/ 10 August 2012

The institutionalisation of rogue behaviour

Barclays has paid a fine of £290-million for its role in manipulating the London interbank offer rate.
Barclays has paid a fine of £290-million for its role in manipulating the London interbank offer rate.

It also lists how much they lost for their employer and the jail time they served.

Rogue traders, Wikipedia tells us, are authorised employees making unauthorised trades.

Most famous was Nick Leeson, who incurred a $1.3-billion loss for the venerable Barings Bank. Uniquely, this rascal – who went to prison for six and a half years – bankrupted his bank.

The rogue trader is no stranger to banking. But in recent weeks we have got used to a new phenomenon, the rogue bank. Some of the biggest names in banking have been accused of illegal activities that, until now, were more usually associated with a single employer gone bad. Or mad.

There is Barclays, which has paid a fine of £290-million for its role in manipulating the London interbank offer rate (Libor), the basic interest rate used internationally for financial contracts. As many as 20 banks could be implicated in the scandal.

Bet and lost
Citing research by Morgan Stanley, Bloomberg reported that legal expenses stemming from probes into Libor manipulation could range from $59-million for Lloyds Banking Group to as much as $1.04-billion for Deutsche Bank and $1.06-billion for the Royal Bank of Scotland. No one as yet faces jail time for manipulating Libor, but this scandal goes to the heart of the financial system: If we can't trust Libor, what can we trust?

Then there is JP Morgan, which bet and lost the farm on an obscure exotic trade known as the IG9 10-year when a single trader, Bruno Iksil, reportedly put up to $100-billion of its funds at risk. When the trade went bad, JP Morgan booked losses of $5.8-billion, which could rise to $8-billion, and its share price fell by 25% in May.

Crucially, top management at JP Morgan has not characterised Iksil's activities as those of a rogue trader and he does not face charges – he was taking a massive bet, for a time earning handsome profits, with the full knowledge of his superiors.

Next HSBC admitted to laundering $7-billion in Mexican drug money. HSBC has set aside $2-billion to be able to pay the fines it faces.

Rivalry
This week's scandal has regulators accusing Standard Chartered of laundering $250-billion of Iranian money in contravention of United States sanctions. Standard Chartered, which saw its share price fall by 16% in a single day this week after these accusations had been made by New York state's department of financial services, has rejected the claims. The Financial Times reported that the bank described any transgression as "small clerical errors".

Some commentators are casting the Standard Chartered matter in the wider context of rivalry between the US and the UK for supremacy as the world's financial capital, but for the time being Standard Chartered finds itself mired, with some of the biggest names in banking, in allegations of rogue activity.

It was not long ago that where rogue activity emerged it was the work of an individual, but when you consider the recent cases collectively, it is hard to not conclude that a culture of greed and too-big-too-fail indemnity have led to the biggest names in banking going rogue.