A few weeks ago the federal government fined five banks more than 5 billion dollars related to currency manipulation and rigging.
The traders and sales people involved in the manipulation called themselves The Cartel” which turned out to be an appropriate name. Prosecutors said that traders and sales agents used electronic chat rooms to conspire to manipulate prices in the foreign currency markets. They secretly marked up transaction costs telling customers they hadn’t.
To get an edge, traders at the five banks colluded to pad their returns. In order to carry out the the plan, one trader would typically build a huge position in a currency then unload it, hoping to move prices. Traders at the other banks would play along, coordinating their actions in online chat rooms. What is more worrisome is that in this process, the traders were sharing what trades their customers were making, completely violating their privacy.
The charges laid forth were that the banks colluded when quoting their customers so that they could exact as much profit as possible on the transactions. So, as a result of this theft, the banks will now pay the government $5Billion for market rigging. However, the clients most harmed by this transaction will never see a penny in restitution.The banks will pay the government for wrong doing… and life will go on.Shamefully, the U.S government will continue to transact with these same banks next week for their borrowing needs, issuance of new debt, debt repurchases, and repurchase agreements.
Th end result is that these banks will make back from the government that charged them with fraud, the fees they paid to the government for ripping off their customers in the first place!
This is the mad world we in which we are living. Yet, a closer look reveals that nothing has changed.
In 2008, the U.S government bailed out most of the major banks in the U.S, along with a lot of other companies related to the real estate sector, as experts sounded the alarm that the U.S economy would collapse without a bailout. Because the banks made a series of bad investments in the real estate sector (with the aid of the government), the U.S treasury gave cash, loan facilities and 0% interest rate loans to the banks to shore up their losses. In the end, it worked. The banks did not go bust, confidence was restored, and the market plowed higher.
But what about the homeowners?
Why weren’t they paid for the losses they suffered? Think about it. Both parties made a bet. The home buyer made a bet that he could purchase a home that would go increase in value and later sell it for a profit. The bank made a bet that the home buyer would be able to meet the loan (mortgage) obligation and the bank would make profit by way of interest fees on the loan. Both parties lost on their “bet.” But in that case, only the banks were made whole for their losses while the homeowner, in most cases, lost his property
Bailing out companies for making bad bets started a long time ago.
The Chrysler bailout in the 1970’s became a proxy for future bailouts where companies, mostly in the financial sector, started making bigger and bigger bets knowing the government would be there to bail them out. (For a great history of bailouts, take a look at Bailout Nation).
Imagine I’m inviting you to bet on the flip of a coin whereby “heads I win and tails you lose.” I am guaranteed a win! This is the bet structure that exists in the United States, with the government and financial sectors on one side and the consumer on the other. Its socialized losses and privatized gains.
In the real estate crisis of 2008, the bank employees still got paid their bonuses via taxpayer money. The rationale for this farce was that “the employees would have quit en mass had they not received their bonuses.” Better to have let them quit, Perhaps people who really wanted to put in an honest days work for a fair wage in return would have taken their place.
In both the currency fine and 2008 bailout, the government became the judge, jury and deliverer of justice and in both instances only the public took the hit.