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UK Gets Tough on Missold Swaps; What Excuse Does the US Have?

Even though the executive branch of the English government has as much of a soft spot for its banks as America’s does, its regulators are less craven than ours* (admittedly, ours set such a low standard that it is not all that hard, and the UK’s relative advantage may be about to go into reverse with the appointment of a new head of the Prudential Regulation Authority, since the designee presumptive believes big banks can’t be prosecuted). Despite some major lapses, such as failing to deal with Libor abuses, the Bank of England has been been openly critical of bank behavior and has pushed for reform, specifically, a Glass-Steagall like breakup of the banks. It was joined in this effort by the FSA, but the Treasury and the industry succeeded in getting that proposal watered down to ring-fencing of the retail banking operations, which is still more serious than any structural reforms implemented in the US. And remember banking contributes an even bigger percentage of GDP in England than in America, so the usual palaver about the need to leave banks alone, given the size of their economic footprint, would seem to have more weight there than here.

Consider another way that England departs from the US: it’s already devised a program to compensate victims of misrepresented swaps (usually interest rate). In the US, municipalities have been shellacked by being on the wrong side of these trades, with the bankruptcy of Jefferson County serving as the poster child for both how much corruption was involved and how damaging the consequences can be. In the UK, the preferred chump customer was small businesses, but the bad outcomes were very much the same. The FSA has established a scheme through which the eleven biggest banks involved have agreed to join an FSA sponsored program to compensate victims of mis-sold swaps.

The problem is that the scheme is moving forward too slowly, which has led some MPs to demand that swap payments for transactions already flagged as probable mis-sellings be suspended until the investigation is completed. From the Telegraph:

Banks must be forced to offer a moratorium on payments that thousands of small businesses are still being forced to make on interest rate swaps, according to a group of MPs investigating the scandal.

The Financial Services Authority and Treasury have been told they must push banks to offer an immediate freeze on all swap payments, according to a letter signed by 24 MPs.

“There are many businesses who are continuing to enter administration as a direct result of their obligations under their swap contracts,” wrote Guto Bebb, a Conservative MP and chairman of the All-Party Parliamentary Group on swap mis-selling.

Mr Bebb and the other MPs said the existing offer of suspending payments on a case-by-case basis was not sufficient and that more needed to be done to help struggling victims.

More than 40,000 interest rate derivatives are estimated to have been sold to smaller businesses since 2001, but with interest rates at historic lows the cost of servicing these contracts has left many firms facing hundreds of thousands and even millions of pounds in costs they say they were never warned about.

“Administration” is UK-speak for “bankruptcy”.

By contrast, we’ve had a mortgage settlement in which banks violate key terms of the agreement, yet as far as I can tell, not a Congresscritter, much the less a meaningful group, has said a peep. Nor have we heard much official noise about criminal practices in the municipal swaps market, including bribes and bid-rigging. And the lack of criticism from the political classes means the media uptake on these issues has been sporadic and half-hearted, which reinforces the official narrative that things really aren’t that bad and the public does not care all that much. And they might not be wrong. As long as citizens can be kept largely ignorant of the many and varied ways that banks have been looting the public purse and breaking laws, they at most have a sense the banks get the cream and they get the crumbs. They can’t articulate anything more than general suspicions and thus can be dismissed as uninformed. Even though the English have a long way to go in cutting their banks down to size (and the support of the government is a major obstacle), the frequent and negative coverage of bank behavior in major news outlets means that it is less risky for politicians to go on the offensive against banks. That is a bridge we need to cross if we are to reverse what Simon Johnson has called a quiet coup.

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* The Bank of England dropped the ball on the Libor scandal, but so did the US Treasury, and US banks were deeply involved too. And at least in the UK, they had hearings and grilled bank CEOs and senior officials at the Bank of England pointedly. And those were covered in considerable detail in the UK media. We haven’t had anything remotely like this sort of roughing up of officials here, and their performance on the whole has been much worse.

 

This piece is cross-posted from Naked Capitalism with permission.

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Dr Dan Steinbock is a recognized expert of the multipolar world. He focuses on international business, international relations, investment and risk among the major advanced economies (G7) and large emerging economies (BRICS and beyond).

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