The United States: $5.8 Billion Fine for 6 Global Banks

JP Morgan Chase, Citigroup, Barclays and RBS pleaded guilty in the exchange rates scandal. UBS and Bank of America are also charged.

For the first time in decades, American banks are forced to admit their guilt in front of a criminal court. Wednesday, JP Morgan and Citigroup admitted that some of their traders agreed to manipulate the currency market to their advantage and to the detriment of their clients. Traders, who should have been competing, nicknamed themselves “the cartel,” the “mafia” and “the musketeers”. The banks admitted they did not prevent these behaviors, despite the warnings from whistle-blowers and client complaints. JP Morgan and Citigroup are not the only ones: On Wednesday, no less than six banks — JP Morgan Chase, Citigroup, Barclays, Bank of America, UBS and RBS — reached a gentlemen’s agreement with the U.S. attorney general, the Federal Reserve and New York regulators. They will pay a $5.8 billion fine in total, added to the $3.4 billion already paid for the same scandal last year to the British, Swiss and U.S. authorities.

Heavy Repercussions

The fines might seem important, but in this case they are not what is really interesting. The big novelty dwells in the fact that American banks are forced to plead guilty. Certain foreign establishments have already done it before, e.g., BNP Parisbas last year. Nevertheless, the American judges had never cornered the U.S. banks, likely for fear of weakening these national champions and destroying jobs. The Arthur Andersen case calmed them down for a while: The consulting firm had to destroy 28,000 jobs after admitting its responsibility in the Enron case.

The confessions of guilt on Wednesday constitute a big victory for the Wall Street detractors, who think that fines are not enough to change the behavior of many. Pleading guilty can have dire repercussions: It forces banks to display an act of contrition, which constitutes an embarrassing confession vis-à-vis their big clients. Some of them might be forced, for ethical and regulatory reasons, to cease their collaboration with the bank, a risk particularly high in asset management.

Even worse, pleading guilty can result in the loss of professional licenses, menacing entire sectors of activities. There is no risk of this in the U.S., where the banks are great job providers. Nevertheless, in many countries banking licenses follow a no-legal-condemnation policy. Pleading guilty could then open a period of incertitude for the banks, which will have to agree with tens of regulators in order to continue to operate locally.

The Soap Opera Is Not Over

The U.S. authorities are far from done with this case. According to a Citigroup report, banks might have to pay a fine of over $40 billion to settle this financial scandal. Deutsche Bank, which has miraculously eschewed sanctions so far, is the most vulnerable in the long term: It could pay off a $6.5 billion fine in total — Barclays $4.8 billion — indicates Citigroup. If banks eschew legal proceedings thanks to gentlemen’s agreements, they do not protect their staff from a possible conviction. Forex traders are currently being prosecuted in the U.S. and the U.K. Nonetheless, prison sentences remain extremely rare.