Manipulation of markets and manipulation of accounts

The press is full of issues around the manipulation by Barclays Bank of their input into LIBOR calculations. They did this to seek advantage to themselves and sometimes to help out some key contacts. The behaviour has been described variously as criminal, illegal or deceitful. Whatever describes it best, the damage done to the reputation of the bank has been high and this must spread to the reputation of other banks, both in the City of London and elsewhere. Employees move relatively freely between banks and while many banks and their employees have very high integrity, this kind of behaviour must surely happen elsewhere. One newspaper suggests that RBS will also be fined for similar reasons.

Those seeking arguments to attempt to knock London from its key role in financial services have been offered more ammunition. Who can argue with financiers from anywhere in the world who seek integrity and transparency in their financial partners? Insider trading cases also throw fuel onto the fire of reputational risk.

LIBOR is just one market among many operating in both the City of London and in many financial centres around the world. To what extent are other rates or markets manipulated? In the case of Barclays it seems that it was manipulation of information but history is littered with all sorts of manipulation. From the cornering of the silver market by the Hunt brothers to the Guinness share trading scandal of the 1980s, manipulation is everywhere. As recently as April 2012, President Obama talked about possible manipulation of the energy markets, after high gas prices caused concern.

There is even a website dedicated to the subject:

http://www.marketmanipulation.com/
The tag line on the site is:

THE TRUTH: ALL MARKETS ARE MANIPULATED!

Let us now look to manipulation elsewhere.

Are central banks manipulating markets with Quantitative Easing? The result in the UK has been lower gilt yields. No doubt someone has lost out on that, such as Defined benefit pension providers.

Is the TWIST arrangement in the US where the Fed is selling short term debt to buy longer term debt, manipulation of the yield curve?

Do hedge funds manipulate the market with short selling of shares?

Does window dressing of financial accounts amount to manipulation?

I have come across a company where debt was artificially depressed at reporting dates by the temporary factoring of receivables. Many firms stretch working capital at such times, suppliers and customers often taking it in turns to do each other favours and earn bonuses for their friends.

There is a substantial part of accounting which is down to opinion, on provisioning for example, or depreciation. In the past acquisitions were renowned for the opportunities they threw up for generous accounting. Accounting standards exist to avoid manipulation and allow a level playing field.

All these are examples of manipulation, although there are clearly many different shades of gray involved and some have wider reaching implications than others. The examples are done by companies as well as banks and by governments as well.

However, we should not be dismayed, the majority of people are honest and the secular trend in business is towards openness and transparency. Firms should protect themselves and their reputation with strong controls and robust supervision of staff.

By Will Spinney