An Epidemic of Price Fixing in the Financial Markets

Nothing is more antithetical to the principles of free enterprise than price fixing.  Rigged prices undermine the efficient functioning of markets and defeat their ability to maximize economic welfare.  Sadly, we've had an epidemic of price fixing in the financial markets, frequently involving the largest and most important banks.

The London Interbank Offered Rate has been the subject of governmental investigations in Europe and the U.S. for alleged years-long collusion. Billions of dollars of fines, penalties and other payments have been assessed on various big banks, and the investigation of other major banks continues.  Trillions of dollars of loans and contracts were priced based on Libor, and the potential impact of this price fixing is massive.

Foreign exchange rates have been investigated for rigged prices, and billions of dollars of fines, penalties, etc. have been paid in government and private civil lawsuits.  Again, some of the largest banks are implicated.

Now, word comes that the market for interest rate swaps has been under investigation for price fixing via the alleged collusive manipulation of the ISDAfix, a benchmark swap rate that is used in the pricing of a variety of financial products.  The interest rate swaps market, although obscure to the general public, involves hundreds of trillions of dollars of financial products (in notional value) sold to corporations and other commercial customers to offset interest rate risk.  Big banks are reportedly involved this collusion and the fines, penalties, etc. could total perhaps billions.

There are also reports of investigations of price manipulation by big banks in the metals markets.  These might involve restricting supply and other maneuvers to rig prices.  If wrongdoing is uncovered, more large fines, penalties, etc, can be expected.

Many of the banks involved in these matters are likely to be too big to fail.  In other words, while conspiring against the public in very large and important markets, these banks enjoyed the explicit and/or implicit backing of the taxpayers.  This backing helped them attain Brobdingnagian size, which in turn probably facilitated their ability to rig markets. 

The financial markets are the central venue of the capitalist system, being the place where holders of capital and borrowers of capital meet to determine the allocation of society's financial resources.  The largest banks are at the center of the financial markets, and their conduct ripples through the financial markets and the entire free enterprise system.  That such crucially important players are so regularly conspiring against the public and the public interest presents a galling spectacle that damages the credibility of the capitalist system.  Are markets truly socially beneficial or are they simply a means by which the rich and powerful fleece others? 

The world's largest banks have the legal and social responsibility to refrain from such reprehensible conduct.  However, their sad record of massive, multi-market price fixing seems to tell us that their chances of upholding these responsibilities aren't very high.  Their collusive activities often arise in markets that have a bi-level structure:  an inner inter-dealer market where the big banks and other financial firms trade among themselves, and an outer market where the dealers trade with the public at usually marked up prices.  The inside inter-dealer market is a perfect venue for price-fixing, as the dealers have to talk and trade with each other every business day.  As Adam Smith put it in The Wealth of Nations, "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or some contrivance to raise prices."

Thus, the challenge falls on regulators and law enforcement authorities to be vigilant and firm.  The sheer magnitude of the wrongdoing, as demonstrated by the billions that have been paid out to date, is astonishing.  Those who may seem paranoid about the financial markets have it right--way too often, the markets are rigged.

Currency Market Ripoffs

News services report that banks have allegedly been ripping off customers in the foreign exchange markets. Major banks buying or selling foreign currencies for institutional investors have supposedly been cheery picking their day's transactions after the market closes, keeping the good trades for themselves, and sticking their customers with the lousy trades. Unlike the stock markets, there isn't a consolidated tape in the currency markets that reports transactions publicly, and customers are at a disadvantage in trying to figure out whether they've gotten fair prices. The banks have a free hand to turn lead into gold by keeping the golden trades for themselves and dumping the lead into customer accounts.

It's easy to be a winner in the financial markets if you have the benefit of hindsight and can help yourself to a do-over. It's even easier when you're transacting in an unregulated market that's largely opaque to your customers. The currency markets are unregulated, and only the naive and poorly read would be surprised by the recent allegations. After all, similar ripoffs occurred in the opaque mortgage-backed securities and derivatives markets, crucial parts of an unregulated shadow banking system whose collapse in 2007-08 continues to haunt our economy today. A recurring story of Wall Street is that insiders will rig the market against the public whenever they can. The news reports about currency trading ripoffs is just another iteration of that story.

That institutional customers, including some well-known money managers, were victimized brings to mind a lesson of the Bernie Madoff scandal: even the well-heeled and sophisticated are vulnerable. No one is safe when transparency and accountability are in short supply. Moreover, pension funds and other investment vehicles holding money for the benefit of middle class workers and investors are among the victims. This isn't just a problem for residents of Palm Beach.

Greater regulation of the currency markets, even simple measures like better recordkeeping of transactions and more timely confirmation of trades with customers, would enhance accountability. However, today's political climate precludes greater regulatory protections, even if pension funds and other repositories of middle-class assets are at risk. Some victims have filed lawsuits--the State of Virginia even intervened in one--and perhaps they'll recover their losses after a long slog through the courts. Otherwise, caveat emptor remains the word of the day.