Remember earlier this week, when we talked about different math careers (even accounting and finance!), and I shared Benjmin Franklin’s wise words: “An investment in knowledge pays the best interest”? Let’s keep the money theme going in our news for the week.
The New York Times has reported that FIVE of the biggest banks in the world (Barclays, Citigroup, JP Morgan Chase, UBS, and Royal Bank of Scotland, in case you’re wondering) are getting ready to plead guilty for price rigging and violation of anti-trust laws. Specifically, they knowingly manipulated interest rates and foreign exchange rates. Those are pretty big crimes in my book.
Usually, there are big consequences when businesses are guilty of breaking the law. In fact, that reminds me to check in on a refund I should have coming. During one of those super cold, super snowy winters, there was a mysterious “propane shortage” in my area that caused home heating fuel prices to rise from ~$2.00/gallon to ~$5.00/gallon for no apparent reason. Michigan’s attorney general said that the companies that charged those prices have to issue refunds to the customers who were unfairly charged because they were unfairly price fixing. I’m looking forward to getting a couple hundred dollars back – yay!
In this case, we are talking about HUGE financial institutions, not my overpriced $1000 heat bill. The fines mentioned in the NYT story are in the ballpark of $500,000,000 ($500 Million). Another bank, BNP Paribas was fined $8.9 BILLION last year for banking with Iran.
However, those numbers must be placed in context. In 2011, BNP Paribas’ profit was about $6.88 billion dollars. They had over $2.23 trillion dollars in assets, and $97.3 billion dollars in pure equity. $8.9 billion actually does very little to their bottom line. The $500 million penalties at stake for the 5 banks described here are even smaller in comparison.
When banks plead guilty to charges, however, there’s an even bigger consequence than a fine. The S.E.C. (Securities and Exchange Commission) can ban them from conducting certain kinds of business. This could include banning management of mutual funds, to operating branch offices, to offering loans and making future predictions on the economy.
If those bans are put in place, it would hurt the bank’s bottom line, but it would also hurt the national and international economy. Damage could range from employees losing their jobs to shareholders losing their investment. Hundreds of thousands of people could be profoundly affected.
This exact scenario happened in the 1990’s to Arthur Anderson, the accounting firm that worked with Enron. They were found guilty of faulty auditing. The guilty verdict was later overturned; however, they went from 85,000 employees in 2002 to just 200 in 2007. 84,800 people lost their jobs because of an overturned guilty verdict.
The financial impact of that verdict was devastating, and since then, the justice department and SEC have changed how they prosecute big corporations. From the article: “The collateral consequences consideration is designed to address the risk that a particular criminal charge might inflict disproportionate harm to shareholders, pension holders and employees who are not even alleged to be culpable or to have profited potentially from wrongdoing,” said Mark Filip of the Justice department.
So what’s going to happen to these five banks that knowingly violated federal banking regulations? Nobody knows for sure yet, but the tone of the article suggests that for the greater good of the economy, the punishments will be minimal.
What do you think about this news story?
Is there a fair punishment for these banks?
Should individuals within the banks be held personally accountable?
Should the international economy hinge so much on the financial stability of just a few banks?
How could STEM be used to identify price rigging and anti-trust violations before they get this big?
How could STEM be used to develop a model to predict the impact to the company versus impact to the overall economy for different punishments?
If one of these major banks failed, how big of a financial impact do you think it would have on the economy? How would you even begin to estimate a number like that?
That’s a lot to think about! Keep investing in your knowledge, STEM friends – I don’t have the answers to these questions. The world needs brilliant minds like you to search for those answers.