The Big Banks On Trial, Again

You want to know why the entire global financial system almost collapsed in 2008?

There seems to be a simple answer. Not encouraging, but simple: The European Commission is exploring the possibility that there was a conspiracy among 13 of the world's major banks that colluded to keep the entire house of cards a secret.

In a press release Monday the European Commission announced it sent a "statement of objections" to Bank of America Merrill Lynch (BAC), Barclays (BARC), Bear Stearns , BNP Paribas (BNP), Citigroup (C), Credit Suisse (CS), Deutsche Bank (DB), Goldman Sachs (GS), HSBC (HBC), JP Morgan (JPM), Morgan Stanley (MS), Royal Bank of Scotland (RBS), UBS (UBS) as well as the International Swaps and Derivatives Association (ISDA) and data service provider Markit.

This statement of objections is a formal step in EU investigations that charges the banks, the dealers' association, and the swaps pricing agent and index controller of "colluding to prevent exchanges from entering the credit derivatives business between 2006 and 2009."

The companies are then expected to answer the charges.

"If, after the parties have exercised their rights of defence, the Commission concludes that there is sufficient evidence of an infringement, it can issue a decision prohibiting the conduct and impose a fine of up to 10% of a company's annual worldwide turnover."

Part of the antitrust behavior of the accused, besides controlling pricing of derivatives to their exclusive benefit, would likely address their complicity in veiling the entire market to deflect fears of counterparty exposure, concentration of risks and leverage in the financial system.

Behind the Veil: Where the Elite Meet

The ISDA, the trade and lobbying group for users of over-the-Counter (OTC) derivatives that was named as a colluding partner, said last August that after eliminating more than $200 trillion in notional value of interest rate and credit-default swaps by cancel ing offsetting trades, on an adjusted basis interest rate swaps totaled $262 trillion.

According to the ISDA's website it has 840 members. There are 196 "primary members" that include all the big banks in the statement of objections and most of the world's trading banks.

Associate members include banks, corporations and some of the most powerful law firms around the world. Among them: Washington power lobbying firm Patton Boggs LLP, bank and securities law firms Davis Polk & Wardwell, Wachtell, Lipton, Rosen & Katz, and Weil Gotshal & Manges.

The ISDA's "subscriber members" include the 12 Federal Home Loan Banks, Freddie Mac and Fannie Mae, the Student Loan Marketing Association (Sallie Mae), New York Life Insurance Company, Intel Corporation (INTC), the Bank of England, Luxembourg and GMAC Inc. are all subscriber members.

Markit, according to its website, "is a private company headquartered in London. The company is owned by employees, private investors, private equity investors and numerous buy-side and sell-side financial institutions."

But Markit wants to change that. The company, which competes with Bloomberg and Thomson Reuters Corp, has been planning a public offering to raise $1 billion.

Outrage Upon Outrage

A Reuters story on June 25 quoted a source saying, "A registration statement for the deal could be filed with U.S. regulators during the fourth quarter of this year, although timing is still in flux and could change depending on market conditions."

The story names Goldman Sachs as the lead coordinator for the deal, but points out Markit's other large stakeholders, including JPMorgan Chase and Bank of America Merrill Lynch want to be lead syndicate partners.

An IPO may be a long way off if Markit, in large part owned by the big banks who also are all primary members of the ISDA, are all accused of antitrust violations and face potential multi-billion dollar fines.

In addition to its current woes, Markit would have to disclose that back in July 2009 the Justice Department's antitrust division had sent civil notices to banks that own Markit to find out if they had unfair access to price information.

Justice, or Just Cold Comfort?

A July 14, 2009 New York Times Dealbook post pointed to William Cohan, a former investment banker and financial crisis commentator, who said any potential investigation into Markit and its owners was overdue.

"The fact that they control Markit and it provides information about the prices of credit default swaps and they've benefited from this for many years without any challenge or investigation was outrageous," he was quoted as saying by Bloomberg News.

To date, nothing has come out of the Justice Department's investigation.

Yet again, the world's biggest banks, those principally responsible for driving the global financial system off a cliff, are being exposed for what they've done and how they did it. That's the bad news - for them.

The good news - for them - is they still have the earnings power to pay whatever fines are levied against them and that no one at the top of any of these criminal enterprises has gone to jail.


About the Author

Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.

The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.

Shah founded a second hedge fund in 1999, which he ran until 2003.

Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.

Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.

Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.

Read full bio