A tale of two scandals

July 3, 2012 11:18 AM
A little shame is a good thing

Perhaps it is a cultural thing but it is impossible not to recognize the polar opposite reactions to a couple of banking scandals that came to light recently.

Representing the West is Barclays Bank that was fined approximately $452 million by three regulators on two continents for basically attempting to rig Libor (London InterBank Offered  Rate), which serves as a benchmark for hundreds of trillions of fixed income products covering the globe. You would be hard pressed to find anyone who in some fashion is not affected by Libor.

A few days later Japan’s Nomura Holdings Inc. announced that it would punish executives based on an “internal probe into leaked information amid a government crackdown on insider trading.” The scandal involved Nomura “employees [leaking] information that third parties used for trading ahead of share sales managed by Nomura in 2010.”

In the Barclays case the alleged attempted manipulation began in 2005 and went on for at least four years. The Bank agreed to the huge fines after being given partial assurance the Department of Justice wouldn’t pursue criminal charges. The Nomura case appears to be centered on action taken in 2010 and the bank assessed punishment on its own and not part of any deal with regulators.

Barclays, in a press release, made a point to note that the fine was part of a broader investigation (i.e. everyone was doing it) and its CEO and top executives agreed to forgo 2012 bonuses, though not any pay or bonuses from the period that the misconduct—which may have improved the bank’s balance sheet and thus their compensation—occurred.  

Japanese regulators have not completed its investigation but Nomura acted proactively to cut CEO Kenichi Watanabe’s pay by half as well as cuts to other top executives. It also decided to halt business in it institutional equity sales department for five days.

Given the importance of Libor and the seriousness of the charges against Barclays and their admission of wrongdoing, the lack of outrage in the United States is unfathomable. While initially CEO Bob Diamond appeared to survive the news, outrage in London forced him to resign a week later.  

But there has been little call for Congressional Hearings on this issue, despite much greater implications than the recent trading loss by JP Morgan. Not that Congress asked any tough questions of Dimon despite the bank's likely role in the missing former MF Global customer funds. You half expected members of Congress to carry Dimon—a sugar daddy of political contributions—out on their shoulders. Even those that railed on behalf of the ‘poor farmers and ranchers’ shrunk in the presence of Dimon and did not pose tough question to him.

We understand that trading and banking is a bottom line business but it is also a customer business and customers need to hold these executives to account because there isn’t much hope for political leaders doing so.

More importantly, we must bring back the idea that there are other considerations beyond the bottom line. Acting honorably should not be a game for suckers and misconduct should be acknowledged rather than simply spun. We need a sense of fair play and shame. Without it all the rules and regulations are putty in the hands of smart lawyers and compliant politicians and won’t stop the next crisis.


About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.