What is happening with the Bank of America? Litigation costs, legal concerns, offical statements – all of which have been cropping up in international media recently.
P4Capital looks past the Spin and investigates what’s really happening with these big banks.
Amanda: The Bank of America and Litigation costs has been resurfacing time and time again in the mainstream media over the last few weeks. What does this mean, and what does it mean for the world economy? The P4Capital executive team investigates in this week’s round table discussion.
Jim: Today’s discussion is about Bank of America setting aside 400 million dollars, to essentially say they may have been involved in a front running foreign exchange game that’s been going on for some period of time. So as we sit around the table we’re going to discuss it in greater length.
Archana: The litigation costs the Bank of America has essentially set aside, which amounts to 400 million dollars, has essentially tripled their third quarter loss to 232 million, from 70 million that they’d originally reported.
Shaheerah: This 232 million dollar loss, in other words, it’s four cents per share. Similar issues have happened earlier with JP Morgan Chase and Citigroup, and it really shows that banks both in the US and elsewhere in the world, may be abusing the rules of the foreign exchange business. And that is just one of the negative issues that comes with all of the international commerce and the international investments that we’re seeing today. Since the 2008 financial and mortgage crisis, all the three banks– which is JP Morgan, Citigroup and Bank of America–have agreed to pay a total of 103 billion dollars in fines for issues like Mortgage Backed Securities, rigged interest rates and manipulating the markets.
Jeremy: The foreign exchange trading market is estimated at about 5 trillion dollars a day. It’s a very fluid market, there’s no central clearing houses, it’s all kind of over the counter trades 24 hours a day, as I mentioned. Fairly hard to regulate.
Jim: The interesting part is Bank of America, this is now twice in six years as Shaheerah alluded too. One time Bank of America was Bank of America and a separate company named Merrill Lynch. They are now combined together known as BA Merrill Lynch, and this is the second time they are in the penalty box for a very severe misconduct.
Shaheerah: How does this impact consumer confidence? The Morning Consult conducted a poll in September of this year, and that revealed that 71% of Americans want banks to be regulated by either the Federal Government or by State Governments. According to recent polls, Americans are still reporting very low or declining trust in banks.
Archana: Shaheerah mentioned that Citi and JP Morgan have also been under fire for similar reasons. In Britain as well HSBC, RBS have been under similar investigations. Like my colleague pointed out that foreign exchange trading is a five trillion dollar a day market, and most of the foreign exchange trading essentially controlled by the top five banks in 2013. Regulators are very keen on looking for any erroneous trades being conducted, so that they can nip this essentially in the bud.
Jeremy: I’m not sure if any of my colleagues can elaborate further on how the markets were manipulated here, but my understanding was there’s a base rate that currencies go on that’s established one time a day, and used for futures and forwards contracts and spot prices. There was a lot of discussions via various chat rooms by traders and many of the big banks around the world. A lot of the discussions were actually in Bloomberg terminal chat rooms, even Facebook and Twitter. There’s talk of monitoring the conversations on those different social media platforms now.
Jim: So when you go into big rigging or fixed pricing at its essence, especially in the legal world, it’s advanced communication. And, interesting enough P4Capital has a sister division called P4Digital, which looks at the explosive growth in data through social media. And now we see them coming together, and fortunately for ourselves here at Planet we have both divisions up and roaring with success, and we can see the cross points coming over. Of how you can take oceans of data and quickly do deep dive analytics on it and figure out who’s involved and who’s not involved and according to the penalties in the international banking association, who will be fined or who will have their licence suspended. To me it’s just a tip of an iceberg for those that are maybe playing the game too aggressively outside the rules of permission. We’ll see how this one goes.
Archana: Yes, just as Jim pointed out, at P4Capital we essentially understand how the analysis of all this data, whether it’s structured or not, can greatly improve foreign exchange pricing. We essentially specialize in Technologists who are well versed in working with different tools that continuously analyse this kind of data and alert any erroneous trading patterns or banking transactions that might be getting conducted. The banks can essentially, or human intervention can stop any activity of this sort happening right at stage one before it requires the intervention of a regulator.
Jeremy: I’ve heard also several of the major banks are instituting mandatory vacation periods for their traders. So that, if somebody’s involved in erroneous trades they can better detect the pattern when they see that person wasn’t there for one week. So they can notice the differences between when they’re there and when they’re not.
Jim: And again when you look at the tools that are available to communicate, and point being made they weren’t into social media hubs which are well known and well documented throughout the world, is that all those social media outlets have phenomenal analytics that are available to either, in this case the institution themselves the trading company, or more importantly the regulators around the world. So regardless of whether it’s the court of public opinion or a legal court, facts will come out. So like other industries of risk if you will, overtime they’ve been regulated to keep the game fair and above board and this seems to be going to be applied with a lot of rigour if you will and to all capital markets. It’s going to be a huge, huge fundamental requirement by these companies that want to play here is to get their technology engines right because that will now be the competitive advantage going forward, as opposed to a rigged game.
Amanda: That was the P4Capital executive team discussing the Bank of America and litigation costs. P4Capital, helping you and your company reach digital velocity quickly. Want to know more? Check out our website at http://www.planet4it.com Thanks and see you next time.