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| Metals and Currency Exchanges |
Consider this article from George Mangion from today's Malta Times. It raises some serious questions that are simply not being addressed. In practice Banks themselves are the problem. They have evolved into instutions of greed. In practice the basis of banking in both boring and highly marginal.
But the creation of credit and derviatives have turned the Banks into 'monsters', like 'black-holes' who are devouring the middle classes, and their impotent Governments. We need much more than Basel 111. We need radical break-ups, new trading platforms and transparancy. But do not hold your breath! JB
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| The fabled Higgs-Bouson Particle has more realism than the creation of bank credit |
"Banks under fire"
by George M. Mangion from the Malta Times
Article published on 18 September 2011
It does not rain but it pours when financial scandals erupt. Little did we expect that with the introduction of strict banking regulation, including the implementation of new stress tests and Basel 111 rules, another bank would bite the dust? Reference is made here to the shock news that police in London had arrested a “rogue trader” in connection with allegations of unauthorised trading in UBS. At a time when the markets and shares show unprecedented losses, one could hardly believe that this trader at UBS bank caused an estimated $2 million loss. It was immediately reflected in an 8.00 per cent drop in UBS’ share value. Luckily, no client positions have been affected so far, yet the news came as a bolt out of the blue for FINMA, Switzerland’s financial regulator.
Ironically, at a time of such austerity, global banks are under stricter supervision and hence they will struggle to recoup the fat returns they had grown used to, prior to the credit crunch, by trading anything from complex bond derivatives to gold and currencies they made millions. It is obvious that after the balmy pre 2007 days when bank profits flowed so copiously in their Balance Sheets they now face an escalating debt crisis and heightened uncertainty both in Europe and more so in the US where we are seeing banks’ share value dip in market trading.
ZKB trading analyst Claude Zehnder said of the UBS scandal, “They obviously have a problem with risk management.” The Swiss taxpayer had bailed out this top Swiss bank in the 2007/8 banking crisis, following huge losses on toxic assets held by its investment bank. Recently, UBS made 3,500 workers redundant leaving 65,000 staff worldwide. It hoped to save $2.3 billion in wages and salaries and now, paradoxically, it lost them in this last scandal that rocked the UK branch. Furthermore, it was associated with a serious tax evasion dispute with US authorities and was forced to disclose over 300 client names and pay a $780 million fine. In another instant it agreed with the US authorities to reveal data on 4,450 American clients. All this echoes the risks that Swiss banks in post sub-prime crisis are facing. British economist Professor Chris Roebuck said UBS has tightened its compliance and rules, but this latest breach “is a staggering demonstration that all the clever systems that the banks now have still cannot stop a determined individual getting round them if they want to”.
Sadly, this reflects poor corporate governance and lower audit oversight in sensitive sectors such as currency trading where millions are made or lost in a trade. This “casino” style trading is a lucrative edge of each international bank but while it lays the golden egg when things go wrong it conjures visions of ugly days. Just remember when we saw other rogue traders, including the one at Société Générale, rogue trader Jerome Kerviel, who was arrested in 2008 over unauthorised trades that cost the bank €4.9 billion. Following his arrest, a court sentenced him to three years in prison in October 2010. Records show it was one of the largest investor losses in France’s history.
So what is the solution that can plug a bank’s defences against such expensive fraud? Can effective risk management process result in zero risk occurrences? Hardly, as these systems are not watertight and still cost a lot of money to operate. Banks are sometimes unable or unwilling to implement this high level of control. It’s still unclear if management of Société Générale knew about Kerviel’s scam, though he has claimed that it’s impossible his managers didn’t know what was happening, given the level of risk and the amount of cash involved in his trades was perpetrated inside the four walls of the financial institution. Critics argue that it requires inside knowledge of the bank’s security policies and means how to override those policies. Or else the risk mitigation and compliance processes in place were fundamentally flawed. Critics also question how trades of this nature could go unidentified amid the network of risk management in place at a large bank like Société Générale. The bank stated it had no indication that the trader had taken massive fraudulent directional positions in 2007 and 2008 far beyond his limited authority. It is no consolation that France’s regulator fined the bank €4 million in 2008 and issued a formal warning to the bank for “grave deficiencies” in its internal controls that “made possible the development of the fraud and its serious financial consequences”. It looks more like shutting the stable door after the horse has bolted. The Kerviel scandal was a record heist, superseding losses involved in 1995 when Nick Leeson (now a free man) burnt a €900 million hole in Barings Bank plc.
Barings was one of the oldest and most respected British investment banks. After the fraud was discovered in Singapore, it was subsequently sold to Dutch bank ING for £1. Another bank under fire is Ireland’s largest bank, Allied Irish. In 2002 it discovered a rogue US trader John Rusnak who had defrauded its US subsidiary of up to $750 million. His labours netted him a generous salary while his clever manoeuvres landed him with a scheme worth $850,000 in salary plus juicy bonuses from for five years. So have we learnt any lessons from these banking fiascos? Perhaps we did not heed Leeson’s own words when he was interviewed after the Barings fraud was discovered. He was critical of the way banking supervision is entrusted to certain authorities. Perhaps one may say the kettle calling the pot black but when more frauds are discovered it makes you wonder if the gatekeepers are asleep on their watch. The former trader said: “The core, or the key to this fraud problem is that you then have a central bank and a government that don’t really understand the financial markets.” He meekly asserts that in 1995 the government in Singapore did not detect the fraud and he continued to blame the central banks, which omitted to unravel it, saying it was too complex for them.
Banking investment scandals of such magnitude are unheard of in Malta. This is thanks to a closely supervised network operated by trained banking and investment inspectors at the financial watchdog MFSA. Still, one can recall the downfall of the BICAL private bank in the early seventies, which saw the loss of many subsidiaries owned by the family-controlled bank face bankruptcy. Recently, the demise of La Valette multi-manager property fund managed by a subsidiary of Bank of Valletta saw thousands of small investors protesting in court that overzealous banking staff had urged them to invest in risky projects when they alleged that they were ignorant of the potential risks. Luckily for them, sanity prevailed and Bank of Valletta as the custodian agreed without admitting guilt to compensate such investors up to 75 per cent of their investment (provided they renege on their rights at court). This brought a happy ending to a long drawn saga that was hitting local media and was not doing any good to the solid banking reputation enjoyed by the island. Bad news followed with another claim by Finco Treasury Management, a stockbroker firm, in the name of some 40 claimants who were allegedly encouraged by BOV to invest in Lehman Bros perpetuals. It appears that such investors were not informed of the risks involved and they lacked any financial background, and most of them were not experienced investors. The claimants say BOV failed to explain the risks of the perpetual securities; in fact they were described in purchase contracts as “straight bonds”. They were not informed that these perpetuals could be converted to ordinary shares without investors being able to halt the conversion. In their judicial protest, the claimants say they were advised by the bank to place their savings in ‘junior subordinated bonds’ and perpetuals in the Lehman. Unfortunately, this triple A bank went into bankruptcy in 2008 when housing prices crashed in the United States. The worrying news for BOV is that Finco alleges the bank is at fault for not having warned investors of the worsening credit risk of the Lehman Group when the bank itself had suffered massive losses after investing in Lehman securities. On its part, Bank of Valletta has rebutted all claims but stated its intention to meet the claimants to better explain its position.
To conclude, it appears that in times of financial turmoil, the incidence of banking troubles increases exponentially. One hopes that an honourable solution is found for the hapless investors once MFSA as the regulator takes its time to investigate the claims and issues its verdict on the underlying facts that led to their losses. Banks are under fire and they certainly welcome all the protection they can muster from their patron saint in the sky.
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