Weak systems beget more collusion or, more precisely, corruption, writes Victor Kgomoeswana.
Just why are we rattled by the recommendations of the Competition Commission that the Competition Tribunal should prosecute 17 banks for allegedly colluding to manipulate the exchange rate of the rand?
This is a mere symptom of a system that has given too much leeway to banks. It has happened everywhere else in the world, it is still happening now and it will happen again.
The commission statement said: “From at least 2007, the respondents had a general agreement to collude on prices for bids, offers and bid-offer spreads for the spot trades in relation to currency trading involving the US dollar/rand currency pair”.
2007 was followed a year later by the global credit crunch; and all this time we thought our banks were solid.
This suggests that banks fixed the price of currencies to score big on translation gains (our loss) in their international dealings.
Translation gain or loss is a profit or loss incurred by a business due to fluctuations in the value of its currency, when such a currency is expressed in terms of another.
Since we pay for oil imports, electronic and other goods in foreign currencies, we paid dearly as a result, due to imported inflation and higher interest rates in the name of inflation targeting.
Let us consider how much the value of major currencies can change in one day to appreciate the gravity of the commission’s findings.
At 5pm on Friday, the dollar cost R13.0327, having opened at R13.0323.
The difference in eight hours was a measly 0.003%. Look closer, though.
The same dollar fluctuated between a low of R12.9698 and a high of R13.1551 during the course of trade on Friday. Buying it at R12.9698 to sell at R13.1551 would have made anyone 1.4% richer, instantly.
Conversely, it would have left anyone who bought at R13.1551 out of pocket by 0.9% if they sold at the 5pm price; all in a matter of minutes.
That is how markets work; for every smart seller who makes a profit, there must be another hoping to make even more when they sell later.
Anyone who finds calculations of this nature dizzying or tiring – like me – is precisely the kind of sucker dishonest forex traders and their sponsors prey on.
Adding these 0.9% gains per dollar sold has made some traders filthy rich.
Good for them if they are honest; but the commission’s findings are about those who were not.
Someone at a bank’s forex counter, with a bit of inside information, could delay my purchase by a few minutes if they knew that the dollar would cost me more later.
To accomplish this on a substantively commercial scale, however, complex networks of the powerful and algorithms are required.
Far too many people are going to be implicated in this, both public servants and private sector bigwigs.
This is but one example of how since 2007 you and I could have suffered massive financial losses for knowing little of the goings-on in those glass buildings housing our trusted bankers.
If the investigation by the tribunal finds the banks guilty, it would set off a chain reaction of justifiable protests, class actions and settlements.
Most of all, it would serve us right for having left the banks to their own anti-competitive devices; such as permitting them to charge the same price for money in lending, the so-called prime lending rate.
I have yet to comprehend why banks can openly charge the same margin for lending, and still claim to be part of a free market system.
We have always known about this anti-competitive practice, and many others, without taking action.
Weak systems beget more collusion or, more precisely, corruption.
If 2008 – and now this – cannot convince us our wonderful private sector needs better governance and regulation, nothing will. This case deserves our full attention, untainted by suspicions of whoever stands to benefit politically from what outcome.
Kgomoeswana is author of Africa is Open for Business. He also hosts Power Hour from Monday to Thursday on Power FM. Twitter Handle: @VictorAfrica