Big world banks to pay $ 4.95bn for cheating customers; Is it a punishment or a gentle caress?

The City, London’s financial district where the headquarters of major banks are based. The Committee of European Banking Supervisors (CEBS) is also based in this area. (European Council – Council of the European Union Newsroom, snapshot from a video footage)

Last week five of the world largest banks, JPMorgan, Barclays, Citigroup, Royal Bank of Scotland and Union de Banques Suisses were fined by the American magistrates a total of $ 4.7 billion for rigging interest rate benchmarks. The banks had been setting those standards by themselves for five years after 2007. In another case the US Federal Reserve, the Fed, asked the Bank of America to pay a fine of $250 million for foreign exchange rigging. In the case of Barclays the fine was imposed in collaboration with the British and the Swiss authorities.

These are not the only cases the largest world banks were investigated and fined for rigging crucial benchmarks like derivative price settings, the London interest rate fixings (Euribor and Libor) and cheating with other global financial yardsticks. In December 2013 the European Commission fined eight banks (Barclays, Deutsche Bank, RBS and Société Générale, UBS, Citigroup, JPMorgan and the broker RP Martin) with €1.7bn in total, for participating in cartels organized to cheat with financial benchmarking.

Robbing the clients

It’s a well established fact then that the largest world banks have in many ways been usurping their clients’ money, but no banker went to jail for that. As for the fines mentioned above they are peanuts compared to the immense wealth of transactions in dollars, euros, British pounds, yens and other moneys those banks are conducting every day. Cheating by next to a hundredth of a percentage unit may translate into billions every day.

Not to forget that financial benchmarks are used as a base for the negotiation and the sewing up of millions of contracts around the world every day between the banks and their clients, business and consumers alike. Mortgages and other loans are just one example of that. The slightest tampering could mean inconceivable amounts of additional and illegal profits for the banks.

However, this is not the only way the ‘too big to fail’ lenders are overexploiting businesses, mainly SMEs, and consumers. The standard way our western financial system functioned for the last two decades is an enormous trap the bankers have set up. But let’s tell a story.

An unbelievable story

Imagine that somebody lends you money, lots of it, at zero or very close to zero interest rates and for long durations. When one loan matures your benefactor has the gallantry to accord you another, much bigger one, with the same or softer terms, and out of extreme courtesy avoiding altogether any reference about when this amazing bonanza could end. Of course your angel lets you do whatever you like with his money and at times lets it to be understood that it’s highly possible that this arrangement may last forever or at least for many-many years.

As time goes by you understand that even if you spend or invest recklessly and you lose your sponsor’s money you don’t get severely rebuked. After a few really nice words are exchanged, you get more trillions under the same or better terms and the system continues all right and you even get some gentle friendly pats on the shoulder.

This is not a fairy tale. It’s a living reality for some people, for whom the laws of gravity do not function. If you haven’t yet understood to whom this world has been so unbelievably generous, well into the region of absurdity, the answer, is that…‘it’s the bankers stupid’. Their benefactors are the central banks and through them they overexploit entire societies in the developed world. In the developing countries the direct interference of the government in the banking system, mitigates all that to a certain extent, but it creates other secret ways of malfunctioning and exploitation.

Yet it’s true

In the developed world let us take the example of the 2008 financial crisis which tore apart the Atlantic financial system. Everybody agrees today that the bankers caused it, drove the world economy to its knees and made us all much poorer. However as it turned out, the result was that in the period 2008 -2014 the American banks received from the US central bank, the Fed almost four trillion dollars at a zero interest rate. Is this an incredible gift or not? On this side of the Atlantic, the ECB accorded to Eurozone banks something around one and a half trillion euro. As from last March this arrangement continues and the ECB adds cash injections to banks to the tune of €60 billion a month; also at close to zero interest rates. This latest bargain is expected to continue until September 2016.

Other smaller central banks like the Bank of England and the Bank of Canada accord some more hundreds billions to the Atlantic banking sharks. Having received all that money for free, the banks lent it out at an average yearly interest rate of 10%. In this way they are making an equal percentage of gross profit on all the money that was handed to them for free. It doesn’t take much accounting expertise to estimate that for the major western banks, just a dozen of them, the gross profit should reach at least six hundred billion a year. Then paying a few billions in fines is rather a free of charge and complete absolution for bankers and a clear encouragement to continue on the same path. Just like that.

Real anti-social bandits

All along those years though the bankers didn’t restrict their antisocial activities in exploiting us all through this scheme. They even crossed the criminal law boundaries and rigged the most important markets making huge extra profits. To do this they rigged the exchange rates, the interest rates, the derivative market pricing and every other financial benchmarking, making it to work to their illicit benefit and to our detriment. Shamelessly, they have been ripping off their own customers, that is, us all.

Unfortunately this ignominious story doesn’t seem to be close to an ending nor does our political leadership appear ready to confront this unholy arrangement head on. The fines imposed on banks so far are just a gentle caress.