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Financial “Family” Collusion Will Likely Increase

Posted by Larry Doyle on March 30, 2010 9:18 AM |

What will be the next explosion in financial chicanery if not outright fraud? Collusion, that is price fixing. Why? A number of reasons, including:

1. The financial industry has become an oligopoly, (some may say cartel) thus setting the table for increased collusion to propagate.

2. Lower volumes across exchanges, which pressure revenues and incentivize market participants to collude to generate greater profits.

3. Increased regulation and oversight of products (such as the potential for covered bonds here in the United States) will also pressure the bottom line. Will the regulation and regulators be able to stay ahead of those colluding? Have they ever, especially within the municipal space? Why should we expect them to keep pace now?

4. Where are new products going to develop? The pendulum is swinging back toward simplicity in product offerings. This trend will also pressure the bottom line.

Make no mistake, there has been plenty of collusion in terms of price-fixing in the markets over the years. There always will be some degree of collusion. I just think it is going to increase as we move forward on our new economic landscape.

Another story breaks overnight highlighting this reality. Bloomberg reports, RBS Gets Record Fine Over Pricing Leaks to Barclays:

Royal Bank of Scotland Group Plc was fined 28.6 million pounds ($43 million), the largest U.K. regulatory penalty against a financial institution, for giving confidential pricing data to Barclays Plc.

Two employees on RBS’s professional practices coverage team disclosed confidential pricing data to their counterparts at Barclays from October 2007 to at least February 2008, the Office of Fair Trading said today in a statement. Barclays isn’t likely to be fined because it brought the matter to the antitrust regulator’s attention, the OFT said.

“The financial crisis has narrowed the market in a number of financial sectors,” said David Strang, the head of the competition group at law firm Barlow Lyde & Gilbert LLP in London. “People have gone out of business, there’s less willingness to lend, so there’s clearly more incentive for them to collude.”

On Wall Street, the bottom line drives everything. There are many factors that drive the bottom line, but ultimately that bottom line is not about “how” it is about “how much.”

I hope I am wrong, but I foresee developments on Wall Street and around the world as ripe for these collusive practices to explode.

Thoughts, comments, constructive criticism always appreciated. What do those in finance think?

LD

  • Bareknuckles

    Larry,

    Great site! From your comment it seems you see the US heading towards a model similar to what we have in Canada. It is a well known fact here that the Canadian banking cartel overcharges its customers (fees) and does not provide as diversified range of products as US banks. However, because our business culture is far less aggressive (competitive) than in the US and very profitable the banks did not have to engage in the questionable practices of large US banks to boost the bottom line. As a result they do not hold (as far as I know) hold gigantic balance sheet losses. Hyper competitiveness got the US banks in a mess, less competition ‘protected’ the Canadian system. It’s a matter of choice.

  • Mike

    If you’re not inside, you’re outside.






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