Rarely does the heart bleed for insurance companies, but today we confess to mustering a little compassion.
It is the insurers who are shaping up to lose the biggest game in town; that is, the sting on the banks for rigging money markets, the BBSW (bank bill swap rate) scandal.
Lawyers for the big banks are bunkered in talks with the corporate regulator, Australian Securities & Investments Commission (ASIC), with the most likely outcome a negotiated settlement; a back-room deal which would see the banks fork out cash penalties and the regulator wave about a flashy settlement figure.
Win-win; synchronised press releases will herald a “record settlement”, justice will be said to have been done. And in the time-honoured fashion, the blame will fall, not to the generals, but to a few rogue sergeants down the command chain.
The banks may even concede to a lapse in their otherwise fine culture, and agree that, yes, civil misdemeanours did occur.
But, to the chagrin of their insurers, they should still claim for any financial losses under their insurance policies.
Would $100 million buy a deal?
They can rely on “exclusions” for fraud and dishonesty, after all. What is the bid and offer on such a settlement then?
Is it an $80 million spread, per bank: bid $20 million, ASIC offer $100 million?
If the market manipulation claims have substance, and they must have some credence or the banks would be purple with indignation, we are talking about a rip-off of all 24 million Australians. After all, this is about rigging the price of money.
Ultimately, however, the terms of a settlement won’t come down to the size of the crime but rather the negotiating leverage of either party. As its leverage, ASIC has the capacity to make menacing legal threats, as it has already in the case of ANZ.
Though the banks know well that the corporate watchdog has neither the resources nor the inclination to sue the most powerful and profitable institutions in Australia, literally, in a billion-dollar, decade-long legal battle.
Reputation is king
For the banks this is about containing reputation damage. And this is where ASIC does have leverage. It can drop a slew of pleadings into the courts, affidavits full of names, times, places, allegations.
Indeed draft affidavits in a case against the ANZ matter have been prepared, though not yet filed. The real financial exposure is not in fighting ASIC per se but in collateral damage from the regulator’s two-year investigation.
Even $200 million in penalties apiece would be water off a duck’s back for the big four banks.They might even absorb that above the line, so executive bonuses remained intact, not to mention their collective $30 billion bottom-line profit.
Their real risk is in the exposure of bank equity to class action lawsuits. In the UK, regulatory investigations into the Libor rigging scam did not preclude bank clients from seeking individual redress.
If ASIC files its pleadings in the courts, there will be material aplenty for hungry class-action litigators to peruse. The banks must be balancing this risk to their equity, assuming the claims stand up, against the expedience of a quick resolution.
Medcraft’s term ends in May
Things are reaching a tipping point. And there are some timing issues. ASIC chairman Greg Medcraft would dearly love to exit with a big win to his name. But his five-year term expires in May and it would be quite a call to lump the carriage of a nine-digit lawsuit onto his successor, especially one against a politically powerful institution with bottomless pockets.
As for justice being done, there was demonstrable fraud and forgery in the Commonwealth Bank financial advice scandal but no convictions, no jail-time, let alone prosecutions, other than an advisory ban or two. The banks don’t prosecute their “rogues”. Big bankers don’t go to jail.
The irritating thing is that we all have a stake in this drama. Not only do we all have superannuation, whose proceeds are funding this $100 million lawyers’ picnic, but we also stand personally behind the big banks. Let’s not forget that, via the Reserve Bank’s Committed Liquidity Facility (potentially a $300 billion bail-out fund), that taxpayers underpin the solvency of the banks should they get into strife.
Moral hazard is mounting
That brings us to “moral hazard”. The BBSW debacle is further clear evidence the banks are too big, their risks are low – both financially and in terms of personal accountability – while the rewards flow thick and fast.
According to documents before the court in an unfair dismissal case by a former top trader Etienne Alexiou, the bank hosted a dealing-room culture of sex, cocaine and booze.
Alexiou, who ran the bank’s balance sheet and was paid $5 million annual bonuses, was fired for lewd Bloomberg messages to colleagues. Another sacked trader also lodged a claim which he then withdrew. Both blamed the bank for its culture.
Alexiou claims his boss even took him to a lap-dancing establishment when he joined the bank, along with two female HR officers. Apart from the prurient interest these sorts of claims deliver, the warning bells of moral hazard are clanging loudly.
What are the banks doing paying desk-jockeys $5 million bonuses for trading? Why are they still running proprietary trading books when their balance sheets are guaranteed by the taxpayer? Even without diddling the BBSW rate, their cost of money is effectively subsidised by sovereign guarantee.
A soft outcome in this investigation will only buttress community suspicions that Australia’s banks are beyond the law.