Monday, February 14, 2011

Currency Market Ripoffs

News services report that banks have allegedly been ripping off customers in the foreign exchange markets. Major banks buying or selling foreign currencies for institutional investors have supposedly been cheery picking their day's transactions after the market closes, keeping the good trades for themselves, and sticking their customers with the lousy trades. Unlike the stock markets, there isn't a consolidated tape in the currency markets that reports transactions publicly, and customers are at a disadvantage in trying to figure out whether they've gotten fair prices. The banks have a free hand to turn lead into gold by keeping the golden trades for themselves and dumping the lead into customer accounts.

It's easy to be a winner in the financial markets if you have the benefit of hindsight and can help yourself to a do-over. It's even easier when you're transacting in an unregulated market that's largely opaque to your customers. The currency markets are unregulated, and only the naive and poorly read would be surprised by the recent allegations. After all, similar ripoffs occurred in the opaque mortgage-backed securities and derivatives markets, crucial parts of an unregulated shadow banking system whose collapse in 2007-08 continues to haunt our economy today. A recurring story of Wall Street is that insiders will rig the market against the public whenever they can. The news reports about currency trading ripoffs is just another iteration of that story.

That institutional customers, including some well-known money managers, were victimized brings to mind a lesson of the Bernie Madoff scandal: even the well-heeled and sophisticated are vulnerable. No one is safe when transparency and accountability are in short supply. Moreover, pension funds and other investment vehicles holding money for the benefit of middle class workers and investors are among the victims. This isn't just a problem for residents of Palm Beach.

Greater regulation of the currency markets, even simple measures like better recordkeeping of transactions and more timely confirmation of trades with customers, would enhance accountability. However, today's political climate precludes greater regulatory protections, even if pension funds and other repositories of middle-class assets are at risk. Some victims have filed lawsuits--the State of Virginia even intervened in one--and perhaps they'll recover their losses after a long slog through the courts. Otherwise, caveat emptor remains the word of the day.

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