A commission of inquiry into the conduct of the big four banks must have widely communicated terms of reference and structure, and powers to compel and protect any witnesses who can bring invaluable information into the work of the banks that is happening in the shadows. There must also be immunity to all witnesses and any bank that is found to be intimidating witnesses must face a possible revoking of its licence as a bank in the country.
I will insist that the inquiry be a genuine probe, rather than merely a platform for grandstanding. I expect this inquiry to then enable the drafting of the enabling legislation that will decisively clamp down on all abusive acts and outright banking fraud. I want the inquiry to pursue grievances on behalf of disgruntled bank customers but also investigate other policy issues such as the nature of the bank guarantees and its risk, prudential frameworks within banks, and the efficacy of current financial misconduct penalties and sentences for white-collar crime.
What we are witnessing now is that the bad behaviour of bankers that led to the great financial crisis, although a well worked theme with measures to prevent a recurrence, is resurging, if it ever changed. Fines have become ineffective, so we need to go much further, we need to establish how do we get into those chat rooms and instant messaging services, where those shared or intended submissions for trading and information is exchanged on their trading positions or on their trading or pricing strategies in order to fight this behaviour once and for all, and hopefully arrest some people.
Seventeen banks have now been referred to the Competition Tribunal, accused of manipulating the value of the rand. The commission also says it has strong evidence that these banks were communicating with each other to co-ordinate the timing of their trades, and created false bids to distort the market. There has clearly been manipulation that would have affected the buyers of the currency. The commission has investigated this case of price fixing and market allocation in the trading of foreign currency pairs involving the rand since April 2015, with local banks Absa and Standard Bank named, along with Investec.
The commission found that from at least 2007, the respondents had a general agreement to collude on prices for bids, offers and bid-offer spreads for the spot trades in relation to currency trading involving the US dollar/rand currency pair. Further, the commission found that the respondents manipulated the price of bids and offers through agreements to refrain from trading and creating fictitious bids and offers at particular times. They reached agreements to refrain from trading, taking turns in transacting and by either pulling or holding trading activities on the Reuters currency trading platform. They also created fictitious bids and offers, distorting demand and supply in order to achieve their profit motives.
The Treasury is correct to say if proven true, these claims would confirm the pervasiveness of unbridled greed within the ranks of the foreign exchange trading sections of banks, even after evidence that such behaviour had the potential to collapse national and global financial systems. The Treasury is also correct to say such actions have led to immeasurable pain to ordinary people as evidenced by the deep recession of 2008-09, which was triggered by banks conducting their business recklessly. “It should be noted these allegations, if proved to be correct, point to poor market conduct practices at such offending institutions,” the Treasury said.
Let’s break this world of foreign currency trading down. The trading of foreign currencies promises substantial revenues and relatively low risk, a perfect breeding ground for crime. The foreign exchange business is vulnerable to manipulation, so much so that these traders created online chat rooms called “the cartel” and “the Mafia”. In 2015 one trader at Barclays wrote in an online chat room where prosecutors said the price-fixing scheme was hatched: “If you ain’t cheating, you ain’t trying.”
This points to a regulatory void which has spawned another round of criminal accusations and multibillion-rand penalties. South African banks, like their counterparts in the United States, the Citigroup, JPMorgan Chase, Barclays and Royal Bank of Scotland — must save us the time and plead guilty to this series of crimes over a scheme to manipulate the value of the country’s currency.
As Aitan Goelman, the trading commission’s head of enforcement in the US, said, “There is very little that is more damaging to the public’s faith in the integrity of our markets than a cabal of international banks working together to manipulate a widely used benchmark in furtherance of their own narrow interests.”
I want this commission to have the power to indict any employee whose errant instant messages underpin the cases against the banks.
Surprisingly, or not suprisingly, the banking sector itself and its hired guns are not outraged; they are in fact downplaying this saga. This reminds me of the words of Paul Pfleiderer (BA, MPhil, and PhD degrees Yale University) who said that “every economist agrees that conflicts of interest were highly problematic for the scientific integrity of their field – In economics and finance, if I’m trying to decide whether I’m going to write something favourable or unfavourable to bankers, well, if it’s favourable that might get me a dinner in Manhattan with movers and shakers”. He also wrote, “I’ve written articles that wouldn’t curry favour with bankers but I did that when I had tenure.”
SA Institute of Race Relations’ chief economist Ian Cruickshanks said the country’s banking sector was well regulated and would withstand the scandal, a contradiction in terms because something can’t be well regulated and have scandals at once.
He continues to say, “The investors might well play a wait-and-see for the moment and see how this plays out, but the strong reputation of South Africa’s banking system, especially the central bank, would bring investors back into the fold after the dust has settled,” Cruickshanks said.
The Banking Association of South Africa managing director Cas Coovadia said the decision by the Competition Commission demonstrated the independence and strength of regulatory authorities. This is even more annoying because you cannot speak of the strength of regulatory authorities when banks have been toying with a country’s currency and lifeline.
Then you have the out-of-depth South African Reserve Bank which said it had, in partnership with the Financial Services Board, conducted an investigation in response to various other investigations that were being undertaken by international regulators that looked at foreign exchange trading practices. “The review found no evidence of serious and widespread misconduct in the South African foreign exchange market, but saw scope for improvement in overall market conduct and made several recommendations in this regard.”
That is why we are calling for a parliamentary commission to break this entrenched culture of collusion by banks, business, economists, analysts, media, and our Reserve Bank.
All arms of state must break this monopoly that has created oligopolies and barriers to entry by new players.
We want justice. DM