The second involved information stemming from the Barclay’s Libor scandal—in particular, exactly how much was known, when, and by what regulators. The NY Fed, confirming that it received reports about Libor issues in 2007 and 2008, on Friday released documents showing it took “prompt action four years ago to highlight problems.” The actions of Treasury Secretary Timothy Geithner, who headed the New York Fed from 2003 until 2009, may be heavily scrutinized. So will those of the U.K. authorities.
And then there is the recent announcement by JPMorgan of possible valuation discrepancies by its traders. According to JPMorgan’s chief financial officer, a restatement may be necessary based upon facts uncovered “regarding the CIO traders’ intent as they were marking the book. And as a result, we questioned the integrity of those trader marks.”
What impact will this have on the regulatory climate? Clearly, the regulators will be under tremendous pressure. Richard Shelby, the top Republican on the U.S. Senate Banking Committee, noted Peregrine “raises serious questions about our current regulators and whether they are capable of doing their jobs.” Others are also voicing concerns. In turn, the regulators are likely to respond by increasing their oversight.
And as they do so, traders in particular may be in the line of fire. Reflecting on LIBOR, Warren Buffett is quoted as saying, “the idea that a bunch of traders can start e-mailing each other . . . and play around with . . . [the Libor] rate . . . is not good for the system.” This is the type of concern that prompted the CFTC this past April to pass rules for swap participants, which basically wall off traders from the rest of the firm. Traders cannot supervise or influence the compensation of research analysts or clearing unit employees. In some cases, communications with traders are prohibited unless the communication is made through the firm’s compliance department. Both the Libor scandal and the J.P. Morgan trading loss, coupled perhaps with a few new situations brewing in the background, might give this type of thinking a major boost.