In May 2015, Citicorp, JPMorgan Chase, Barclays, and the
Royal Bank of Scotland both acknowledged colluding to set the “fix” rate in
foreign exchange markets, and agreed both to change their internal cultures and
pay criminal fines of over $2.5 billion.[1]
The U.S. Attorney General, Loretta Lynch, stated that her department would “vigorously
prosecute all those who tilt the economic system in their favor; who subvert
our marketplaces; and who enrich themselves at the expense of American
customers.”[2]
I submit that this does not go far enough, given the size and power of the
banks and the condition of the sector.
Private gain at the expense of the public good is an old
story. Corporations give to Congressional campaigns at least in part in hopes
of being able to bend federal lawmakers to insert and approve a loophole that
would keep the good of the whole from constraining quite so much the particular
private interests. To be viable in the long term, a republic—even a republic of
republics—must privilege the public good over potentially overweening private
interests; otherwise, the implicit message can only be that anything goes—provided
a company’s head knows where to send the dollars.
In using “a private electronic chatroom to manipulate the
spot market’s exchange rate between euros and dollars using coded language to
conceal their collusion,” the banks, or “The Cartel” as they referred to their
group, “acted as partners—rather than competitors—in an effort to push the
exchange rate in directions favorable to their banks but detrimental to many
others.”[3]
In other words, the banks acted as price-makers rather than price-takers; the
market could not, therefore, be considered competitive. I submit that Lynch did
not go far enough in settling for an acknowledgement of wrong-doing, promised
change of internal cultures, and a fine; they do necessarily result in a
competitive marketplace. Lynch said that the “penalty all these banks will now
pay is fitting considering the long-running and egregious nature of their
anticompetitive conduct” as well as “the pervasive harm done.”[4]
Perhaps this so in terms of the size of the fine, but in giving the public
confidence that the market would from then on be competitive. If firms in an
industry are large enough that four of them colluding can set a price or rate,
then the industry is oligarchic. To move it to a competitive basis, governmental
action breaking up the largest firms (including in terms of ownership) is
necessary. The justification lies in the value of the public good when economic
liberty and property rights threaten to compromise the good of the whole.
To be sure, the U.S. Government would only be able to break
up Citicorp and JPMorgan. Lest it be claimed that the resulting smaller firms
would have less wherewithal to compete with Barclays and the Royal Bank of
Scotland (as well as other banks), shedding less profitable divisions and
focusing on developing a specialty-area can result in higher profits (i.e.,
from the sale of premium goods). Had lawmakers and President Obama given the
U.S. Government the authority to break up financial institutions that have an
unacceptable level of system risk (i.e, that a bank’s collapse could paralyze
the entire financial system given the impact of high volatility on the market
mechanism adjusting for risk), breaking up the largest American banks would not
only make the sector more competitive, but also reduce the banks’ respective
systemic risks. Were a crisis and ensuing short-sellers’ run on the banks
occur, holding more dollars in reserves might not buy a bank much more time. It
did not take long for Lehman Brothers to run through its cash once the
short-sellers set in.
In short, the U.S. Attorney General could have taken a more
systemic view and a related pro-active approach oriented beyond holding the
banks accountable by including measures that would have provided the public
with more confidence that the sector would be more competitive in the future.
1. Loretta Lynch, “Attorney
General Lynch Delivers Remarks at a Press Conference on Foreign Exchange Spot
Market Manipulation,” The U.S. Department of Justice, May 20-, 2015.
2. Ibid.
3 Ibid.
4. Ibid. Lynch said that the banks’ concerted actions “inflated the banks’ profits
while harming countless consumers, investors and institutions around the globe—from
pension funds to major corporations, and including the banks’ own customers—who
placed their faith in the market and relied on it to produce a competitive
exchange rate.” Ibid.
