Dissuasive punishment

It cannot be by chance that, just after the harsh EU reprimand to the rating agencies, Brussels has announced the heaviest sanction in its history (1.7 billion euros) against six banks — Citigroup, JP Morgan, Deutsche Bank, Société Générale, Royal Bank of Scotland and the broker RP Martin — for concerted manipulation of products derived from the Euribor and other indices. The message implicit in both decisions, especially in the second, is that the EU machinery is prepared to act against any distortion of the markets, and that it will do this decisively regardless of the prestigious names of those sanctioned. The Commission’s watchword was summed up by its vice-president and commissioner for competition, Joaquín Almunia: “Punish and dissuade.”

The punishment exists, of course, and is deserved. This collusion between the six financial institutions to raise the Euribor is something more than an ordinary speculative operation aimed at profiting from insider information in a closed financial circuit. It includes at least two more serious infractions. The first is the violation of the principle of competition — in other words, the formation of a cartel with criminal intent. Almunia himself points out the market distortion involved in this unnatural collaboration between banks which, in an open and transparent system, ought to be competing with each other. The banks and the broker have thus violated the principle of competition proper to any market.

The second perversion is probably more serious. The Euribor is a benchmark rate for a large number of financial contracts that affect many millions of people in Europe, including investment operations, sales transactions and mortgages. With their tampering and manipulation, the sanctioned banks raised the cost of mortgages and of other types of loan to many Europeans; they have thus enriched themselves outside the laws of the market and at the cost of large numbers of citizens. The fraud was not limited to a restricted number of intermediaries and speculators.

Hence, the fine is only the beginning of wider action against the six banks; they will also have to face the consequences of legal claims that may be brought by citizens who consider themselves damaged by the excessive rates of interest on their loans. The cost of such claims may be several times that of the sanction.

The dissuasive effect, then, will not derive from the sanction alone — indeed the profits obtained from the market manipulation are probably greatly in excess of the fine imposed — but from public knowledge of the fraudulent practices, and from the threat of a wave of claims from private individuals. To rig a financial market is a very serious economic crime, and it would by no means be excessive if, apart from the fine, the banks and the broker had been punished with temporary disqualification from operating in the markets they contaminated.