Freedom or Fraud?

London's Canary Wharf, the Banking District (via The New York Times)

London’s Canary Wharf, the Banking District (via The New York Times)

Only a few short years after the second-largest financial crisis in American history, the big banks are back in the news again, with less than positive headlines. This time, the world’s largest banks are under fire for manipulating currency exchange markets to make a profit. Individual traders made up to $500,000 on single transactions thanks to their collusions. The conspirators were from a variety of banks in America and Europe, including JP Morgan Chase, Citigroup, and UBS, among others.

These banks rigged the price known as “The Fix,” which is the intraday benchmark exchange rate for a currency (in this case between the Euro and the U.S. Dollar). By fixing “The Fix,” these traders were able to make large amount of money at the expense of those who were unable to predict these benchmark prices. The Fix is set every day at 4:00 PM, when the London Currency Markets stop trading for one minute in order to set the benchmark for each currency.

“The Fix” Explained (via The New York Times)

Regulators in the U.S., Britain, and Switzerland were quick to come up with fines and punishment, announcing that the banks that settled owed a total $4.25 Billion for their currency-rigging activity. While investigations by the Justice Department are still ongoing, these fines are a major step towards greater transparency in the Investment Banking sector, especially the notoriously grey area of forex markets.

There are many people, especially here in the U.S., that are adamant about keeping regulation out of the financial industry. Even after all of the issues with irresponsible loans and bad investments, a good percentage of Americans believe that the government ought to leave the big Investment Banks alone. While some may believe in this pure form of capitalism, it is a great opportunity to apply the ideas of John Stuart Mill that we have recently discussed in class.

Mill wrote that the freedom of individuals must be protected, but government should intervene in the case that other people may be harmed. The case of these banks rigging the prices of international currency exchanges harms individual investors and smaller banks as well, and is therefore the exact sort of situation in which Mill would have called for intervention by the U.S. government.

(via The New York Times)

(via The New York Times)

The long leash that we give to big banks seems to be as loose as ever. Even after regulators supposedly tightened their grip following the financial crisis, these large banks are still able to take advantage of their size and power at the expense of others. Mill’s philosophy would be very useful for the authorities that supervise these institutions, as these banks clearly need to be reeled in further. While these banks seem to think they are free to act in any way they see fit, they need to be held accountable for their harmful actions. While this settlement is surely a step in the right direction, more regulation is necessary to keep our Investment Banks in check.

One thought on “Freedom or Fraud?

  1. Every time the financial sector blows up with another story about how some big bank or corporation did something that robbed people of their hard earned money or that they cheated the system in order to make a few bucks, it gets harder and harder to argue for a restriction on regulation. I believe in the free market. I also believe that some measures must be taken in order to prevent major financial institutions from ignoring or violating the law. What I don’t believe is that government is always the answer. My knowledge of finances and the financial sector is cursory at best, but I would propose the solution to come from within. Maybe the NYSE or the NASDAQ could create self monitoring and regulating committees that investigate companies and look for wrongdoing. My fear is that entrusting the government with more power over the financial sector could result in an over complication in investing which would deter citizens from investing in the markets.


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