HSBC, Goldman Rigged Metals’ Prices for Years, Suit Says
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In America, the political climate disgusts me. When it comes to the poor and the front-line workers, we're all about the strictest forms of accountability. Drug tests for basic aid. Punitive oversight of educators. But our richest, most powerful institutions are robbing us blind on the regular and getting away with it.
It's about enforcing fairness, and not continuing to signal to the rich and powerful that really, they can get away with anything. That their wealth and power doesn't place them above the law.
And I believe that in the end, when abuses like this start getting punished in a meaningful way, and moves are made to prevent further abuse, all our lives WILL actually improve.
Except it always has and I don't see why that would change as long as there is scarcity in some form.
What it comes down to is cost/benefit of enforcing "fairness" or "equity." If someone has a lot of resources and they are using them to employ people or otherwise keep institutions that people rely on running - even if they are in the long term toxic institutions - there is momentum to not disturb that system in order to shield the people downstream from layoffs and disorder etc...
This is actually our democratic system in action, where the lawmakers and enforcers are put in place by voters, who respond to jobs, social investment and stability in their regions. Even if the people who are the mechanisms for those benefits are assholes and crooks, on par as long as there is relative stability and growth it is better to keep their actions from disrupting the ecosystem.
Arguably it will eventually be too corrupt to stand and crumble, but if the way that capital and goods are allocated is through a private consumer-producer mechanism with state power applied to maintain or promote this system, this is the inevitable result.
In the end, the majority of people aren't so dedicated to the value of fairness/equality that they are willing to risk their livelihoods on it.
That shouldn't mean we need to accept this. We can try new solutions, move the status quo. We probably won't succeed, but at least we have to try?
In this specific case it's hard to quantify but my personal losses are easily more than 10$ which is not exactly meaningless fractions of a cent.
look into: (Cybernetic) Resource-based Economic Model.
It is the most efficient and effective use of resources with human concern that I am aware of... anyone with other ideas, I am open to listen and digest.
The developer "class" will be around to automate almost all job functionality as time continues. In this unique economic and functional opportunity that we have, what will we do with the time we have left? Will we create a world designed to support and nurture all human beings to grow their full potential, or will we be short-sighted and manipulative for momentary gain?
Either way, I have no expectations from this current culture.
I would agree with an AI managing the world's resources; we have proven ourselves unable to do so in an intelligent manner.
Open the code. Let anyone see how it functions if they care to take the time. Base it on real math. Real statistics. Remove the political sound bites from governance.
Factors the "market" doesn't take into account should be extrapolated and accounted for. What is the cost of a barrel of oil really? What about when it ruins a fishery or aquifer and heats up the planet? What about the fact it is a resource that is not renewable? So we are passing a burden to future generations in that they don't have the resource anymore. Not to mention a possibly ruined fishery. The market doesn't care about these things, and thus we get problem after problem (not to mention wars).
Governance of resources by nice hair and teeth and political soundbite and cronyism is ultimately a stupid way to do things and I can't imagine it will win the evolutionary battle of systems.
This is so very true but almost certainly undoable without a some form of help from the rich and powerful.
For example, one positive (or negative depending on which side you're on) thing about depleting oil resources is that much of the Government financing relies on tax dollars collected from hydrocarbons. And thus little oil would effectively mean lower available budgets, lesser means/control etc. Especially for totalitarian Governments that are considerable more expensive to operate.
Unless of course entrepreneurs like Elon Musk solve the energy problem for them. :)
"Many forms of Government have been tried and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all-wise. Indeed, it has been said that democracy is the worst form of government except all those other forms that have been tried from time to time."
Speech in the House of Commons (11 November 1947)
Obviously, the only time a riot become a revolution is when you have a perfect storm of food shortage, social inequality, increased literacy, etc.
Let's face it, humans need somebody to be on top. We don't know how to function otherwise. At least not for very long.
What's your basis for saying this? Do you have any way of verifying this claim?
A leader always emerges.
If you know of a counter-example, I'd love to hear it. But even in the smallest experiments I've run (group of friends trying to agree on where to have dinner), a leader always emerges and then consensus is reached.
And yet, despite all the overthrown governments, the toppled empires, and flat out revolutions - a leader always emerges. After a few years, the common population is always in pretty much the same boat they were before the revolution.
To contrast that very little substantive reporting occurs on issues that matter. Then when finally a crisis ends (like the cold war) and we can hope to focus on improving justice and social issues we end up entering a new period to distract us like the drug.
More recently we can use the war on terror as a distraction from the financial crisis--note our preoccupation with ISIS instead of a focus on the social issues that are becoming an increasing drag on the US economy.
Until we become a despot I don't see things changing very much.
So, there isn't even that much experimentation required to get a better system in the US. Rather, I'd say American's have thoroughly been indoctrinated against social support constructs that you only have yourselves to blame (you only need to look at how underfunded the public school systems, police, college are).
*http://www.cnn.com/2014/03/20/travel/happiest-countries-to-v...
I personally look at that data set and find it telling that those are all small countries by population size, wealthy and have lots of mineral resources per capita. For instance, are people in Iceland more happy than people in Corpus Cristi, Tx (which gets routinely rated as a happy US city and is bigger than Iceland).
I've seen a study in the past showing the relationship between happiness and financial income. It showed that happiness largely peaked when you had enough money to support your basic needs and do a few extra fun things. Any additional income didn't do much to help people feel happier.
So, my conclusion based on that was that a mixed economy where everyone's basic needs are largely met seems like a good way to keep it's population basically happy. The study seemed to validate that somewhat.
In contrast in the US where the growing bottom percent of the population faces stress over basic needs, and many in the middle class are one health care diagnosis away from bankruptcy seemed like a good indicator that the current American economic system is not ideal, and has a clear direction that it could take to solve these issues.
And in what sense are US schools underfunded?
http://www.cbsnews.com/news/us-education-spending-tops-globa...
My experience from those that I know in the US (middle class) either have their children in private schools, or they choose where to live based on which neighbourhoods have a good public school. This behaviour, as far as I am aware, is unheard of in those countries in the top 10.
Regarding the questions you raise, some can be answered if you follow the link to the original report.
What bothers me the most about your response is to completely discount a well researched report because it doesn't answer all possible questions. Sure, maybe race plays a role. But, if you want to answer that you need to ask different questions than this report did.
What you need to do is look at the report as a whole and reflect on it. Sure the US may have the greatest GDP, but in so many other factors lags behind other countries, is optimizing for financial return really what we as a nation need to strive for?--That is the takeaway that you should contemplate, not nitpicking over answers that the report didn't set out to address.
I've lived in several US states, a variety of European and Asian countries, and have travelled broadly - and the US, I put on a par with post-soviet Russia in terms of standards of living - and in terms of cultural attitudes.
It's amazing how similar the two are, to someone external to both worlds.
That said, it also depends on what you view as downsides to living in a place. For example, South Korean isn't considered backwards by any means, but you do have mandatory military service, which the US does not have (to the point that even a Korean born & raised in another country might be forced into service when going back to Korea to visit relatives).
Illinois, Chicago and rural. Virginia, several locations. New Jersey. New York. LA, Norcal. Ohio New Mexico
Which I'll grant isn't "everywhere", but is a decent sample of East, West, Midwest, and various shades such as "mountain man" and "rust belt" between.
Fully aware, I've been to Xi'an and parts of China most folks don't even know exist - driving across large swathes of the planet is one of my favourite hobbies. Driving west to east across Russia is great, as you barely notice the change as you go, as it's HUGE, but you couldn't mistake, say, Ulan Ude for Novosibirsk in a million years.
Conscription is a potential downside, yes, but I look more at things like "do the people seem fundamentally happy, or neurotic and really messed up?". In the US and Russia, the latter applies. In the US, they all take prescription meds. In Russia, they drink until they don't care any more. Not symptoms of healthy, happy societies.
I don't know where I actually would say is "better" - most of the places I've been to where I've gone "this is nice" have been devoid of humans. We have a knack for turning things to shit.
As far as risking status by protesting, by that logic, no one should have boycotted segregated institutions. "Separate and unequal, but adequate", would have been the mantra.
Democratic Constitutional Republic, not a pure democracy. The entire existence of the American System was against the European oligarchy and for the establishment of American aristocracy (the founding brothers weren't saints, they were monied land-owning aristocrats).
The real problem is that the oligarchs in the City of London have continually subverted the American System and entangled us abroad (triple entente, anyone?), and have corrupted all our branches of government. The American Constitution, if we actually followed it, provides mechanisms to deal with problems such as this. Namely, the idea of equality under the law. Ah, but the justice system is corrupt to, up to and including SCOTUS.
Please stop conflating democracy with our Constitutional Republic, and also stop vilifying a system that is not in it's proper state, eg, you essentially imply that democracy is a fad because it's been shown to not work, when if fact it has worked in some cases so well that it became a threat to the oligarchs and they actively subverted it.
Our problem is the oligarchs, not the system itself.
There is no intrinsic, “proper state” of a constitutional republic. If the Constitution did not permit the current situation, then it did not prevent it. Thus it has failed.
This will be the justification used to dismantle the idea of American national sovereignty then. I see your point and am trying very hard to understand, but I always understood that the constitution was something that needed protection, hence the various oaths of office, not that the constitution was expected to simply stand on it's own structure.
It was designed such that the various branches of power would cancel each other out. The bankers realized they could buy all the branches, including the fourth estate, and I think it is the people who are sworn to defend the constitution who have failed, not the constitution itself.
Your outlook scares me that it may be more widespread than I previously realized.
That's fundamentally what defines being rich. "Wealth" is just another word for "power", and "rich" just means possessed of substantially more wealth than average.
> The real culprit is democracy's false promise that it can do anything to change this.
Democracy seeks to redistribute some elements of power more equally, and is not completely unsuccessful in so doing in many real world systems. It does something to change the degree to which the rich get away with what they want -- simply by reducing the degree to which they are really rich.
OTOH, its offset often in real democratic politico-economic systems by other elements of the system -- e.g., capitalism -- which have the exact opposite effect.
I don't see a way out of this through any of the legitimate channels.
I believe it was This American Life that recently did a podcast that went into depth on this issue.
He went from making probably around 200k (my guess) to 3 million+. I would probably sell out for that money too.
The pay differential between banks and the rest is just too much.
It's good of you to admit that, but I have to ask: why? Why is 3 million so different from 200k as to be worth being willing to set aside ethics / become antisocial?
- Do this for one or two years and you are pretty much set for life. That's pretty tempting
- I don't think the bankers think of themselves as antisocial or non-ethical.
Our government literally makes a mockery of justice out of attempting to prop up our economy.
Therefore, BASF calls up their friendly bankers, Goldman and HSBC, to reduce BASF's exposure to platinum price swings through derivatives. BASF hears both banks' proposals over respective dinners. The conversations between the teams range from difficulties with the business, the client that BASF is dealing with, and what could be done to make everyone's job a little easier.
The relationships get cozy over time and BASF starts an open flow of information about who's purchasing what metals so Goldman and HSBC can 'just handle' the derivatives BASF should buy. Unscrupulously, the banks start trading on the information on when large orders will be placed on which metals markets and get discovered insider trading.
When there are many routinely violating a law which is very broad, it is generally seen as an argument in favor of getting rid of the law, especially when the law is of dubious or debatable benefit to the public. This is one argument in favor of the legalization of narcotic drugs, and it seems to be a good argument in favor of the legalization of insider trading.
If insider trading were legalized, then BASF's customers could either make discretion an explicit condition of their purchasing contracts, or else sell their information (to futures market participants and analysts). This would raise the table stakes for participating in markets like this, but it is not clear that there would be any substantial negative impact to the efficiency of the market; the additional transparency and increased flow of information might even improve the liquidity of the assets, and smooth price fluctuations through better predictions in then futures market.
I am not the first to make these points, but I would be very interested to hear what HNers think of them.
The above sounds a little bit like front-running[1], though, which is far more likely to be illegal if the banks were serving as broker.
[1]: That is, accepting an order and then trading for yourself based on the fact that you received the order before you fill the order.
For example, let's take two worlds: one with illegal insider trading and one with legal insider trading.
With illegal insider trading: Banks learn about BASF's customers and front run derivatives to make money off the ensuing price change.
With legal insider trading: Banks learn about BASF's customers and front run derivatives to make money off the ensuing price change.
The two situations are the same but in one scenario the bad actors go unpunished. I think a better solution analysis would include upstream and downstream market participants, their goals/interests, and analyze the incentives for each institution and individual.
When a company trades with a bank to manage its risk, it gives information away by telling the bank that it wants to trade. That is not "insider" information at all. What it gets in return depends on how the company negotiates the price; it could get nothing at all, in which case it's a bit of a failure on its part. The bank is under no obligation to not use that information to make guesses about the market situation. That information is valuable to the bank, and the bank might even offer discounts to the client to get the client to trade with it first.
If the company believes it leaves money on the table by disclosing the information about its order flow, it's free not to deal with the bank. What you're describing is mostly market-making, there's no insider trading here.
P.S. Another thing this is not is front-running. If you come to me wanting to trade, I trade with you, complete the trade, then decide for myself that you're clever and you probably know where the price will go, then trade for myself, that is not front-running because of the order in which those things happened. If you "leave money on the table" by disclosing to me what you know about the price and I take advantage of that, conventional market theory says it's kind of your own fault, regardless of how unhappy you are about it. There are things you can do to not disclose such things, such as trading with many dealers at once. In fact, the skill of trading without moving the market is really valuable.
> Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security.
Here is an example it gives of insider trading:
> Employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded;
Isn't that exactly what the parent is describing? The banks used nonpublic information given to them to provide other services.
But when a company (rather than some privileged employee), approaches a bank, and reveals that it wants to make a trade, it has no special relationship with the bank.
Another thing is that the meaning of "securities" is quite specific, and doesn't cover commodities. I don't think this would be insider trading even with securities.
Yet another downside of very broad interpretations of insider trading is that if someone invests time and effort into studying market conditions, the resulting research is non-public, yet they would be perfectly justified in trading on their own non-public information. It is only specific cases of non-public information obtained through privileged access that are insider trading.
A bank having access to a company's order flow by having that company reveal the flow to them is not engaged in insider trading, it's just doing a good job of participating in the market and studying market conditions. Someone else who wants to buy/sell the commodities from the bank gets a better price as a result. If the bank didn't have a good idea of the market conditions, it would offer worse prices to compensate itself for the uncertainty.
It's a wonder that we don't see more of these crimes, given that the rewards (if they don't get caught) accrue to the parties responsible, while the punishments (if caught) are suffered almost exclusively by everybody else. The people who made the criminal decisions do not suffer when the corporation is fined/santioned, it's shareholders, innocent employees and society at large who do. In other words, there's very little disincentive against this behavior.
What we really should consider is adding personal criminal liability to corporate officers who are found to either commit or condone financial crimes, as far up in the call stack as it can be proven.
1. http://www.amazon.com/Antifragile-Things-That-Disorder-Incer...
My understanding is the lack of will (or resources) for entities like the DOJ/SEC to investigate and punish those responsible.
I was bond trader so I don't know the specifics of the platinum and palladium markets, but my guess is they are pretty illiquid. A significant portion of it is likely traded off-exchange so discovery of the true value of the commodity is a huge issue. It sounds like these four companies see a lot of flow in one form or another and thus have a better idea of what the true market price is. They also probably have significant counter party exposure to each other through derivative contracts. Meeting twice daily to compare notes and settle on a price to adjust margin, etc. It doesn't sound very nefarious. It just sounds like a bunch of market participants trying to figure out the right price. And of course they use this information to make money for themselves - that's how a market making operation works.
Now you could make the argument that regulation should push more of this type of trading onto an anonymous Exchange where price discovery is available to everyone and this drives down the information advantage that insiders have. The Government pushed that with swaps to various degrees of success. Hopefully they continue to do more of it.
This happened because the broker-dealers stopped believing that their counterparts would still be afloat in 3 months. They required collateral and that gets funded on a daily basis.
As such, the usual flow of longer term loans dried up and so the rate setters effectively had to make up the numbers. The scandal was that swap traders and management influenced their rates, not that they were made up.
I agree with you on the fx rigging though. The allegations are, as i understand it, that there was collusion such that front running became viable.
1) Who HAS the market in 'X' cornered, and is working to drive prices up so they can unload their shares.
2) Who is WORKING to corner the market in 'X' by driving prices down.
The fortunate thing (I think) is that removing barriers from access to data will eventually make schemes like this all but extinct. It will no longer be how rich people get richer. It will be how crooks end up in jail.
Besides, the collective lawyer-power of these banks is no joke. You don't go against them unless you have them dead-to-rights.
As an aside, if they DO have this kind of info, it will have to set off international investigations of the LIBOR scandal type, no?
Not at all.
"The fixing process is governed by a set of Rules for the Administration and Conduct of The London Platinum and Palladium Market Fixings (the Fixing Rules).The current version of the Fixing Rules, made under Article 74 of The London Platinum and Palladium Fixing Company Limited’s Articles of Association, became effective on 29 July 2014.
Pursuant to the Fixing Rules, representatives of the four members of The London Platinum and Palladium Fixing Company Limited (the Company) dial in to a secure conference facility to determine the single trading prices for platinum and palladium at 9.45 am and 2.00 pm London time on each London business day. The price for platinum is determined first, followed by the price for palladium."
That's a quote from here: http://www.lppm.com/contentitem.aspx?cid=19
And it refers to how (at the moment) the price of platinum and palladium is officially reported. The allegation is not that the twice-daily meetings occurred, it's that the results of those meetings was rigged.
Unfortunately, it's still not clear to me if there's a smoking gun, or if this is all just part of a general move away from manipulatable benchmarks.
I say: these years will be taught in law schools and in finance masters for ever. History in the making.
I'd go back to Enron/healthsouth as the begining of the modern education, but yeah, I definitely agree.
And we generally do tend to find such emails, even in Goldman. It's a big company that does all its business in writing.
(To be clear: It was not alleged that Goldman delayed aluminum deliveries to raise the price of aluminum. The allegation was that Goldman paid people to store metal in warranted warehouses that had slow withdrawals, which had the side effect of raising the premium which metals in non-warranted warehouses command over metal in warranted warehouses. Not only is it not clear that this happened, it's also not illegal—the lawsuit was thrown out. Plus, the actual price of aluminum was actually falling over this period, and nobody thinks Goldman's actions influenced this price.)
If you'd like to read a lot more about aluminum markets than you probably want, this article is pretty good: http://www.bloombergview.com/articles/2014-09-03/the-goldman...
When ordered to shut down a bar, the police captain uses the excuse that illegal gambling is taking place in the bar. But the Captain is a frequent patron of the illicit gambling.
The exact quote is roughly
"Shocked, I say. Shocked to find that gambling has been going on in this location."
"Your winnings sir."
"Thank you."
Um..?
I expect no change from any elected official, even though my elected official is Liz Warren...
Every time some huge scandal like this is broken (LIBOR, aluminum fixing, mortgage default swaps) I openly wonder how long it's going to be before people start wrecking things out of anger.
Why can't we first try actively prosecuting the individuals who take part in these frauds?
That seems to be the one action missing from the recent banking scandals.
One interesting point is if it was legal, it would be in the open, and market forces might intensely force it out. You vs your ex- and future- coworkers in the regulatory agencies is pretty easy to outsmart, you vs every other player is harder to outsmart.
Another interesting point is in the olden days when stocks were traded by telegram and fractional prices and computers were human females with arithmetic skills, an abstract false market where we pretend there's no insider trading is simpler and simpler was computationally required. In 2014 thats not a valid argument anymore.
20 firms with 20 slightly false insider modified prices are just going to result in slightly wealthier arb players and slightly less false prices.
Rather than not knowing who will get screwed when by insider trading but there being a long term average cost to the economy of X making it all public would result in a known predetermined measurable and predictable cost of perhaps X/10 or X/100.
There are a bazillion different forms of insider trading, and this discussion would be somewhat separate from the classic trade secret brokering, where stocks trade hands before a confidential public announcement.
This is why some people, myself included, believe insider trading is a victimless "crime" which should be decriminalized.
If one investor has a friend inside the company and another doesn't, that's different. That's not a difference in resources, that's a difference in how the company itself is treating its investors. It's inequitable on the face; more pragmatically, it makes it much easier for the rich to exploit their advantages if they can just walk up to company officers and bribe them, which exacerbates inequality. Anything the company tells one investor, it is and should be obliged to tell all of them (and all at the same time).
Insider trading laws don't try to make everyone have equal access to information, they try to make everyone have equal access to a very constrained subset of information, because any legal scheme that tried to do more than that would be destined to fail.
It is altogether sinful to have recourse to deceit in order to sell a thing for more than its just price, because this is to deceive one's neighbor so as to injure him.[1]
It seems to me, generally in the case of publicly traded securities, that you may assume that your counterparty in any trade has access to all the same information you do in making their decision to buy what you are selling or to sell what you are buying.
However, this assumption no longer holds if you knowingly make use of insider information in making a trade. In this case, it is more likely than not that the counterparty to your trade does not hold the same information that you do, and hence executing such a trade can rightly be called fraudulent.
An obvious exception would be that you can make the same trade, off-exchange, with someone you know personally and to whom you can privately relate the relevant insider information before making the trade. Is this the type of circumstance you meant when you said "merely trading based on insider knowledge... there is no deception"?
Ie. regulatory capture.