Explainer: how bankers fixed forex trades and why it’s criminal

“Oh what a tangled web we weave. When first we practice to deceive”.

Sir Walter Scott’s comment could have been made about the LIBOR and foreign exchange (forex) scandals engulfing the world’s largest banks.

For the first time, it looks like the banks in question may have to face criminal chargesfor manipulating forex benchmarks, instead of the civil settlements and huge penalties they have agreed up to this point in time. How did we get here?

Imagine if you had a good friend who came to you saying that he/she was short of cash and was selling an investment property. An agent was coming around today to value the property and he would offer it to you at the valuer’s price, if you could proceed right away, they needed the money as fast as possible. You know the property, have a bit of ready cash and agree, for a friend.

What have you done? You have bought a property for an unknown price that you don’t really want so will have to sell again. The house price may go up but also may go down before you sell it. And what about the sales costs? You have taken a lot of risk, for not a lot of return, except friendship. This is not a very “rational” investment.

Believe it or not that is what the masters of the universe on the world’s forex trading desks were doing. No wonder they ran into trouble.

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