Rate Rigging Scandal Extends to Foreign Exchange (FX) Market

Just when it seemed as if the London Interbank Offered Rate or LIBOR scandal outrage had more or less blown over, and that the big players involved were going to go back to business as usual, having the more serious charges against them dropped, and ending up with nothing more than a light slap on the wrist, the news broke about institutionally ingrained energy cost manipulation in the fraudulent fixing of the price of oil .  Next, due to concerns about price manipulation, a major shakeup began in the commodities sector, signaling the loss of confidence in the private firms that have historically provided the benchmark rates  commodity investors, traders, end users and producers use for pricing of base and precious metals. All of this was then compounded by the allegations of LIBOR – style rate manipulation of interest rate swaps.

  Now, like a runaway cancer of high financial crime, illicit rate rigging has also apparently metastasized to the FX market.

With a daily trading volume of over $4.7 trillion, the foreign exchange, or FX market is the largest financial market in the world. Pegged to the FX rates are the daily-adjusted values of an estimated $3.6 trillion worldwide in funds, derivatives and financial products including pension and savings accounts. The nominal value of all of that wealth has just been brought into question.

The Department of Justice, the FBI, and the CFTC as well as regulatory agencies in Europe are now investigating evidence and testimony that for years, currency exchange rates have been tampered with by the habitual, carefully orchestrated practice known as “banging the close”.  Investigators are looking into allegations that 4, possibly more of the biggest megalithic banks that dominate the FX market regularly conspire to concurrently place high-frequency trades of benchmark currencies, just before the close of trading when daily prices are fixed, in order to “peg” exchange rates in their financial favor.

A Pandora’s box of horrific rate rigging scandals has opened.

Rolling Stone contributing editor Matt Taibbi underscores the enormity of the situation in the following excerpt of his article about the building fog of scandals:

“Perhaps most importantly, however, there’s a major drama brewing over legal case in London tied to the Libor scandal.

Guardian Care Homes, a British “residential home care operator,” is suing the British bank Barclays for over $100 million for allegedly selling the company interest rate swaps based on Libor, which numerous companies have now admitted to manipulating, in a series of high-profile settlements. The theory of the case is that if Libor was not a real number, and was being manipulated for years as numerous companies have admitted, then the Libor-based swaps banks sold to companies like Guardian Care are inherently unenforceable.

A ruling against the banks in this case, which goes to trial in April of next year in England, could have serious international ramifications. Suddenly, cities like Philadelphia and Houston, or financial companies like Charles Schwab, or a gazillion other buyers of Libor-based financial products might be able to walk away from their Libor-based contracts. Basically, every customer who’s ever been sold a rotten swap product by a major financial company might now be able to get up from the table, extend two middle fingers squarely in the direction of Wall Street, and simply walk away from the deals.

Nobody is mincing words about what that might mean globally. From a Reuters article on the Guardian Care case:

“To unwind all Libor-linked derivative contracts would be financial Armageddon,” said Abhishek Sachdev, managing director of Vedanta Hedging, which advises companies on interest rate hedging products.

Concern over all of this grew even hotter last week with the latest Libor settlement, in which yet another major bank, the Dutch powerhouse Rabobank, got caught monkeying with the London rate.

Rabobank paid over a billion in fines to American, British, Dutch and Japanese authorities and saw its professorial CEO, Piet Moerland, resign as a result of the probe. The investigation revealed the same disgusting stuff all of the other Libor probes had revealed – traders and various other mid-level bank sociopaths laughing and joking about rigging rates and screwing customers all over the world. From the WSJ:

In a July 2006 electronic chat, an unidentified Rabobank trader was informed about the bank’s plans to set Libor “obscenely high” that day, according to an exchange cited by the Justice Department. The trader responded, “oh dear . . . my poor customers . . . . hehehe!!”

Here at home, virtually simultaneous to the Rabobank settlement, Fannie Mae filed a suit against nine banks – including Barclays Plc (BARC), UBS AG (UBSN), Royal Bank of Scotland Plc, Deutsche Bank AG, Credit Suisse Group AG, Bank of America, Citigroup and JPMorgan – for manipulating Libor, claiming that the mortgage-financing behemoth lost over $800 million due to manipulation of the benchmark rate by the banks.

And virtually simultaneous to that, JP Morgan Chase disclosed that it is currently the target of no fewer than eight federal investigations, for activities ranging from possible bribery of foreign officials in Asia to allegations of improper mortgage-bond sales to . . . the Libor mess. “The scope and breadth of risky practices at JPMorgan are mind-boggling,” Mark Williams, a former Federal Reserve bank examiner, told Bloomberg.

The point of all of this is that any thought that the potential Chase settlement might begin a period of regulatory healing for it and other Wall Street banks appears to be wildly mistaken. If anything, the scope of potential liability for all the major banks, particularly in these market-rigging furors, appears to be growing in all directions.”

Have you had enough yet?