By Maheen Senanayake
The Olympics if only for two weeks provides an economically exhausted Europe a moment of distraction. The 27 member states interlocked by a common currency, the Euro has been battling several fundamental issues including the Tiresome Trinity of interest rates, exchange rates and inflation. Furthermore, bankruptcy and non-ethical performance and in some instances criminal negligence has lead to a loss of confidence in the hitherto dogmatically revered financial space/circuit in the western hemisphere.
It all began with Greece. In January 2001, Greece entered the Eurozone, and embraced the zone’s single currency, amidst advice from Wim Duisenberg, the then European Central Bank President, urging her to keep working hard to improve its economy. Duisenberg opined that the euro could in fact suffer from the inclusion of weaker European nations.
Fast forward to November of 2004 and Greece makes the historical admission that its deficit had never been less than 3%, a fact that was only discovered upon closer scrutiny of its budget, a prerequisite to join the EU. Ever since the Greeks have struggled to keep their economy afloat (Please see time line Greece for a chronological record of events). With fears mounting as to whether Greece might be forced to exit the euro, a new France and Italy battle to bring their economies back on track began.
As unemployment in Europe rose to 22 million a couple of weeks ago, the financial world is seeing a new wave of revelations that is doing more harm to an otherwise dogmatically revered financial circuit.
Enter Goldman Sachs
It might be interesting if nothing else to note that Goldman’s boss, Lloyd Blankfein, has been quoted as saying that he is doing "God’s work". However, investigations have revealed his use of aggressive tactics against rivals and customers that included the design of a series of complex derivatives [a derivative instrument is a contract between two parties that specifies conditions especially the dates, resulting values of the underlying variables, and amounts) ] to help a previous Greek government hide its debts from the EU regulator. Then it has also been accused of profiteering from the country’s sovereign debt crisis and in particular for short selling its bonds. The Financial Services Authority had fined Goldman Sachs £20m after the investment bank failed to disclose some vital information to the regulator. Some sections of Wall Street together with the press have now portrayed Goldman Sachs as "a great vampire squid wrapped around the face of humanity"
Mis-selling interest rate swaps & redressing past sales
Early June this year Britain’s four main High Street lenders agreed to compensate small and medium sized businesses to whom interest rate hedging products had been mis-sold according to the Financial Services Authority had found "serious failings" in the way they marketed to some customers. Accordingly, Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland have all agreed to immediately halt the sale of complex interest rate hedges to smaller businesses and have pledged to compensate potentially thousands of customers who have been hurt by the products that have left some firms with hundreds of thousands and even millions in costs they say they were never warned about. According to the FSA about 28,000 businesses had been sold interest rate hedges following a two-month review of the product that was prompted by an investigation by The Sunday Telegraph and The Daily Telegraph that uncovered widespread evidence of mis-selling by banks. The silver lining however is that the banks will offer redress on previous sales.
Then came the Libor scandal.
Threatening the integrity of the banking industry as a whole, the Royal Bank of Scotland (RBS) and Barclays along with a few influential banks have come under investigation for allegedly fixing of the key Libor bank rate. This has raised huge concerns and consumer confidence has hit an all time low, with most analysts and consumer watchdogs calling for tremendous changes that called for the strengthening of ethical foundation in the industry.
The Libor (London Inter Bank Offered Rate) is the rate at which banks in London lend money to each other. The fraud involves giving a lower reading than the true rate which would give the impression other banks thought it was a better risk to lend to than it was. So when it’s manipulated the rate banks pay to raise money affects how much they charge on loans and mortgages. Thus, an increase in Libor can add hundreds of pounds to households’ annual mortgage repayments or a loan to a small business. Some of the major banks that came under investigation were Bank of America, Citigroup, UBS and JPMorgan Chase.
Barclays was the first bank to be fined £290m ($450m) by the Financial Services Authority and had agreed to pay for lying about the interest rate other banks were charging it for loans. Despite this, Barclays chief executive refusing to quit expressed disappointment but took responsibility.
The scandal has left many in and outside the banking sector doubtful of the integrity of the banking industry. The question posed by many is that if trusted banks such as Barclays and RBS will lie about something as fundamental as Libor to profit on its trades, how will clients trust them with their finances. The entire ethical foundation of the banking industry has become a question mark because of this scandal.
HSBC and the Cartels
Mexican regulators have imposed a fine of $27.5m (£17.7m) on banking giant HSBC for its failure to comply with money-laundering regulations. The fine comes a week after HSBC’s chief compliance officer resigned over allegations that the bank ignored warnings that Mexican drug money was being allowed to pass through the bank. Analysts who claim the fine is the highest ever imposed by Mexican regulators constitutes 51.5% of the 2011 annual profit of HSBC’s Mexican subsidiary. Mexico’s National Banking and Securities Commission (CNBV) said it had imposed the fine against HSBC due to its "non-compliance with anti-money laundering systems and controls". Meanwhile HSBC Mexico issued a statement acknowledging that it failed to report 39 suspicious transactions and had been late in reporting 1,729 others. The US department of justice is conducting a criminal investigation into HSBC’s operations.
VISA and those transaction fees
Visa posted a loss of $1.8 billion for the April-to-June period on an increase in litigation costs. Payments processors Visa and MasterCard, along with a number of major banks, recently settled a longstanding legal battle against stores over card fees. Visa, MasterCard and the banks agreed to pay the retailers $6 billion as part of the settlement. Visa had increased its litigation provision by $4.1 billion, which led the company to post a loss of $1.8 billion, or $2.74 per share, for its fiscal third quarter. Visa however, posted a net incomeof $1.1 billion. Visa makes money by processing card transactions. As the world’s largest processor of debit and credit card payments, its results provide insight into how much consumers are spending. In a sign that people aren’t spending as freely as they used to, the total number of transactions Visa processed worldwide in the quarter rose just 1 percent from last year to 13.1 billion. The slowdown was particularly pronounced in the U.S.
Lessons for Sri Lanka
Whilst such major concerns have not yet reached the Sri Lankan market, a brief perusal of the cases at the Financial Ombudsman’s office will demonstrate clearly that this market is not exempt. Furthermore, the cases above highlight the need for a regulator that is keen to champion the right of the consumers in a fair and just manner. Given the backdrop of the NSB –TFC scandal, the need for a justice system that is the bedrock of the democracy. Furthermore, the Central Bank as the apex body and ultimate regulator cannot afford to lose the confidence of the parties concerned.
For instance certain discrepancies in Central Bank data has been pointed out .Referring to the recent announcement by the Central Bank that apparel exports have fallen every month in spite of the depreciation of the rupee, Member for Parliament Dr. Harsha de Silva has pointed out discrepancies in Central Bank data. Monthly exports amounting to USD 367 million in January had dropped to just USD 278 million by May. He has cited an instance where, although the Central Bank had announced that the export income has exceeded $1,000 million a month in March with apparel exports increasing to $473 million in that month, later on this figure had been revised to $362 million.
There is very little doubt that answers to these questions must be given if the Central Bank as the apex body is to regain the confidence of those around. Indeed it has a moral obligation to explain such drastic adjustments. Moreover, if anything is to be learnt it is that without realizing the true picture of the economy nothing of significance can be done to rectify it. Principally because the starting point would be fundamentally flawed.
Draft Week starting 30th July 2012