On Dec. 4 several world banks were implicated in an interest rate fixing scheme that amounted to, in the words of the European Commission, a financial world “illegal cartel,” and were ordered to pay out some $3.2 billion in fines. While many major investment banks have been getting dinged for separate instances of unethical trading practices in 2013 – with Citigroup (C) paying out $590 million and JP Morgan and Chase Co. (JPM) shelling out $13 billion – Dec. 4 marked the first time the majors have been singled out for participating in the same offense.
The LIBOR Gang
The banks involved – JP Morgan and Citigroup, along with Deutsche Bank (DB) and Societe Generale – have been found to engage in collusion to manipulate LIBOR rates, otherwise known as the London Interbank Offered Rate. In short, it’s the rate at which banks lend money to each other.
The rate affects some $800 trillion US dollars worth of contracts a year, and is theoretically regulated by the free market. There is no government oversight over the rate, which gave banks the chance to tweak it to their benefit, at the expense of those not in on the fix.
Multibillions in Fines Could Just be the Beginning
Fines levied by the European Commission against the various banks involved will eventually exceed $6 billion. This total includes the penalties assessed at earlier dates. The total tally could end up being much higher, as UK bank HSBC Holdings and France’s Creidt Agricole both declined to settle and thus are still under investigation.
Deutsche Bank and Societe Generale paid the bulk of the fines, with over $600 million apiece. However, allegations have not subsided for JP Morgan, and they could be face far stiffer penalties. The bank is still under investigation concerning LIBOR counterpart EURIBOR rate fixing.
EU Competition Commissioner Joaquin Almunia said he was shocked at the magnitude of the scam, and said it was the commission’s job to put an end to the bank’s cartel-like behavior.