TIME finance

Top Banks Fined $2.5 Billion Over Currency Manipulation

(WASHINGTON) — Four big banks will pay $2.5 billion in fines and plead guilty to criminally manipulating global currency market going back to 2007.

JPMorgan Chase, Citigroup, Barclays and The Royal Bank of Scotland conspired with one another to fix rates on U.S. dollars and euros traded in the huge global market for currencies, according to a settlement announced Wednesday between the banks and U.S. Justice Department. Currency traders allegedly shared customer orders through chat rooms and used that information to profit ahead of their clients.

The criminal behavior took place between December 2007 and January 2013, according to the agreement.

A separate bank, UBS, has agreed to plead guilty to manipulating key interest rates and will pay a separate $203 million criminal penalty.

The broader settlement was long expected. The Commodity Futures Trading Commission had fined those banks a combined $1.4 billion for their involvement in the scheme last year.

Big banks have been fined billions of dollars for their role in the housing bubble and subsequent financial crisis. But even so, the latest penalties are big. Including a separate agreement with the Federal Reserve announced Wednesday, the banks will have paid nearly $9 billion in fines and penalties for their manipulation of the $5.3 trillion foreign exchange market.

Unlike the stock and bond markets, currencies trade nearly 24 hours a day, seven days a week. The market pauses two times a day, a moment known as “the fix.” Traders allegedly shared client orders with rivals ahead of the “fix”, pumping up currency rates to make profits.

Global companies, who do business in multiple currencies, rely on their banks to give them the closest thing to an official exchange rate each day. Banks are supposed to be looking out for their clients instead of using their clients’ needs to profit ahead of them.

It is rare to see a bank plead guilty to any wrongdoing. Even in the aftermath of the financial crisis, most reached what were known as “non-prosecution agreements” or “deferred prosecution agreements” with regulators, agreeing to pay billions in fines but not admit any guilt. If any guilt was found, it was usually one of the bank’s subsidiaries or divisions — not the bank holding company itself.

One of the most notable banks to plead guilty to any criminal wrongdoing was investment bank Drexel Burnham Lambert, which plead guilty to fraud in the 1980s following the implosion of the junk bond bubble.

TIME Economy

The Real Way to Fix Finance Once and for All

Bull statue on Wall Street
Murat Taner—Getty Images

Changing the way financial institutions operate will require more than calculations and complex regulation

We live in an age of big data and hot and cold running metrics. Everywhere, at all times, we are counting things—our productivity, our friends and followers on social media, how many steps we take per day. But is it all getting us closer to truth and real understanding? I have been thinking about this a lot in the wake of a terrific conference I attended this week on “finance and society” co-sponsored by the Institute for New Economic Thinking.

There was plenty of new and creative thinking. On a panel I moderated in which Margaret Heffernan, a business consultant and author of the book Willful Blindness, made some really important points about why culture is just as important as numbers, particularly when it comes to issues like financial reform and corporate governance. As Heffernan sums it up quite aptly in her new book on the topic of corporate culture, Beyond Measure, “numbers are comforting…but when we’re confronted by spectacular success or failure, everyone from the CEO to the janitor points in the same direction: the culture.”

That’s at the core of a big debate in Washington and on Wall Street right now about how to change the financial system and ensure that it’s a help, rather than a hindrance, to the real economy. Everyone from Fed chair Janet Yellen to IMF head Christine Lagarde to Senator Elizabeth Warren—all of whom spoke at the INET conference; other big wigs like Fed vice chair Stanley Fischer and FDIC vice-chair Tom Hoenig were in the audience—agree more needs to be done to put banking back in service to society.

MORE: What Apple’s Gargantuan Cash Giveaway Really Means

But a lot of the discussion about how to do that hinges on complex and technocratic debates about incomprehensible (to most people anyway) things like “tier-1 capital” and “risk-weighted asset calculations.” Not only does that quickly narrow the discussion to one in which only “insiders,” many of whom are beholden to finance or political interests, can participate, but it also leaves regulators and policy makers trying to fight the last war. No matter how clever the metrics are that we apply to regulation, the only thing we know for sure is that the next financial crisis won’t look at all like the last one. And, it will probably come from some unexpected area of the industry, an increasing part of which falls into the unregulated “shadow banking” area.

That’s why changing the culture of finance and of business is general is so important. There’s a long way to go there: In one telling survey by the whistle blower’s law firm Labaton Sucharow, which interviewed 500 senior financial executives in the United States and the UK, 26% of respondents said they had observed or had firsthand knowledge of wrongdoing in the workplace, while 24% said they believed they might need to engage in unethical or illegal conduct to be successful. Sixteen percent of respondents said they would commit insider trading if they could get away with it, and 30% said their compensation plans created pressure to compromise ethical standards or violate the law.

How to change this? For starters, more collaboration–as Heffernan points out, economic research shows that successful organizations are almost always those that empower teams, rather than individuals. Yet in finance, as in much of corporate America, the mythology of the heroic individual lingers. Star traders or CEOs get huge salaries (and often take huge risks), while their success is inevitably a team effort. Indeed, the argument that individuals, rather than teams, should get all the glory or blame is often used perversely by the financial industry itself to get around rules and regulations. SEC Commissioner Kara Stein has been waging a one-woman war to try to prevent big banks that have already been found guilty of various kinds of malfeasance to get “waiver” exceptions from various filing rules by claiming that only a few individuals in the organization were responsible for bad behavior. Check out some of her very smart comments on that in our panel entitled “Other People’s Money.”

MORE: The Real (and Troubling) Reason Behind Lower Oil Prices

Getting more “outsiders” involved in the conversation will help change culture too. In fact, that’s one reason INET president Rob Johnson wanted to invite all women to the Finance and Society panel. “When society is set up around men’s power and control, women are cast as outsiders whether you like it or not,” he says. Research shows, of course, that outsiders are much more likely to call attention to problems within organizations, since not being invited to the power party means they aren’t as vulnerable to cognitive capture by powerful interests. (On that note, see a very powerful 3 minute video by Elizabeth Warren, who has always supported average consumers and not been cowed by the banking lobby, here.)

For more on the conference and the debate over how to reform banking, check out the latest episode of WNYC’s Money Talking, where I debated the issue on the fifth anniversary of the “Flash Crash,” with Charlie Herman and Mashable business editor, Heidi Moore.

TIME Careers & Workplace

10 Personal Finance Books Every Professional Should Read

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If you’re not sure where to start, these books will really help out

startupcollective

Question: What is a great personal finance book to read for a young entrepreneur trying to get better at managing their money while launching a startup?

Rich Dad, Poor Dad

“I read Rich Dad, Poor Dad in high school, and it started me on a personal journey to learn about personal finance and entrepreneurship. Whether or not you agree with all of the principles, it’s a great jumping-off point.” — Darrah Brustein, Network Under 40 / Finance Whiz Kids

Accounting Made Simple: Accounting Explained in 100 Pages or Less

Accounting Made Simple: Accounting Explained in 100 Pages or Less is a solid introduction to accounting principles, including GAAP compliance, cash versus accrual methods, and financial ratios. It’s a good foundation for young entrepreneurs and a good resource for the early stages when you want to set up a clean accounting system but don’t have the resources to hire a professional.” — David Ehrenberg, Early Growth Financial Services

Solving the Money Puzzle: Personal Finance Made Simple

“I recommend Solving the Money Puzzle: Personal Finance Made Simple because it’s crucial for young entrepreneurs to properly manage their personal finances before being endowed with startup capital. If you can straighten out your own house, the pressures of being responsible for vast capital will diminish, and your positive habits will carry over.” — Nicolas Gremion, Free-eBooks.net

Get a Financial Life: Personal Finance In Your Twenties and Thirties

Get a Financial Life: Personal Finance In Your Twenties and Thirties is a great primer on the basics of personal finance and money management. A lot of the tips and advice in the book are invaluable.” — Josh Weiss, Bluegala

The Richest Man in Babylon

The Richest Man in Babylon is 100 pages, was written in the 1920s and has stood the test of time with simple personal finance lessons such as “Pay yourself first.” Head into a bookstore one afternoon for some nuggets of financial wisdom.” — Brett Farmiloe, Markitors

I Will Teach You To Be Rich

I Will Teach You To Be Rich is a great book on how to automate your savings by creating a sound system. The author has personally gone to businesses like Google to speak about his systems that are simple and effective.” — Eric Siu, Single Grain

The Lean Startup

The Lean Startup is a phenomenal piece of work that inspired me in how I operate my own business. Managing finances is an important aspect of the book, and it will definitely help readers lay some necessary cornerstones for their company.” — Daniel Wesley, Quote.com

Predictable Revenue

Predictable Revenue is a fantastic book for startups with a B2B sales process that want a more modern perspective on consistent quality lead generation and more predictable revenue.” — Ryan Stoner, Publicis

Financially Fearless: The LearnVest Program for Taking Control of Your Money

Financially Fearless: The LearnVest Program for Taking Control of Your Money has some unique tips such as always saving a $5 bill instead of spending it. The book is a fast read, comes with a strong website portal and has beneficial information.” — Raoul Davis, Ascendant Group

Destroy Student Debt: A Combat Guide to Freedom

“An employee of mine recently recommended Destroy Student Debt: A Combat Guide to Freedom. He said the most valuable advice in the book was that we often aren’t aware of the influence of consumerism in our lives. We buy things because that’s what we do. Being thoughtful consumers — or, as the author suggests, questioning why we purchase things at all — is helpful.” — Mike Seiman, CPXi

The Young Entrepreneur Council (YEC) is an invite-only organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, YEC recently launched StartupCollective, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses.

This article was originally published on StartupCollective.

MONEY financial literacy

Most 20-Somethings Can’t Answer These 3 Financial Questions. Can You?

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Getty Images—Getty Images

A new study finds that young Americans could use some help when it comes to managing their money.

Just in time for financial literacy month, a new San Diego State University study of young Americans has found that they are lacking when it comes to financial knowledge and behavior.

Out of these three questions measuring basic financial knowledge, the average respondent could answer only 1.8 correctly—and only a quarter got all three right. (Answers are at the bottom of this story.)

(1) Do you think that the following statement is true or false? Buying a single company stock usually provides a safer return than a stock mutual fund.

(2) Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow: More than $102, exactly $102, or less than $102?

(3) Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, would you be able to buy more than, exactly the same as, or less than today with the money in this account?

Perhaps most troubling was what the research showed about how respondents have actually been managing their money. The average young person surveyed showed responsible behavior in only one of three categories: Paying off debts on time, budgeting and living within one’s means, and having any retirement savings at all. Only 2% of all respondents showed responsible behavior in all three categories.

Furthermore, the study—led by SDSU professors Ning Tang, Andrew Baker, and Paula Peter—found that there was little to no effect of financial knowledge on financial behavior. That is, young people manage money poorly, even when they know better.

But there is hope for America’s youth, says Tang.

“Our findings suggest that if you want to improve your own financial behavior, the best thing you can do is be open to the influences of others,” says Tang.

Though the study did not examine the influence of peers, its results suggest both family and financial professionals could play an important role in improving young people’s financial habits. The researchers found that being close with parents was correlated with better money management among women—and that higher self-reported levels of being “thorough” and “careful” was correlated with better financial behavior among men. Among both sexes, higher self-reported levels of being “self-disciplined” was correlated with better money habits.

That suggests educators and financial planners should focus on getting young people to be more self-aware in general and more motivated to improve their organizational habits across the board—not just when it comes to finances, says Tang.

“It can be helpful just to be more aware of your own psychological barriers,” she says.

One thing the study did not explore much is the cause of gender differences in the results. For example, the authors did not control for whether parents tend to treat daughters differently than sons.

And the answers to the questions above? They are: (1) false; (2) more than $102; and (3) less than today.

Read Next: This One Question Can Show If You’re Smarter Than Most U.S. Millennials

TIME Economics

The Real Reason the Dollar Is So Strong Right Now

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Purestock—Getty Images/Purestock Close-up of American dollar bills

And why it could seriously hurt American business

When is a stronger U.S. dollar not a good thing? When it causes companies to sell fewer products overseas. That’s one of the big concerns at the moment among American CEOs, many of whom are worried about what the dollar’s strength against currencies like the euro and the yen mean for US exports–and corporate profits.

They have legitimate reason to worry. Each of the five major dips in U.S. corporate profitability since 1970 have occurred following reduced sales after periods of relative dollar strength. The Fed has recently expressed concerns about whether the dollar’s strength could hold back the US recovery, which has been lackluster to begin with. Wages are still growing at only around 2 %, not enough to push up consumer spending, which is the major driver of our economy. If US exports also begin to suffer, it could be difficult for the economy to sustain the 3% a year growth figure that is needed to create more jobs.

Some economists believe the dollar’s strength reflects the fact that the U.S. is still the prettiest house on the ugly block that is the global economy. (Certainly, to employ another metaphor, it’s the strongest leg on the global stool with China slowing sharply and the Eurozone debt crisis flaring back up as Greece looks likely to run out of money next month.) But I think it’s more about central bankers and their actions. The dollar’s strength reflects the Fed’s own recent indications that it will likely raise interest rates by the end of the year.

Indeed, the dollar’s strength almost perfectly tracks Fed statements about the coming end of easy money. The tightening of US monetary policy (or even the hint that policy will tighten at some point) has driven the dollar up (and oil down) even as Europe’s beginning of its own “QE” or quantitative easing program has driven the Euro down. None of it reflects the economic reality on the ground, but rather the fact that central bankers are, as investment guru Mohamed El-Erian frequently says, the “only game in town.” For more on what the stronger dollar might mean for consumers, companies and the economy as a whole, you can listen to Josh Barro from the New York Times and I discuss the topic on this week’s Money Talking.

TIME Crime

Bernie Madoff Victims’ Fund Breaches $10.6 Billion After Feeder Firm Settlement

File photo of Bernard Madoff exiting the Manhattan federal court house in New York
Brendan McDermid—Reuters Bernard Madoff exits the Manhattan federal court house in New York in this Jan. 14, 2009, file photo

Victims gain and additional $90 million as Madoff feeder fund settles

Victims of the biggest investment scam in U.S. history, run by disgraced financier Bernard Madoff, have gained an additional $93 million from a “feeder fund” settlement, bringing the total recovered to $10.6 billion.

Irving Picard, the trustee charged with recovering money for those duped by Madoff, said that Defender Ltd., which used to send money to the swindler’s firm, will receive $520 million from the liquidation of Bernard Madoff’s Investment Securities LLC, owing to significant overpayment.

The first $93 million of this will got to Madoff’s victims, while Defender Ltd. will recoup its share from future payouts, reports Reuters.

Picard has regained around 60% of the estimated $17.5 billion total loss perpetrated by Madoff’s Ponzi scheme, which lures investors by promising unusually high returns.

In 2009, Madoff was sentenced to 150 years in prison for fraud, the maximum term possible.

[Reuters]

TIME Economy

Don’t Trust the Markets: A Correction Is Coming

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Getty Images

The Fed, despite its recent pronouncements, will trigger a fall in stock prices later this year

Up until yesterday’s Fed meeting, America’s central bankers said they were going to be “patient” about the timing of an interest rate hike, which most experts believe will ultimately result in a significant stock market correction (see my recent column about why). So why did that make markets go up so dramatically yesterday?

Because everything else about the Fed’s communication said “we’re going to be more patient than ever” about when and how to raise rates. The central bank downgraded its forecast on the US economic recovery, saying that the pace of the recovery had “moderated somewhat,” in large part because of the strong dollar.

Why is the dollar strong? Mainly because everyone knows that the easy money monetary policy in the US is coming to an end. (QE is over, and most economists are now predicting a rate hike by September.) Meanwhile, pretty much every other central bank is now easing monetary policy—witness the ECB’s new money dump, which has sent European markets soaring.

What does all this tell us? That markets and the real economy are disconnected in a way that is terrifying. Central banks are, as chief economic advisor to Allianz and former PIMCO CEO Mohamed El-Erian put it to me recently, “the only game in town.” Every time the Fed says it will keep rates low a little longer, the market party goes on. All that means is that there will be more pain, eventually, when the punch bowl gets pulled away.

TIME stocks

The Average Wall Street Bonus Was $172,860 in 2014

A trader works on the floor of the New York Stock Exchange shortly before the end of the day's trading in New York July 31, 2013
Lucas Jackson—Reuters A trader works on the floor of the New York Stock Exchange shortly before the end of the day's trading in New York July 31, 2013

But that's only a 2% rise on the previous year

Despite falling profits, the average bonus on Wall Street rose to $172,860 last year, according to a report released Wednesday by New York State Comptroller Thomas P. DiNapoli.

That marks a 2% increase from 2013 and is the highest average payout since 2007 — right before the financial crisis.

The bump comes as estimated pre-tax profits fell by 4.5% from $16.7 billion in 2013 to $16 billlion last year.

“The cost of legal settlements related to the 2008 financial crisis continues to be a drag on Wall Street profits, but the securities industry remains profitable and well-compensated even as it adjusts to regulatory changes,” DiNapoli said in a press release.

The New York Office of the State Comptroller, whose main duty is to audit government operations and operate the retirement system, has been tracking the average bonus paid on Wall Street for nearly three decades. When it began recording in 1986, the average payout was $14,120. The highest average bonus was $191,360 in 2006.

After two years of job losses, the industry added 2,300 jobs in 2014 to a total of 167,800 workers.

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