November 12th, 2014
Guest Post by Rowan Bosworth-Davies
One of the major unexplained elements in the foreign exchange (forex) rigging case is the level of knowledge of manipulative activity possessed by the Bank of England.
If it, as a leading market participant and a regulator, had prior knowledge that the forex markets were being manipulated, or indeed, had reasonable grounds for suspicion that criminal offences of market manipulation were taking place, then their role was clear and they should have acted swiftly in the hope of returning integrity to the market, and to ensure that genuine users of these markets were not inadvertently suffering loss and damage.
The case is throwing up a lot of unanswered questions.
UK, US and Swiss authorities have so far fined six banks — Citigroup, JP Morgan, Bank of America Merrill Lynch, UBS, Royal Bank of Scotland and HSBC — more than £2.7 billion ($4.3 billion) over “failings” that led to the criminal manipulation of the $5.3 trillion-a-day foreign exchange market. Separately, FINMA, the Swiss regulator, further fined UBS. Barclays Bank is still in negotiations with regulators.
Groups of traders from these large “too big to fail” banks were found to have been conspiring and colluding with each other via semi-illiterate instant messages to nudge currency rates ahead of the 4pm “fix” to benefit financially to the detriment of customers and to the exclusion of other financial market participants who they named “numpties”. The group of traders gave themselves names like “The Players”, “The 3 Musketeers”, and “1 Team, 1 Dream”.
If you were listening to BBC Radio 4 this morning, you would have heard ministers and pundits queuing up to decry their activities, making out they were a bunch of oiks in shiny and narrow-trousered suits, and that they alone were responsible for possibly the biggest financial crime in the history of capital markets.
We don’t need not go into why none of them is in prison — no-one goes to jail for financial crimes these days. You can bankrupt one of the world’s leading banks and fleece investors with a rights issue that is widely considered to have been fraudulent, à la RBS, or you can launder billions of dollars for the Mexican drug cartels, à la HSBC, and no-one in authority will bat an eyelid (though HSBC was fined in the US).
Conservative MP Andrea Leadsom, economic secretary to the Treasury, appeared on the BBC Radio 4 Today programme where she made a series of claims about how effective the government had been in regulating the financial markets since May 2010. I don’t know which bush Leadsom has been asleep under for the last few years, but her claims to be ‘completely disgusted’ at the activities of a bunch of City Coke-noses rang hollow Like other government ministers eager to stem the tide of public concern, Leadsom waded in with a very broad brush, claiming among other things that the government has ‘…created a new regime that will ensure that criminal behaviour gets punished by jail sentences…’
I had to think long and hard about this, but it finally dawned on me she was referring to the ‘reckless banker’ proposals which emerged from the Parliamentary Commission on Banking Standards and which were enacted in the Financial Services (Banking Reform) Act 2013!
As I have previously reported, the provision is never going to fly in practice, and anyway, the new bank capital rules outlined by Bank of England governor Mark Carney yesterday mean that, in future, a bank should never get within shouting distance of the necessary state of affairs whereby a senior bank official could be prosecuted for bringing it down through recklessness. But like any good minister, Ms Leadsom was not about to allow the facts get in the way of a good soundbite.
Much more interestingly, the scandal has also threatened to embroil the Bank of England. The Bank dismissed its chief currencies dealer as a result of the findings of its own investigation into the currency rigging scandal. Martin “The Hammer” Mallett was originally suspended by the Bank in March, following an earlier internal investigation that started in October 2013.
The Bank today published a report by Lord Grabiner QC on the role of its own officials in the forex rigging scandal. It would have us believe that one member of staff, and one alone — “the Hammer” — was aware that bank traders were sharing information ahead of the 4pm “fix”, that he been uncomfortable with this, but had failed to ‘escalate’ it or share it with superiors. But the report added there was “no evidence that any Bank of England official was involved in any unlawful or improper behaviour in the FX market …. No Bank of England official was aware that this improper behaviour was happening.”
In a separate statement, the Bank of England said that Mallett had been dismissed following a process “unrelated to [the forex] investigation”.
This really is complete and utter bollocks.Let me explain.
A spokesman for the Bank of England said:
“Following a disciplinary process unrelated to Lord Grabiner’s investigation, the Bank’s chief dealer, who was suspended in March, was dismissed on 11 November for serious misconduct relating to a failure to adhere to the Bank’s internal policies …The individual’s dismissal was not at all related to the allegations investigated by Lord Grabiner, but as a result of information that came to light during the course of the Bank’s initial internal review into allegations relating to the [foreign exchange] market and Bank staff. This information related to the Bank’s internal policies, not to [foreign exchange..].”
In the report, Lord Grabiner wrote:
“Mr Mallett did not escalate this issue to an appropriate person. This was an error of judgment for which he should be criticised. However, I should emphasise the limited nature of this criticism. Mr Mallett did not act in bad faith. He was not involved in any unlawful or improper behaviour nor was he aware of specific instances of such behaviour. In particular, he was not aware of the improper behaviour with which the FCA is concerned that goes far beyond his own concerns about potential misconduct.”
The Bank was assiduous in saying that Mallett had not been dismissed in relation to the foreign exchange investigation, insisting instead he had been fired for “breaching internal policies” that were uncovered in the course of the investigation.
This is a standard British establishment cover-up.
The Bank of England is in a quandary. It is aware that billions of dollars worth of financial crime and market manipulation has gone on at a time when the Bank was supposed to be surveying the markets, and it is now obvious that many people — including investors, mutual funds, investment trusts, pension funds, other counterparties and bank clients — may have suffered serious losses as a result, losses which will require compensation.
It is perfectly clear if you read the Grabiner Report that Mallett was aware of what was going on in the forex market.
It would have been clear to a blind man that what was going on was a conspiracy to make illicit gains by improper means, and that a large number of banks were engaging in criminal offences, by rigging the market. Mallet himself says so in one of his recorded conversations.
A transcript of a phone call between Mallett and an unnamed trader dated October 2011 showed the trader referring to banks trying to “bully the fix” — a benchmark for currency rates. Traders were executing unnecessarily large volumes to move exchange rates around in their favour, said the trader. The conversation continued:-
Mallett: “… what troubles me is your, um, your accusation that there could actually be some, ummm…”
Trader: “It’s not an, well, accusation is probably a strong word, there’s stuff going through that probably…”
Mallett: “Doesn’t exist…”
Trader: “… doesn’t exist and it’s kind of…”
Mallett: “Well yeah…”
Trader: “… it’s being, it’s being exaggerated shall we put…”
Mallett: “Well that’s market manipulation isn’t it?”
Trader: “Yep absolutely …”
Other transcripts reported on by Katie Martin at the Wall Street Journal refer to “shenanigans” in the market and “murky” activity, with traders raising their concerns with Mallett on this matter. Mallett said he would feel “uncomfortable justifying [this] to the regulator.”
It’s clear Mallett had long-standing relationships with forex traders. Every spring, he hosted an FX markets quiz, a charity event generally attended by about 150 bankers. In March 2014, he was suspended from the Bank of England around the time that the quiz was scheduled to take place, says Martin.
I for one would be astonished if he really failed to escalate his concerns to anyone else at the Bank of England. Surely he would have at some stage mentioned it or made a minute of the actions complained of? Grabiner maintains Mallett did not, and that this was procedural failure which merited censure. However Grabiner is so forgiving over so many reported actions in his report, with seeming predisposition to see them in the most benign light, that I doubt the rigour of his investigation. I suspect that a far more obvious reason was that Mallett was trying to protect others in the Bank when he stated he had not escalated the information, and had agreed to perform the time-honoured role of scapegoat.
The suggestion that the Bank of England was not seized of any knowledge of criminal activities in the forex market, is mightily convenient for the ‘Old Lady of Threadneedle Street’. It enables the Bank to conveniently sidestep liability for financial losses caused to individual investors or forex users.
It is a typical regulatory manoeuvre, and the Bank of England’s lawyers and insurers will almost certainly have given this a lot of consideration. If there is the slightest likelihood that anyone will sue the Bank of England for liability for failing to prevent the forex scams to take place, then the best plan is to deny any responsibility for Mallett’s actions, to claim he was acting autonomously and entirely of his own volition, and to cast him to the wolves and tell him he is on his own and must be separately represented as far as any further civil claims are concerned.
If Mallett has any sense he will seek legal advice from his own solicitors, and make no further statement to the Bank or their lawyers.
I would love to know the financial terms of his severance package from the Bank of England and indeed, the relevant gagging clauses they may have insisted upon.