This Big Bank Probe Is a Question of Values

The ongoing probe of bank’s manipulation of the London interbank offered rate, or LIBOR, is likely to be another legal concern for money center banks in 2014.

Kyle Colona
Kyle Colona
Jan 20, 2014 at 2:00PM

The ongoing probe of banks' manipulation of the London interbank offered rate, or LIBOR, as well as other benchmark rates is likely to be another legal concern for banks in 2014. As has been widely reported, this probe has already resulted in a number of big payouts from global banks.

In 2012, for example, Barclays forked over about $450 million to regulators in the U.S., the U.K., and the European Union.

Moreover, landmark settlements with UBS and the Royal Bank of Scotland also required foreign subsidiaries to cop guilty pleas to charges of wire fraud.

What rate manipulation probes mean for U.S. Banks
The coming year will inevitably see more cases closer to home. The extent to which the Big Four U.S. banks might be liable is unclear, as is the possibility that executives will be forced to walk the plank, as was the case with Barclays. But at the end of the day, potential settlements might be a drag on earnings.

Last Decemeber, Citigroup (NYSE:C) and JPMorgan Chase (NYSE:JPM) were hit first when the European Commission handed down penalties in connection with its probe into rate collusion of Euribor and Japanese interest rates.

Citigroup ponied up a $95 million fine for its participation in the Japanese scheme, but the bank was also granted full immunity for one of the violations for cooperating with authorities and avoided an additional $74 million penalty.

JPMorgan's payout was $108 million in connection with charges of manipulation of the Japanese benchmark rate; however, the bank maintains its innocence in the Euribor probe. More importantly, the bank said in a statement that the settlement does not mean JPMorgan was involved in the LIBOR rate manipulation issue.

A question of values
These settlements are relatively small matters from a dollars and cents perspective, given the size of the banks' balance sheets. Moreover, the big U.S. banks have returned to profitability and remain strong from a fundamental perspective.

But the rate manipulation cases raise questions of ethics. To paraphrase the late economist Milton Friedman, the business of business is business. And the primary objective of business is to generate profits, which support earnings growth and shareholder value.

Source: Katrina.Tuliao.

Obviously, the banks left standing after the financial crisis have a track record of being capable of achieving both of these ends. But for investors who factor other values into their fundamental calculations, the LIBOR probe has far-reaching implications for the broader economy, as borrowing rates have a direct impact on small business lending, consumer finance, and the mortgage markets.

But there is another side to the story. When news of this matter first surfaced, it was also revealed the regulators in the U.S., the U.K. and the EU had long been aware of rate rigging by big banks here and abroad. 

Moreover, there have long been a number of laws and regulations in place designed to keep tabs on the capital markets, and an argument can be made that regulators at home and abroad failed to live up to their charge leading into the financial crisis of 2008.

At the surface, the business of business is to make money, but the rate manipulation matters are a concern that affects consumers and investors who also place a value on ethical considerations. Ultimately, free market capitalism is still the best path to prosperity, and prosperity is best protected by the rule of law.