Facebook Twitter

Fines levied against banks and brokers

SHARE Fines levied against banks and brokers
Hillsborough Sheriff deputy patrols outside the gate of JP Morgan Chase annual stockholders meeting held Tuesday, May 15, 2012, in Tampa, Fla.

Hillsborough Sheriff deputy patrols outside the gate of JP Morgan Chase annual stockholders meeting held Tuesday, May 15, 2012, in Tampa, Fla.

Scott Iskowitz, Associated Press

JP Morgan was recently levied a potential fine totaling $13 billion, likely to consist of both a cash payment to regulators and partial mortgage debt relief to certain homeowners. The core issues driving this fine were alleged misrepresentation and related mis-selling of certain securities. Most of these securities were backed by residential mortgages that had been bundled and sold to institutional investors.

Another recent large fine to be assessed to a global bank amounts to $1 billion. In this case, Rabobank, a Dutch entity, was penalized for manipulation of various Libor rates. Libor is an acronym that stands for "London interbank offered rate." Libor rates are supposed to represent the interest rate at which large, stable banks would loan money to each other, generally on a shorter-term basis. Libor rates are denominated in various major currencies and can have varying maturities.

In the case of Rabobank, approximately 30 individuals were identified as contributing to a broader set of activities that led to the daily fixing of various Libor rates being manipulated. Although there are trillions of dollars of transactions that reference a wide range of different Libor rates, it appears the general intent of this broader group was to move the Libor rates so traders at these specific banks would benefit. At the same time, for certain counterparties of these banks, the effects of the rate settings would be detrimental.

The $1 billion fine paid by Rabobank is in addition to a $1.5 billion fine agreed to by Union Bank of Switzerland and a $615 million settlement agreed to by Royal Bank of Scotland. These are not the only banks which have agreed to settlements in this issue of manipulating Libor. A range of other banks and brokers are alleged to have been involved in these rate-manipulating activities.

Given the success regulators have enjoyed in these arenas, several other areas of the financial markets are likely targets for future investigations. Most global banking and brokerage institutions are also involved in the very large, global currency markets. The U.S. Department of Justice has announced it is looking into potential illegal activities in the foreign exchange markets.

Another segment of the financial markets where regulators will likely focus some of their investigative efforts will be the commodities markets. Like the currency markets, there are some very large and very liquid commodities, such as oil and gold. At the same time, there are smaller and less liquid areas of the commodities markets where it might be easier for prices to be manipulated.

As financial profits at many banks and brokers have recovered somewhat from the lows experienced during the financial crisis over the past several years, regulators are able to extract sizable settlements without risking insolvency at these institutions as a result of the settlements. Expect more fines to be levied against additional banks and brokers over issues in the mortgage, foreign exchange and commodities markets.

Kirby Brown is the CEO of Beneficial Financial Group based in Salt Lake City.