Despite a slate of criminal fines with eye-popping dollar figures announced on Wednesday, five banks that conspired to rig foreign currency exchange rates in recent years face only minor real-world consequences that are more a cost of doing business than a significant punishment for breaking the law.
The banks admit they engaged in a years-long conspiracy to manipulate currency exchange rates on a daily basis in ways that would boost profits and limit losses. Currency traders from JP Morgan, Royal Bank of Scotland (RBS), Citigroup, and Barclays met in a secret chatroom they dubbed “The Cartel” to collude on the size, timing, and nature of their buy and sell orders for U.S. dollars and euros. Those four banks pleaded guilty to criminal charges Wednesday. The Department of Justice (DOJ) announced the guilty pleas and fines totaling $2.5 billion, as well as its decision to tear up a prior non-prosecution agreement with british bank UBS and force the company to plead guilty to separate, related charges. The Federal Reserve announced its own set of corresponding fines on Wednesday for those same five banks and Bank of America.
Combined with a prior slate of penalties, the total charges to the banks over “The Cartel” approach $9 billion. But even that large figure is piddling relative to the overall size of these banks. The real-world impact of all that showy enforcement activity is likely to be almost nil thanks to related decisions by other executive branch agencies in the case. And the stock market response to Wednesday’s announcement almost immediately pushed the banks back into the black.
Fines are supposed to be just one of the consequences of this kind of criminal confession by a major financial company. Pleading guilty is also supposed to put a sort of scarlet letter on the banks to protect everyone else in the financial system from doing business with people who broke the law. But the Securities and Exchange Commission (SEC) is reportedly set to waive these additional systemic consequences and allow the banks to continue operating normally. The DOJ’s authority to bring fines will not be reinforced with financial regulators’ authority to apply longer-lasting reputational and functional punishment, if the Bloomberg report that the SEC will grant the banks waivers is correct.
This isn’t a one-off. When Credit Suisse pleaded guilty last spring to actively helping Americans evade taxes through secret Swiss accounts, another executive branch agency also worked to dampen the blow of the company’s admission on its bottom line. After a Department of Labor official told a lawyer for the bank that the company didn’t have to notify individual citizens that their retirement accounts “were being overseen by a manager with links to a felon,” Bloomberg reported Tuesday, the lawyer responded with an email containing the words “thank you” 600 separate times. The decision meant that in addition to winning reduced criminal consequences by pleading guilty, Credit Suisse could reduce the business consequences of customers being told they were investing with confessed crooks.
Banks pleading guilty to criminal charges is unusual, and the DOJ press office naturally presents such events with fanfare. But while such admissions are rare, waivers that ensure the crimes don’t actually mess with the felons’ business activity appears to be common practice. Banks are batting 1.000 on waiver requests in recent years according to Bloomberg, despite settling or pleading out numerous cases where investigators had turned up overwhelming evidence of conspiracies to rig markets and harm consumers.
Waivers may defang the DOJ’s work to hold banks accountable to the law, but at least the fines themselves still give these deals some teeth, right? Wrong. The fines will get paid by shareholders, not by individual executives or traders who benefited personally and professionally from the crimes their firms are admitting to.
This week’s fines do have one advantage over other much-touted DOJ deals involving bank misconduct, though. The much larger settlement agreements that Bank of America, JP Morgan, and others used to escape prosecution for their mortgage misdeeds were largely tax deductible, effectively putting the American public on the hook for the cost of whatever justice those deals provided. The foreign exchange rigging fines that the DOJ levied are criminal penalties, however, which are not tax deductible for the banks. It is unclear if the smaller corresponding fines from the Federal Reserve can be deducted, as civil penalties have a murkier tax status than the criminal penalties tied to the guilty pleas. A call to the Federal Reserve Board of Governors was not returned by press time.
Regardless of how the tax implications shake out, the banks are already coming out ahead judging by the stock market’s response to the fine announcements Wednesday. Barclay’s stock price rose so significantly over the course of trading Wednesday that the bank “is worth £1.5bn more than this time yesterday, or almost exactly its total fines,” the Guardian notes. RBS came out even better, gaining £715 million in value over the day. That’s $1.12 billion at current exchange rates, or nearly double the $669 million in combined DOJ and Federal Reserve fines the bank was just levied over its role in manipulating those very same rates.