Lack of accountability and minuscule nature of payouts throws doubt on whether fines are a serious deterrent
Almost every week there seems to be an announcement that some regulator has settled claims for a sum of money that to most seem staggering. Yet the question remains: are eye-wateringly high US dollar settlements true deterrents for trillion-dollar enterprises?
On 6 February, the Commodity Futures Trading Commission (CFTC), the US Department of Justice (DOJ), and the Financial Services Authority (FSA) announced that they had reached a settlement with the Royal Bank of Scotland (RBS) in relation to its involvement in the Libor-rigging scandal.
The FSA announced that at least 219 requests for inappropriate submissions were documented, in addition to an unquantifiable number of verbal requests. These requests took place over texts, instant messages and e-mails – requests to move Libor rate submissions for the Japanese Yen and Swiss Franc for benefits such as lunch, wine, sushi and steak.
As punishment for rigging the primary benchmark for short-term interest rates globally, RBS was fined $612m (£394m) – less than UBS’s ($1.5bn) but more than Barclays’ ($450m).
Clearly $612m is a lot of money, but is it a reasonable punishment?
Consider this: it was less than 0.03 per cent of RBS’s total assets as of 30 September 2012. It was less than 1 per cent of RBS’s market capitalisation on 6 February 2012. RBS even saw its stock price rise when the fines were announced. By the following week, the stock price had jumped 50 cents.
Though some of these fines are reportedly to be financed by clawbacks of bonuses, the unanswered question is how much money will corporate leaders get to keep?
Are they merely forfeiting what amounts to a nominal fee for a licence to break the law?
The Libor scandal is stunning in regard to the intent by which it was carried out and its broad-sweeping impact. It is a reminder that the integrity of our financial mechanisms, which affect citizens across the globe, is contingent on the honesty and moral behaviour of relatively few institutions and individuals.
Those who assume the role of trustees for our financial system – and other public services, such as the manufacture of drugs – should be held fully accountable for their misconduct. To do otherwise falls short of promoting economic efficiency and justice for the victims of malfeasance. How and whether accountability is reached through these penalties should be made fully transparent.
Former US Supreme Court Justice Louis Brandeis is noted for saying that sunshine is the greatest disinfectant. Whether the most recent Libor settlement is reasonable cannot yet be determined. There is not enough information about how the penalties were calculated or which culpable individuals will be giving back money and in what amount.
Perhaps when these settlements are more transparent, we will be in a position to determine whether they are perfunctory or punctilious.
Reuben Guttman is senior fellow and adjunct professor, Emory University Center for Advocacy and Dispute Resolution