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SA Business
Nov 26 2012 3:23PM
Global banks’ annus horribilis
MASTER MANIPULATOR: Bob Diamond, former CEO of Barclays, who tried to dodge a bullet but ended up resigning. Picture: REUTERS
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Barry Sergeant

It has been another tough year for many Western banks, both from a reputational and profits point of view.

In South Africa, meanwhile, there are increasing signs that the proverbial “little man” may be on the road to reality in taking on certain banks at their own game.

Before considering developments here, it’s worth dwelling on some of the horror stories that banks have generated recently. In June, Barclays was the first mover among culprits in the Libor scandal. Hoping for leniency, it paid fines and penalties of $453m (about R4bn), and promised full co-operation.

Libor, the London inter-bank overnight rate, is a variable interest rate which is used globally and which can be linked to an estimated $800 trillion worth of debt. This may prove to be the biggest fraud in securities history.

Yet by its very nature, the scandal may be considered as an outlier to the many banking peccadilloes that were exposed during and in the wake of the 2008 global crisis.

Most of these scandals hinge around banks behaving disgracefully. The biggest “settlement” from that wreckage came courtesy of haughty Goldman Sachs. In July 2010, the US Securities Exchange Commission boldly announced that “Goldman Sachs will pay $550m and reform its business practices to settle SEC charges that Goldman misled investors in a subprime mortgage product just as the US housing market was starting to collapse”.

Goldman – like so many other banks – has long spun the line that it chose to settle in order to get regulators off its back, insisting all the while that it did nothing wrong.

Barclays CEO Bob Diamond famously denied any involvement in the Libor scandal. He told staff that “on the majority of days, no requests were made at all” – in attempts, that is, to manipulate Libor. As The Economist commented: “This was rather like an adulterer saying that he was faithful on most days”. While Diamond’s faux pas was risible, it was first and foremost an admission of guilt.

Diamond resigned on July 3. Barclays holds a 55.5% stake in Absa, whose CEO, Maria Ramos, has sat on the Barclays executive committee for two-and-a-half years. She said at the time Barclays was paying huge fines that “it’s important for us to know what we’re about. We’re about integrity and honesty, trustworthiness and fairness. And I know that Barclays is about that.”

Bankers have a way of saying things.

Another probe making headlines, in the form of a US Senate report, accused HSBC of displaying a “pervasively polluted” culture, which “allowed” the bank to act as financier to clients wanting to divert murky cash from some of the world’s dodgy corners, including Mexico, Iran, the Cayman Islands, Saudi Arabia and Syria.

In July 2012 HSBC had come under investigation for allegedly assisting in the money laundering of terrorist money, after a probe found that there was “significant potential for unreported money laundering or terrorist financing”.

Earlier this month, HSBC’s earnings were marred by a $1.15bn provision for fines it may have to pay to settle money-laundering charges in the US, and other fines in the UK. Europe’s largest bank faces allegations of misselling in Britain. HSBC has been warned US authorities could lay charges.

In July, MasterCard and Visa agreed to a $7.3bn settlement to resolve lawsuits, initiated by retailers, alleging collusion over credit card fees. MasterCard and Visa denied the allegations but settled in the belief that such an outcome was “in the best interests of all parties”.

Earlier this month, US federal regulators temporarily banned JP Morgan Chase’s energy trading arm from a segment of the domestic power market, the first time such a penalty has been imposed, for “making factual misrepresentations during an investigation into market manipulation”.

Public Citizen, a Washington DC-based consumer advocacy group, remarked that this was probably the first time that a major market player had its market-based rate authority removed since Enron, which ranks as one of the world’s most infamous bankruptcies.

There’s more. Back on August 6, Standard Chartered Bank hit the headlines when Benjamin Lawsky, superintendent of the New York State Department of Financial Services, stated that “SCB schemed with the government of Iran and hid from regulators roughly 60000 secret transactions involving at least $250bn and reaping SCB hundreds of millions of dollars in fees”.

SCB rigorously denied the accusations. A spokesman for Deloitte, one of the Big Four global accountancy firms, also dismissed the allegations.

On August 14, Lawsky announced that SCB had reached a settlement that allowed the bank to keep its licence in New York. According to the terms, the bank agreed to pay a $340m fine.

In South Africa, regulatory authorities have a very different approach, essentially allowing banks to roam free. Instead, action is increasingly being taken by “the little man”. A set of minority shareholders in Randgold & Exploration, a company that was ruthlessly looted by the late Brett Kebble, have sued Investec for up to R10bn.

The action has become known as the Palmer and Smythe case. In the words of Investec, “these shareholders have instituted a claim against Investec in essence for oppression of minority rights and have alleged that Randgold was manipulated into accepting the final legal settlement”. In classic bank talk, Investec says: “We are contesting this claim vigorously and believe the case has no merit whatsoever.”

Behind the scenes, however, Investec seems to be taking the case very seriously. It has appointed a small army of very expensive lawyers. So far, legal costs – on both sides of the case – top R10m and the case is yet to open in court. More than 10000 pages of court documents have been filed.

More than half these pages deal with Investec’s bizarre – and highly technical – contention that Randgold’s minority shareholders are in fact not shareholders at all. It is this kind of cynicism, allied with the technique of trying to destroy opponents with a cocktail of attrition and never-ending money, that gives South Africa’s banking sector a special charm.

And then there is the Pretoria-based New Economic Rights Alliance, known as NewERA, which is preparing a High Court application to prevent (interdict) bank collections taken against its members, which may amount to more than 40000 individuals. NewERA says that “the banks cannot be allowed to stick their head in the sand and pretend that the R30bn a month securitisation industry simply does not exist. They are secretly gambling with our assets and unless the people demand answers, this rampage of unlawful activity will continue.”

Securitisation is a derivative structure where bundles of loans are sold off to multiple third parties. The device achieved infamy during the 2008 global credit markets crisis, specifically in connection with the US’s sub-prime mortgage bond sector.

These poorer-quality bonds were mixed with higher-quality bonds into products that were sold to third parties. The eventual damages ran into hundreds of billions of dollars, financed, of course, by the US taxpayer.

According to NewERA, “it is very likely that your bank does not own or control these agreements and has, in fact, already been paid out and profited from them”.

When South African banks are asked about this behind-the-scenes profiteering on customer loan agreements, no answers are forthcoming. They would say that, wouldn’t they?

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