JPMorgan, BofA, Citi, Barclays, Deutsche Bank, BBVA, Santander Accused of Rigging Government Bond Auctions in Mexico. Bank of Mexico Implicated

Collusion and “absolute monopoly practices.”

By Nick Corbishley, for WOLF STREET:

Mexico’s antitrust agency Cofece has accused the domestic subsidiaries of JP Morgan Chase, Bank of America, Citigroup, Barclays, Deutsche Bank  Santander, and BBVA of colluding to rig Mexican bond prices, in particular treasury notes, over a ten-year period. Following a three-year investigation, Cofece on Monday declared that it had notified “various economic agents” of their likely involvement in a concerted scheme to manipulate Mexican bond prices .

Sergio Lopez, the head of Cofece’s investigative unit, said that the agency’s probe had unearthed evidence that between 2006 and 2016 banks conspired to withhold bond inventories from the market in order to benefit each other. In a summary on its website, Cofece described the banks’ actions as “absolute monopoly practices”. Also implicated in the scandal, according to the financial daily El Financiero, are:

  • Bank of Mexico (Banxico), which conducts the primary auctions of Mexican government treasuries.
  • Mexico’s former government, which did everything within its power to halt the investigation and bury the scandal.

Here’s how the scheme worked: in the weekly auctions of government securities, the seven banks, in their role as market makers, took it in turns to buy up 80% of the amount issued. The bank that bought the bonds would later divvy them up among the other members of the cartel. On the day of the auction, some of the banks would be ‘long’ treasuries while others would be ‘short’, but the price was invariably fixed. The key was to square the numbers at the end of the day and count up the gains.

Banxico was apparently happy with this arrangement since it ensured that the money market did not spiral out of control and that interest rates did not suddenly soar. The fact that seven of the world’s biggest banks, all with cozy ties to Banxico, were making easy, risk-free profits along the way was no doubt an added bonus. As Dário Celis writes in El Financiero, the apparent knowledge and complicity of Banxico in the cartel’s activities, whose “fixing of treasury rates robbed savers and the government” itself of huge sums of money, is a “scandal.”

In Mexico’s treasury market, all primary market operations, such as weekly auctions and special auctions, are susceptible to collusion, as are all secondary market operations carried out by telephone or through brokers, according to Cofece.

Bank of Mexico’s primary auctions are held weekly and between 40 billion and 50 billion pesos ($2.07 billion-$2.59 billion) of government securities, including so-called “Cetes”, “M Bonds” and “Udibonos”, are traded each time. The secondary market operates from Monday to Friday from 7 a.m. to 2 p.m. and moves more than 50 billion pesos ($2.6 billion) each day. But on days when an auction takes place, the volume at least doubled, to 100 billion pesos ($5.2 billion).

While most market rigging scandals involving global banks have taken place in regional financial centers such as London and New York, this is one of the first to have been laid bare that affected a large emerging economy. It’s likely to be the tip of a very large iceberg. After all, many emerging economies don’t even have the resources to investigate suspicious market movements.

Even when they do, it’s quite possible that the government is in on the act, as appears to be the case here with Mexico’s former government. Instead of supporting Cofece’s inquiry, the then Treasury Secretary, Luis Videgaray, along with his future successor, José Antonio Meade, who now works for HSBC, obstructed it and ordered Mexico’s banking and securities regulator CNBV to launch an alternative inquiry that concluded in November 2018, one month before the Peña Nieto government’s term expired. CNBV fined the banks less than a million dollars a piece for simulating bond trades to pump up volumes.

Cofece, on the other hand, can impose fines that could reach as much as 10% of a company’s annual Mexican revenue. For a bank like Spain’s BBVA which earns almost half of all its global profits from its Mexico operations, such a penalty, however unlikely, would sting. Cofece has until the end of July 2020 to issue a final judgement on the matter.

As for the banks, now that new evidence has come to light, they will probably have to provide all relevant information to U.S. District Judge Paul Oetken in Manhattan, who is presiding over a class action case brought by pension funds against the banks, according to El Financiero. That case was dismissed a couple of months ago but it is now likely to be reopened. By Nick Corbishley, for WOLF STREET.

No matter what, automakers in the US are importing more pickups, SUVs, and compact SUVs from Mexico. Read… GM, Ford, BMW, VW, Honda Shift More Production to Mexico. Auto Imports Surge Despite Decline in US Sales

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  24 comments for “JPMorgan, BofA, Citi, Barclays, Deutsche Bank, BBVA, Santander Accused of Rigging Government Bond Auctions in Mexico. Bank of Mexico Implicated

  1. raxadian says:

    Well, if they actually get the heaviest fine possible, it would be historical.

    • Joe says:

      No problem, just issue created credit to cover the fine and then business as usual…
      Just be a bit more discrete to not get caught.

    • joe saba says:

      sure hope MONEY MARKET doesn’t go to hell
      and LIQUIDITY dries up
      they can also just disappear over night – then what?

  2. Chris Hayden says:

    I don’t know if anyone here knows the history of credit cards but I have read that in the 1980’s when interest rates were really high, 15%, 16%+ on CD’s, savings etc. many banks were complaining that certain states had a 12% maximum or limit of interest allowed to be charged.

    Since interest rates were much higher than 12%, credit card companies, banks were saying that they would close operations because they were losing money everyday due to 5% to 7% point interest rate loss, borrowing rates capped at 12% but needed 18% to 20% to charge their credit card clients.

    States finally buckled under the pressure from these banks, credit companies, lenders. Today, we still have 18% to 20%+ credit card interest rates even after almost 36 years interest rates have fallen below the all time highs in interest rates.

    So I am not surprised about banks, lenders manipulating or colluding interest rates as they have done it many times. Good report here for sure on this interest rate colluding.

    • David Calder says:

      You’re close.. Pick up the latest issue of Mother Jones (Biden Loves Big Banks). Read “House of Cards” by Tim Murphy.. Joe Biden is up to his hips in pushing for bank card deregulation.. The states didn’t buckle under banking pressure because the Delaware model pushed through Congress, Joe leading the charge, became the law of the land..

      • joe saba says:

        I find lending on asset with real value at 12% more comforting

        so glad I’m not bank

    • Rowen says:

      Most states still have usury laws that would effectively outlaw most credit cards. The loophole is that because a state can’t apply its usury laws to federally chartered banks, the credit card companies would operate out of states (e.g. South Dakota, Delaware) that had no usury laws.

    • Kent says:

      We older fellows can remember when the vast majority of banks were required to be local and had a ton of competition. I grew up in a small town in Florida which only had Florida chartered banks. Usury laws were ubiquitous and the banks were highly regulated. The concept being that the money in the banks were the deposits of people in the community and any credit should be extended back to the community.

  3. I consider this a positive sign for Mexico. They are now swimming with the big fish. The redirection of manufacturing and labor to Mexico should also include finance. All signs they are joining the global economy. The problem in Mexico is not corruption, it’s low level corruption. Not sure if Mexico is part of the BRIC, or will be. Their move to legalize marijuana show them to be progressive and business oriented economic power. W Bush wanted a North American currency, a transnational highway from Canada to Mexico and a trillion dollar wall. Trump is such a piker. Not sure if he will wake up and smell the dinero, but maybe the next president will.

    • raxadian says:

      Just because you catch a few crooks it doesn’t mean the system won’t keep being corrupted. Take a look at Spain and Italy that are supposed to be first world countries yet have corruption escandals basically all the time.

      Making a huge fine is good but if you don’t take out all the bad apples they will keep tainting the rest.

  4. R2D2 says:

    You only have to read private-investor, public financial forums, to see widespread accusations of daily financial fraud, manipulation, or cartels. Suspicious market-makers, dodgy rates, shares whipsawing before a press release, etc. Even if only 5% of the wild posts are true, that is still a heck of a lot of financial chicanery in the world!

  5. medial axis says:

    How uncouth. Don’t they know it’s solely the central banks job to rig Government Bounds.

  6. Bookdoc says:

    What shocks me the least is the collusion between the different groups. THIS IS MEXICO! A totally corrupt 3rd world country. I have lived there and still have a relative there. NOTHING happens without payoffs.

  7. NARmageddon says:

    Speaking of JP Morgan: I added a comment to the “crybabies-on-wall-street” that is about JP Morgan and other big banks going big on buying up GSE MBS in 2019/Q1-Q2, as reported by Reuters.

    The reporting is also relevant to the “repo-rates-blew-out” thread. It is all starting to make sense now.

  8. Iamafan says:

    Notice how happy Mexico is that somebody actually bought their bonds.

    • MC01 says:

      People will buy everything with a scrap of yield attached these days, no matter how risky or even patently ludicrous. Compared to the financial toxic waste that has been leaking through every crack of the financial system (Argentina’s infamous “Century Bonds”, Uber’s fresh $2 billion issue coming due in 2027 etc), Mexican sovereign bonds are safe and boring: the only risk is the currency for those who bought peso-denominated securities.

      It’s a completely different music for investors who bought securities issued by Mexican companies and denominated in foreign currencies (chiefly US dollars, euro and yen): large Mexican companies with plenty of foreign sales and/or large foreign subsidiaries are not an issue (see Grupo Bimbo, with foreign sales accounting for over 60% of revenues), but all the others, the ones working primarily or even eclusively in pesos, should be kept under close scrutiny. I am especially thinking about big retailers such as Puerto de Liverpool SA which issued foreign currency denominated securities with gusto but operate exclusively in pesos and face the same headwinds brick and mortar retailers face everywhere: soaring rents and fierce competition, both online and offline.

      Mexico however is pretty safe: at least the peso is not the Turkish lira…

  9. DR DOOM says:

    Mexico would be wise to heed the warning of the great Nobel economist Paul krugman.The dollar is backed up with men with guns.

  10. Jack says:

    Thank You Nick , great work!

    “In Mexico’s treasury market, all primary market operations, such as weekly auctions and special auctions, are susceptible to collusion”

    On the above one could draw the same conclusion in regards to the US financial markets as well as the Japanese and European !

    The degree of market manipulation by these market facilitator “ an unfortunate description “ is mind boggling.

    Until we’re wise enough to scrap the power of these institutions to play with the livelihood of millions, we’ll be doomed to an early Economic quagmire the like of which our ancestors have never seen.

    • Rob says:

      Quite so. I am convinced that the same process of rigging occurs throughout the so called developed countries as well. All coordinated by the Bank of International Settlements unifying the fraud at the center. It is a great shame and absolutely ridiculous that these bonds continue to be bought at all. If interest rate minus inflation rate results in a real gain of anything less than 5% then there are surely better investments in the world. Unfortunately it seems many pension funds are legislated to have to keep buying in these manipulated, so-called markets. Investors should withdraw en-masse. Witness Russia with it’s 8% possible on bank deposits. This also serves to keep companies there healthy as they have to pay real interest and exceed that hurdle on any debt they take on.

  11. Lisa_Hooker says:

    The three rules of thumb from the Honor Code of the US West Point Military Academy. A self-policing system system limited to young folks who have not yet learned to be crooked.

    1) Does this action attempt to deceive anyone or allow anyone to be deceived?

    2) Does this action gain or allow the gain of privilege or advantage to which I or someone else would not otherwise be entitled?

    3) Would I be dissatisfied by the outcome if I were on the receiving end of this action?

    Violation can result in sanctions or expulsion. Unfortunately banks and brokers apparently have no honor code, enforceable or not.

    • Xabier says:

      Interesting code. Reminds me of the experience of the father of an Austrian friend, conscripted into WW2 at 19.

      He’d been brought up to hate Germans, especially Prussians.

      But once in the army, he found the Prussian officers to be always true to their word and just in their decisions.

      Unfortunately, all in the wrong cause, of course….

  12. Keith says:

    Remember the name Sergio Lopez, if history is a guide his life expectancy is not high.

  13. Mean Chicken says:

    Just drain the swamp, already. For the good of humanity, if not the rule of law.

    This has been allowed to progress far too long!

  14. Unamused says:

    Would would the world look like if it were run by crooks?

    What is it going to look like?

    Wake me up when somebody goes to jail.

Comments are closed.