One robin does not make a spring, but Harry Shearer sent a link to a new route by which Main Street interests are starting to take ground back from Wall Street. One of the county supervisors of California’s Santa Cruz County recommended that the county end, to the extent possible, its business dealings with the four banks that had admitted to criminal conduct in a settlement with the Department of Justice and paid a total of $6 billion in fines. Here’s the Reuters recap of the deal reached last month:
Four major banks pleaded guilty on Wednesday to trying to manipulate foreign exchange rates and, with two others, were fined nearly $6 billion in another settlement in a global probe into the $5 trillion-a-day market.
Citigroup Inc (C.N), JPMorgan Chase & Co (JPM.N), Barclays Plc (BARC.L), UBS AG (UBSG.VX)(UBS.N) and Royal Bank of Scotland Plc (RBS.L) were accused by U.S. and UK officials of brazenly cheating clients to boost their own profits using invitation-only chat rooms and coded language to coordinate their trades.
All but UBS pleaded guilty to conspiring to manipulate the price of U.S. dollars and euros exchanged in the FX spot market. UBS pleaded guilty to a different charge. Bank of America Corp (BAC.N) was fined but avoided a guilty plea over the actions of its traders in chatrooms…
The misconduct occurred until 2013, after regulators started punishing banks for rigging the London interbank offered rate (Libor), a global benchmark, and banks had pledged to overhaul their corporate culture and bolster compliance.
We’ve embedded the memo below, which shows it was put on the agenda for the June 9 supervisors’ meeting. I do not know if it was approved or sent for further review before making a decision.
Author Ryan Coonerty points out that it is the established policy of Santa Crux County to sever the investment relationships of the County’s treasury with dealers who have been involved in bid-rigging scandals. Santa Cruz removed Barclays, JP Morgan, and Bank of America from their approved dealer list as a result of their role in earlier market-fixing scandals. Mr. Coonerty recommends strengthening the current policy by setting an explicit prohibition period of five years (rather than leaving its continuation at the discretion of the Treasurer) and unwinding other businesses relationships with these banks to the extent possible.
This proposal is based on the recognition that the flip slide of Too Big to Fail is Too Crooked to Trust. State and local governments are badly outmatched when they deal with major banks. Witness how they’ve been fleeced on municipal bond deals with complex swaps that go bad (Jefferson County, Alabama is the poster child, but there are plenty of other costly fiascoes out there) and privatizations. Not only do these entities have limited in-house expertise and legitimate difficulties in getting good advice, municipal finance has also long been a cesspool of corruption (see David Sirota’s dogged coverage of shady dealings with Big Finance in New Jersey and Chicago for examples).
Santa Cruz is blazing an important path, and I hope readers will press their local officials to take similar actions. Treasury officials make short-term investments in highly liquid and supposedly fairly price markets and instruments. The fact that major banks successfully gamed the most liquid market of all, foreign exchange, says that no trading market can be assumed to have fair prices. An obvious protection (and it is far from perfect) is to stay away from known crooks.