More Banks Sued for Bond Rigging

A lawsuit filed on behalf of a pension fund known as Boston Retirement System alleges that a group of five banks are guilty of rigging so-called agency bonds—securities offered by government entities and supranational institutions—in order to profit off of the unsuspecting investors.

Trading SSA Bonds

The broad category of securities in question are known as SSAs: supranational, sub-sovereign, and agency bonds. In other words, they are forms of debt issued by government-sponsored entities, government agencies, and international development organizations (supranational groups like the World Bank, for instance). The global market for these securities adds up to at least $9 trillion—and perhaps as high as $15 trillion, depending on how broad the SSA bond category is defined.

The wrongdoing the five banks (Bank of America, Credit Suisse, Credit Agricole, Deutsche Bank, and Nomura Holdings) are accused of is essentially price-fixing. By colluding with one another and sharing information about the buy and sell order of their customers, traders at these banks were able to inflate the bid-ask spreads for SSAs they were marketing to investors (in this case, to the plaintiff Boston Retirement System). While a typical spread in the SSA market is about 1.5 basis points (0.015%), Boston Retirement was seeing bid-ask spreads as high as 7 bp above the typical.

One upshot of SSA bonds is that they are considered relatively safe and reliable due to the government guarantee they carry, generally giving them solid credit ratings. With a multi-trillion-dollar market, as well, they are also considered very liquid.

More of the Same

Obviously, this is far from the first time that major banks are accused of unfairly handling investors, nor is it the first time banks have allegedly manipulated benchmark prices or rates. In the wake of the financial crisis, big banks paid steep fines for such unethical and damaging treatment of investors; further, the Libor scandal involved rigging the all-important interest rate.

The fact is that due to their expertise in the field and their enormously deep pockets, these big banks are in the position to engage in such nefarious behavior. With its lawsuit, Boston Retirement System is now taking up the issue with regulators in the U.S. and the U.K. The complaint filed has a similar character to successful lawsuits charging banks with manipulating currency prices.

Under current antitrust laws in the U.S., the five banks named as defendants (as well as four traders who work for those banks) could face triple damages if it is proven that they engaged in illicit price-fixing and thereby harmed investors.

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.