GDP changes hands, in forex trading, every three days. It is a huge market – and a market where banks’ forex traders make fortunes, with insider trading. (There is no ‘insider’ information in forex trading – and rumors, many untrue, are rife).
Every trading day, the banks together set the benchmark forex exchange rates (dollar-euro, dollar-yen, etc.) at 4 pm. During a minute or two of trading, they take the average – and publish the results. This benchmark is crucial for a great many forex contracts, including options.
A Grade Five child can immediately see the vast opportunities for putting your hand in the cookie jar here. You have an option to sell $100 m. worth of yen. So at 3:59 pm you buy yen, to push the rate up. Then you exercise your contract at 4:01…and munch on the cookies. This is not legal, because it is not legal to manipulate the 4 pm benchmark rate. But it is just so tempting, and those cookies are so so SOOOOO tasty. And that Christmas bonus is on the way!
Are we beginning to get the idea that the big banks have not yet learned anything about ethical behavior? And that they continue to make fools of each of us, and especially of the regulators? JP Morgan Chase recently was fined a few billion dollars. I imagine they are amused. Because the extent of their profits is far larger.
It is going to take the banks a very long time to earn back our trust. Meanwhile, the cookie jar forex episode shows that our trust in the banks is still declining, rather than rising.