Is the long series of price-fixing scandals not over yet ?
Yet again, major banks are being investigated by the US authorities about pricing of metals. (www.wsj.com/articles/big-banks-face-scru...). It is not the first time that international banks are being scrutinized and maybe US agencies working on this case may be well-advised to take a look at what happened before. But what are we talking about precisely ?
If you want to buy gold for instance, you'll have to look at the gold benchmark, which will give you the price per ounce you need to pay in order to get gold. Other precious metals' prices are likewise determined by benchmarsks, on which rely billions worth of financial products. Any movement of price thus has quite an extraordinary impact on the value of these products.
However important these benchmarks are though, there have been a series of price-fixing scandals over the past years, always involving major banks of course (which explains the title of this post!). Whether it be by organized cartels between traders or banks themselves using their power to directly influence a benchmark, prices have been deliberately inflated - or deflated - for individual and financial purposes. I am not going to here to discuss the morality of such behavior because I do not think this is the point of this blog and I will rather speak about a more interesting question for investors, and speculators as well : should you buy banks which may be forced to pay huge fines, thus leading to lackluster results eventually leaving you with no dividends at the end of the year or worse, a negative performance over the year ?
There aren't any nosedives for stock prices
In order to answer this question, I have compiled a (small) set of data about the stock prices of banks involved in price-fixing cases and got these results :
In June 2014, there have been concerns that HSBC, Deutsche Bank, Barclays, Société Générale and Bank of Nova Scotia were manipulating the price of Gold to their own advantages. Since banks have not enjoyed any recognition by public opinion since the 2008 crisis and because others scandals had happened before, one could have thought that getting rid of these stocks was necessary. Though we can agree that keeping Barclays or Société Générale in your portfolio would not have produced any results, yet keeping HSBC, Deutsche Bank or Bank of Nova Scotia would have! On average, the 5 banks even achieved a 2,11% return over 3 months.
Another scandal that you have heard of I think is the Labor scandal which spurred the demise of Bob Diamond, former Barclay's CEO. Due to the sheer amount of contracts based on this rate (35O trillion according to recent estimates), any involvment in this price-fixing scheme should have wrought havoc on a bank's stock price. And yet, it turned out most did incredibly well :
David against Goliath
How can we account for these returns ? The first thing that we have to take into account is that there had been a major sell-off before the summer and we can assume the market was buying what had been oversold. True. But it seems (to me, at least) that looming fines and scrutiny over bank activities were of no concern. Interestingly enough, the fines that banks eventually had to pay to settle charges and deny any wrongdoing in the Libor scandal were not that big, except for UBS maybe. For instance, JP Morgan paid to the European Commission $80 million for revenues of over $100 billion that year. The same goes with RBS who gave up on less than 1% of its annual revenues to have authorities go away.
Ultimately, you should not be aware of your banking stocks since their prices will likely change because of anything but price-fixing scandals or fines. Furthermore, the ECB announced a QE in late january which will add fuel to European stock prices. And if you are a regulator looking for a promotion, don't waste your time on suing banks forever : you won't bring them down to their knees and the little you'll get out of them will be made again in less than a week. Heads they win, tails you lose as they say…