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More Price Fixing on Wall Street?

Posted by Larry Doyle on March 27, 2013 6:17 AM |

Here we go again.

With the investigation of the greatest financial fraud ever perpetrated on Wall Street — that being the manipulation of Libor — still in the early stages, news emanating from Europe this morning redirects the shadow from that organized activity into the dark and dank world of credit derivatives, aka CDS.

Recall that cornerstone principles of an industry that operates as an oligopoly are: 
1. price controls and periodic bouts of outright collusion
2. a sharing of information among partners within the oligopoly
3. imperfect information for those operating outside the oligopoly
4. enormous barriers to entry for others looking to operate within the sphere of business transacted
5. outsized profits for those within the oligopoly

Well, in what reads as a classic textbook example of just such a situation, let’s navigate as the WSJ reports, European Regulators to Charge Big Banks,

European antitrust authorities are moving soon to bring a case against some of the world’s largest banks alleging collusion in the $27 trillion dollar market for credit derivatives, people familiar with the investigation said.

The probe by the European Commission involves 16 financial groups. It focuses on whether they sought to stifle competition from exchanges in the market for credit-default swaps, which pay out when a country or a company defaults on its debts.

If the European regulators press ahead with their administrative case and win, some or all of the banks could face fines.

There we go again. With no meaningful penalties but merely the assessment of “cost of doing business” fines, collusive behaviors will never end.

The European Commission, the European Union’s executive arm, said in 2011 it was investigating whether there was a coordinated effort among banks to prevent exchanges from getting a piece of the CDS market.

Unlike other financial instruments, these are traded privately between two investment banks, away from regulated exchanges where prices are displayed—meaning that customers aren’t able to see whether they are getting the best prices.

Can you say, “enormous barriers to entry”, “imperfect information”, and “outsized profits?”

The U.S. Dodd-Frank law and new EU legislation both called for derivatives, with some exceptions, to be traded on exchanges.

This component of Dodd-Frank is a long way from being enacted and aggressively being attacked by Wall Street with support from friends in Washington.

A reshaping of credit-derivatives markets, and a move to open futures exchanges, poses a threat to profits dealers have long made in that market by dominating it. Profits for financial institutions that act as the intermediaries could shrink because of a smaller spread between bid and ask prices.

European regulators in April 2011 began looking into whether a number of investment banks had used Markit Group, the leading provider of financial information in the CDS market, to block the development of certain CDS trading platforms.

Certainly plenty of smoke around this campfire.

The real question that needs to be addressed is whether there was a web of collusion and manipulating of markets by the derivatives dealers within the CDS space in the same fashion as occurred with Libor.

What do you think the chances are of that?

Navigate accordingly.

Related Commentary
Can We ‘TRACE’ JP Morgan’s Business?; July 2009

Larry Doyle

Isn’t  it time or overtime to subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook.

I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Peter Scannell

    What remains a deep concern is the fact the United States Securities and Exchange Commission, the self-funding regulator that requires zero tax dollars to do its duty, and in turn adds not one dollar to our deficit, has been denied by the House of Representatives Appropriations Committee any meaningful increase to its funding level to combat the wide spread fraud on Wall Street that has been pilfering mom and pop for years.

    And now with the sequester, our governments brilliant idea to reduce the deficit, has actually cut the funding appropriation for the SEC by over $100 million dollars despite the fact the funding of the SEC adds zero dollar to the deficit, and ACUALLY RETURNS TO THE TREASURY HUNDREDS OF MILLIONS OF DOLLARS FOR DECIT REDUCTION, AND MOST IMPORTANLY RETURNS TO HARMED INVESTORS BILLIONS OF DOLLARS RIPPED OFF BY WAY OF FRAUD AND UNSCRUPULOUS BUISNESS PRACTICES!

    Federal securities laws direct the Commission to collect three different types of fees: registration fees, transaction fees, and fees on mergers and tender offers. Securities registration fees are paid by corporations and investment companies when they register securities for sale. These were first enacted at a rate of 1/50th of 1 percent under of the Securities Act of 1933. Starting in 1990, the fee rate was increased yearly through the appropriations process. The first 1/50th of 1 percent goes directly to the U.S. Treasury and is unavailable for funding the SEC. The amount over the 1/50th of 1 percent (called offsetting collections) can be used to fund the agency through appropriations. The Commission returns its excess collections to the Treasury and billions of dollars to unwitting investors who suffered losses due to fraud, negligence, or outright theft.

    Imagine that you live in a community that has hired a new police force to combat a massive wide-spread crime wave. This new and invigorated police force requires no taxpayer dollars for funding, and actually returns excesses to the town – and most importantly returns stolen loot back to the citizens.

    But suddenly, your town council (of which many accept contributions from the loathsome criminals) decides to NOT INCREASE THE FUNDING LEVEL of the cops who bring in $2 dollars to the towns coffers and harmed citizens for every $1 dollar in non-taxpayer funding (improving the town’s deficit).

    If this in fact occurred in my town, there would be packed town halls with outraged citizens ready through the bums out!

    Purposefully allowing our securities cops to remain out- manned and out-gunned is not only bad government – it has the distinct appearance of aiding and abetting those who most of the representative’s constituents would want to tar and feather in the town square!

    But what both government and the crooks know is that the vast majority of our nation doesn’t have a clue. Mom and pop are so busy keeping their heads above water there simply is not enough time or energy left to keep tabs on the Wall Street/Washington D.C. incest that continues unabated.

    • LD



      Would make it seem plainly evident that all these transgressions are little more than the equivalents of an … INSIDE JOB!!

      Navigate accordingly.

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