Wall Street banks are facing the threat of new and more damaging allegations about their rigging of foreign exchange markets, as New York’s banking regulator intensifies a probe into computer-driven currency trading — raising the prospect that the total penalties arising from the scandal will exceed the $10bn already paid.
The New York Department of Financial Services, run by Benjamin Lawsky, has become increasingly convinced that banks have been systematically abusing forex markets through the use of automated trades driven by computer algorithms, according to people familiar with its investigation.
Findings from the probe may indicate more widespread market abuse than US and UK authorities disclosed on Wednesday, when detailing their settlement with six global banks, the people added.
They pointed out that this $5.6bn settlement related to allegations of market manipulation in the forex spot market — but Mr Lawsky’s probe covers electronic trading, which accounts for the majority of forex transactions.
Trading platforms at Barclays and Deutsche Bank are being scrutinised by the DFS, and the regulator has also subpoenaed information from BNP Paribas, Credit Suisse, Goldman Sachs and Société Générale.
Its investigation into Barclays is the most advanced, and several bank employees have been called to give evidence, according to people familiar with the case. So far, the probe has led the agency to suspect that the bank intentionally sought to gain unfair advantages over clients and counterparties through its forex trading platform, the people claimed.
The DFS has reached similar initial conclusions in its Deutsche Bank probe but, as it is only at the document review stage, it is not as advanced as the Barclays investigation, the people said.
They added that the DFS investigations into the banks that received subpoenas are at an earlier stage and no initial conclusions have been reached.
All of the banks declined to comment.
On Wednesday, the US Department of Justice and other agencies announced that they had reached a $5.6bn settlement with Barclays, Citigroup, JPMorgan Chase, Royal Bank of Scotland and UBS over a series of allegations of foreign exchange manipulation.
However, while the DFS was one of the agencies involved in the settlement with Barclays, its trading platform investigation remains separate.
The regulator has jurisdiction over banks that hold a New York state banking license — which includes many foreign banks but excludes most domestic groups, which are overseen by other regulators.
On Wednesday, Mr Lawsky announced he would be leaving the agency in late June. He plans to start his own law and consulting firm, in addition to becoming a visiting scholar at Stanford University as part of the school’s cyber initiative.
Whoever replaces Mr Lawsky at the DFS is expected to continue his hardline approach to dealing with Wall Street banks, people familiar with the case said.
Shares in Chinese e-commerce giant Alibaba Holdings Ltd. opened trading on the New York Stock Exchange Friday at $92.70, 36 percent percent higher than its IPO price, making the Hangzhou-based firm more valuable than Amazon.com, Procter & Gamble or Facebook Inc.
The debut gave Alibaba an initial market cap of $228 billion; shares initially surged as high as $99.70 before falling back to the IPO price in the first hour of trading.
The debut came after Alibaba’s IPO, which raised $21.8 billion, a number that could rise to $25 billion if underwriters exercise their option to increase their allotment by 15 percent.
If that happens, the deal will exceed the $22 billion raised by the IPO of the Agricultural Bank of China in 2010, which holds the global record, according to the Wall Street Journal.
The mega-deal values Alibaba tantalizingly close to Walmart, the world’s largest retailer, which has a market cap of $245 billion.
Investment bank Cantor Fitzgerald encapsulated the enthusiasm for the stock by giving it a “buy” rating and a $90 price target, and saying the company “had the potential to dominate global online commerce over time.”
“We believe that a differentiated pricing model, strong brand, and unmatched scale give Alibaba an unfair competitive advantage relative to peers both in and outside China,” analyst Youssef Squali wrote.
The pop in shares created a windfall for the underwriting banks, including Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan and Morgan Stanley, which helped price the shares and make money on the gain over the IPO price. It also means big shareholders like founder Jack Ma himself also left money on the table.
This paragraph from Credit Suisse should scare those in Scotland who might want independence from Great Britain:
Risk of an economic crisis: In our opinion Scotland would fall into a deep recession.
We believe deposit flight is both highly likely and highly problematic (with banks assets of 12x GDP) and should the BoE move to guarantee Scottish deposits, we expect it to extract a high fiscal and regulatory price (probably insisting on a primary budget surplus).
The re-domiciling of the financial sector and UK public service jobs, as well as a legal dispute over North Sea oil, would further accelerate any downturn. In our opinion, as North Sea oil production slows, we estimate that the non-oil economy would need a 10% to 20% devaluation to restore competitiveness.
This would require a 5% to 10% fall in wages, driven by a steep rise in unemployment.
Meanwhile, this chart from the same report shows how gigantic Scotland’s banking sector would be relative to its economy.
Two of Switzerland’s oldest private banks will give details of their financial performance for the first time this week, in the latest sign of how a sector long a byword for secrecy is edging towards greater openness.
Pictet, the 209-year-old Genevan bank, will declare its results on Tuesday. It will be followed on Thursday by its 218-year-old neighbour, Lombard Odier.
The two private banks called time in February 2013 on their two-centuries-long existence as unlimited liability partnerships, shifting instead to a corporate partnership legal structure from the beginning of this year.
Under the new framework, which means the groups’ holding structures, rather than their partners, are liable for the banks’ activities – both banks are now required to provide details of their financial performance for the first time.
Since Lombard Odier and Pictet remain privately owned, the disclosures – which are likely to include a rudimentary income statement and balance sheet, as well as various capital ratios – will be less detailed than for listed banks.
However, given the duo’s significance within the Swiss private banking sector – between them, they manage about SFr600bn ($657bn) in assets (the only metric they have previously disclosed) – even limited numbers will be revealing, said Rainer Skierka, an analyst at J Safra Sarasin in Zurich.
“The numbers will help us to understand not just these two banks, but also the sector as well,” he said, adding that most interest will centre on the banks’ core business of looking after the assets of wealthy families.“That [sector] is where the music is playing at the moment, where the consolidation is happening, where profitability is under pressure,” he said.
However, the results could also underscore the extent to which the two finance houses have diversified. Alongside their core business, both banks have significant mandates from institutional clients, while Lombard Odier also generates income from licensing its own IT and banking technology to other banks.
The disclosures are a symbolic moment in a country whose banking sector was long famous for its impregnable secrecy laws – which prevented banks or their employees divulging information about clients, except in cases of serious crime – and whose banks themselves have traditionally also kept a low profile.
“I can remember a time when certain private banks wouldn’t even publish how many assets they managed. They would simply say that information was private,” said Andreas Venditti, an analyst at Bank Vontobel. “There has been quite a change since then.”
Since the financial crisis, Switzerland’s tradition of bank secrecy has come under increasing pressure from countries frustrated that it has helped their citizens to dodge paying taxes at home.
The US has forced Switzerland’s two biggest banks, UBS and Credit Suisse, to pay large fines for their role in helping US clients evade taxes. And last year, it effectively forced Switzerland’s oldest private bank, Wegelin, to close after indicting it for aiding tax fraud.
Several Swiss banks have threatened to freeze American clients’ accounts unless they prove they are, or take steps to become, tax compliant, as the country’s lenders hurry to resolve a tax evasion dispute with the US.
The moves – made by a number of banks, according to three people familiar with the situation who did not disclose the identity of the banks involved – come before a deadline at the end of July for banks in a programme set up by the US Department of Justice last year to show which American clients conform to US tax requirements . However, the validity of the banks’ approach has split legal experts.
“Swiss banks are trying to compel customers to do something that a customer is not contractually obliged to do and by blocking accounts, they are committing an act of coercion that is problematic under Swiss penal, contractual and regulatory laws,” says one lawyer.
Others disagree. “It’s legally defensible in situations where banks have been lied to by clients about their US status,” says another Swiss lawyer. “In other situations where the bank knew all along that the client was a US person, it’s more problematic.”
The US has been clamping down hard on banks it believes helped US citizens dodge their fiscal responsibilities. In 2009, UBS paid a $780m fine after admitting it helped thousands of clients evade taxes. And in May, US regulators forced Credit Suisse to pay a $2.6bn fine after the bank pleaded guilty to conspiring to help clients evade taxes. About a dozen other banks, including Julius Baer and Zürcher Kantonalbank, have long been under investigation.
The DoJ programme was designed to allow the rest of the Swiss banking sector, which consists of some 300 banks, to atone for any past sins by handing over information about their activities with US clients and, in cases where clients had undeclared accounts, by paying stiff fines.
More than 100 Swiss financial institutions have signed up to the programme. They had until the end of June to provide the US with information about the scale of their activities with US clients and how their cross-border business was run, as well as with information that will help the US government in its efforts to track down tax evaders.
Banks now have until the end of July to provide “mitigating” information – for example that certain accounts had been declared – or until September 15 to show that clients disclosed their accounts themselves, at the urging of their bank, through the US’s Offshore Voluntary Disclosure scheme.
The fines which banks in the programme will have to pay will be calculated based on the maximum dollar value of accounts deemed undeclared, once the mitigating information has been taken into account. Accounts opened before August 1, 2008 will attract a fine of 20 per cent of the assets involved. Fines will rise to 50 per cent for accounts opened after February 2009.
Wall Street banks and their foreign rivals have paid out $100bn in US legal settlements since the financial crisis, according to Financial Times research, with more than half of the penalties extracted in the past year.
The sum reflects a substantial shift in political attitudes towards banks, as regulators and the Obama administration seek to counter perceptions that bankers have got off lightly for their role in the financial crisis.
The milestone comes amid signs that banks’ legal costs could rise further, with a number of large banks still under investigation by the task force set up by Barack Obama in 2012 and the political backlash still under way.
During stress tests last week, the Federal Reserve found that the biggest banks could still face a further $151bn bill for operational risk, repurchasing soured mortgage bonds and dealing with the falling value of buildings they own. Lawyers believe the bulk of this estimate is made up of expected litigation costs, suggesting the Fed is concerned that banks have misjudged badly their legal exposure.
Last week’s $885m deal between Credit Suisse and the Federal Housing Finance Agency took the settlements to $99.5bn, of which $15.5bn came from foreign banks, according to an FT study of 200 fines and restitutions since 2007. Just over $52bn of the total was paid out in 2013 alone. America’s six big banks – JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Morgan Stanley and Goldman Sachs – had combined earnings of $76bn in 2013, just short of their collective peak in 2006.
The settlements and restitutions range from a high of $13bn, agreed to by JPMorgan Chase in a deal with the justice department, to fines as low as $1m. They span penalties levied by agencies such as the Commodity Futures Trading Commission and mortgage repurchases from Fannie Mae and Freddie Mac, the quasi-governmental US mortgage insurers.
The White House toughened its line from 2012 after complaints from Congress and Democratic voters about the failure to punish big banks for their role in the crisis compared to the impact on the broader community.
Despite the large headline number and huge fines paid by individual banks, critics say they may have little impact on institutions with the capacity to easily absorb such penalties.
“The fines can be viewed as [a] ‘cost of doing business’,” said Anat Admati, of Stanford University. “They don’t get at the heart of the problem, and aren’t effective to change behaviour, because the strong incentives by individuals within the banks to keep engaging in the same practices remain in place.”
However, Tony Fratto, of Hamilton Place Strategies in Washington, said the fines were “very substantial, in some cases orders of magnitude larger than anything we’ve seen in the past”, and came on top of higher compliance costs imposed after the crisis.
The fines can be viewed as [a] ‘cost of doing business’. They don’t get at the heart of the problem, and aren’t effective to change behaviour, because the strong incentives by individuals within the banks to keep engaging in the same practices remain in place– Anat Admati, Stanford University
“If the goal is not to shutter banks, but to impress upon them the public interest in adhering to the law, and to better account for risk, the fines go beyond what was necessary,” he said.
The more aggressive approach came after years in which the Obama administration had been criticised for not extracting enough big penalties from banks or pressing criminal charges against top executives.
The justice department and Eric Holder, the attorney-general, in particular, were repeatedly taken to task by Congress and sections of the media for failing to go after financial institutions.
In March last year, Mr Holder acknowledged before a congressional committee that some banks were “too large” to prosecute without risking a “negative impact” on the economy.
Since then, his approach has significantly toughened, along with the ratcheting up of pressure on Capitol Hill.
Two senators, Elizabeth Warren, a Democrat and an outspoken critic of Wall Street, and Tom Coburn, a Republican, introduced a bill in January that would force agencies to reveal the details of settlements reached with banks and other companies accused of wrongdoing.
Ms Warren earlier this month again called into question the effectiveness of regulatory enforcement in light of the recent pay increase for JPMorgan Chase’s CEO Jamie Dimon.
At a Senate Banking Committee hearing, she questioned how Mr Dimon could receive a “fat pay bump” to $20m in 2013, a 74 per cent increase from the previous year, even after the bank had paid out record fines.
“I’m not confident the enforcement system is doing nearly enough,” said Ms Warren, adding that the settlements did not appear to be translating into a deterrent for bad behaviour.
The fines cover the banks’ practices in the foreclosure business, lending practices, market manipulation and fraudulently issuing mortgage-backed securities.
Additional reporting by Tom Braithwaite in New York