The Persistence of Financial Investigations and Their Impacts
By Abraham Mendelson ‘17
With the announcement of Eric Holder’s resignation at the end of September behind it, the Justice Department is back at work with a familiar target in its sights: the financial sector. The Justice Department launched an investigation last month regarding fraud in foreign currency markets that involve traders across multiple banks, including UBS and JP Morgan Chase, allegedly colluding in private chat rooms to manipulate $5.3 trillion in currency. Following the initial probes and inquiries, prosecutors have supposedly compiled sufficient evidence to file the first charges against banks before the end of 2014. While this seems like the start of a routine procedure that has repeated itself several times–allegations of financial misconduct, regulatory wrist slaps, settlement, and fines–the Justice Department anticipates experimenting with a new strategy in this investigation, specifically using this case as leverage to reopen previously settled cases. In fact, suspected banks are preemptively suspending and firing employees involved in the investigation in an attempt to ready themselves for this new tactic and go into impending settlement negotiations having already shown good faith.
Most of these banks are cooperating not only to avoid punitive cash penalties in the future, but also because they are backlogged with other investigations and lawsuits. Deutsche Bank, one of the twelve banks that allegedly manipulated the foreign currency market, is simultaneously defending a suit from spring 2014 regarding Libor manipulations–Libor is the London Interbank Offered Rate that determines the rate of short-term, interbank loans. Additionally, the banks continue to pay fines associated with the 2008-2009 financial crisis. Bank of America alone has incurred $17 billion in fines since the financial crisis. The six largest banks, including Bank of America, have paid $130 billion in fines since the financial crisis.
Government inquiries and punitive fines have become standard fare in Wall Street’s operations since 2009. The real news is not in Holder’s new crusade against financial manipulation, but rather in the findings that the press has reported this week from New York State Comptroller, Thomas DiNapoli. His office released a report showing that broker-dealer’s profits in the financial sector fell 13% for the first half of 2014 compared to the first half of 2013, which was primarily the result of settlement costs and legal penalties. This was not extremely shocking but still frustrating news to Wall Street given that profits declined 30% in the first half of 2013 for the very same reasons that profits declined in the first half of 2012. There has clearly been a trend of contracting profits in the financial sector, rather than the growing profits the banks would like to see. However, the Comptroller’s report shows this contraction of earnings slowing down, which should alleviate Wall Street’s grumblings as financial firms collectively make the slow return to growing profits in spite of regulatory fines.
Of course, some argue that contracting profitability is not bad news for the banks to begin with considering that they still earned $8.7 billion in profit over the first half of 2014. Furthermore, New York State is not too disappointed since it is poised to collect $4.5 billion from the banks’ fines and settlements in 2014. Nevertheless, the State has to weigh this windfall in fines against the lost tax revenue from lower earnings on Wall Street, which comprises approximately 20% of the state’s tax revenue and nearly 10% of New York City’s tax revenue. Furthermore, diminished bank profitability, even if profits are still substantial, has led to a contraction in the finance industry, with 10,500 jobs lost over the past three years. Obviously, those lost jobs are unrelated to the handful of employees who have been or will be fired for illegally manipulating currency and interest rates. It is cause for concern, however, that the handful of unethical employees and managers involved in these collusive acts can cause their firms to lose billions of dollars of earnings and negatively impact so many others within their companies and even the country.
Since the financial crisis, regulators have justifiably subjected Wall Street to full-scale oversight, but the cycle of “investigation, settlement, repeat” has significant social and economic implications in terms of lost jobs and decreased tax revenue despite the banks’ continued profitability. The Justice Department should absolutely pursue its case against the dozen banks responsible for currency manipulation in order to reign in reckless conduct and promote transparent markets. However, the punishments, which prosecutors have in place to achieve that goal exact a very high cost.
Sources:
http://www.reuters.com/article/2014/10/07/us-usa-newyork-brokers-idUSKCN0HW1DS20141007