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Steps Must Be Taken to Halt Market Rigging

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"A great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money."

Journalist Matt Taibbi's memorable description of Goldman Sachs in his 2007 Rolling Stone profile remains one of the most abiding and resonant descriptions of greed in this age of financial crisis, not least because each month - sometimes each week - brings fresh stories of jaw-dropping avarice among the institutions of Wall Street and the City.

Each one brings new outrage, not just because the taxpayer is to all intents and purpose the lender of last resort. We are also the ones being financially hurt and there seems to be little that government and legislation can do. In effect, we've had our clothes taken from us by the very people that caused winter - and could do so again. It is the very definition of moral hazard and it is our vulnerability to it that breeds anger.

It seems that these Teflon Dons of the financial markets can't even be properly prosecuted when they do break the law. They are left free to launder money for drugs cartels, terrorist organisations and so-called 'rogue states'. In 2010, some two years after the bankruptcy of Lehman Brothers, some of the biggest financial names in the world - Citi, Goldman Sachs, JPMorgan Chase and Bank of America - were cited for repeat violations of defrauding clients and markets.

In recent months, there have been new allegations against some of our biggest companies, this time involving market rigging. In June, Barclays was fined £290m for deliberately distorting the LIBOR rate used as a base rate for a range of financial transaction. While the fine sounds huge, it should be remembered that Barclays announced underlying, pre-tax profits of £4.2bn for the first half of 2012 (an increase of 13% on the same period last year) and has also had to set aside £300m for mis-selling PPI. Several other banks remain under investigation by authorities in the UK, EU and US, and presumably await a similar fate should it be shown they too were complicit.

And just last week, Seth Freedman, who works for ICIS Heren, a gas price benchmarker, reported suspect trading on 28 September, the end of the gas industry's financial year and the date used to set prices for the forthcoming period. His allegations of inflated prices are now being investigated by the Financial Services Authority and Ofgem.

Leaving aside the alleged and unresolved illegalities, what we are witnessing is an ongoing transfer of wealth upwards, often from those who cannot afford it to those who do not deserve it. It cannot go on forever, and steps need to be taken now to stop this flow.

In this, the Welsh Government can and should lead. It could and should coordinate concerted legal action by the Welsh public sector against the banks and energy companies, to recoup financial losses incurred through market manipulation. If done successfully, it could pave the way for successful action by Welsh consumers and a playing field levelled to the benefit of customers.

At present, any fine paid as punishment for market rigging does not benefit the taxpayer or the consumer. Barclays' fine was paid to the Financial Services Authority, which is funded by the financial services sector through a levy. The monies from the fine will be used to lower the levy for next year, so Barclays will recoup part of what it has paid. No benefit will accrue directly to those affected by Barclays' action. Similarly, energy minister Ed Davey has already confirmed to MPs that any fines resulting as a consequence of Mr Freedman's allegations will be paid to the energy regulator Ofgem and not to energy consumers, as suggested changes to this process won't be introduced in time.

Welsh public bodies could have lost money through LIBOR misreporting in a number of ways, according to public services law experts Bevan Brittan:

"Financial swaps at the close of many infrastructure deals will be benchmarked on LIBOR. Many local authorities will have become involved in PFI or other funding arrangements. When the financial swap was made, it is likely that it will have been indexed to the LIBOR, thus potentially suffering an indirect loss. Many local authorities have short-term cash balances which they will lend to banks and other financial institutions, sometimes just overnight. The interest rates for such short term lending are normally influenced by LIBOR."

Losses to individual consumers through rate-rigging would come in two basic categories:
• Losses by borrowers: some mortgages are directly linked to LIBOR, such as buy-to-let or poor credit history loans, while short-term fixed rate loans are also influenced by LIBOR. These losses would have been incurred during periods when banks pushed rates higher than they need have been;
• Losses by investors: when the banks pushed rates down as they did in the aftermath of the crisis then savers and investors would have received lower returns.

Losses from energy market manipulations would come in the form of artificially inflated bills. Providers are already being accused of adding an additional £753 million to winter fuel bills in recent weeks, with an unprecedented one-in-four households put into fuel poverty through spending over 10% of their income on fuel. In Wales the figures are starker again with an estimated one in three households in fuel poverty according to Consumer Focus Wales. In 'off-gas' regions, this figure is higher again with an estimated two-fifths of Welsh households in fuel poverty. And Barclays has already been fined for electricity market manipulation this year in the US.

In the United States, the City of Baltimore has been leading a class action against sixteen US and UK banks since June 2011 - preceding the Barclays settlement and in spite of the fact that the investigation into the remaining banks is continuing.

Class action is not so prevalent in the England and Wales legal system but there are notable examples. They were used, for example, in the successful NACODS union compensation cases, contested by the then Westminster Labour Government, for former colliery workers with Vibration White Finger in 1997 and for those with chest disease in 1998. Just last month NACODS won a case for compensation taken out on behalf of former workers of Phurnacite plant at Abercwmboi, Rhondda Cynon Taf. So-called Group Litigation Orders are made in these cases where plaintiffs opt in to a register to record claims. Since group litigants are liable to pay opposing costs it is unlikely that ordinary members of the public will want to bring test cases. But successful litigation by the Welsh public sector will set a precedent for further action on their behalf.

It's an idea that deserves further exploration by the Welsh Government and its civil servants. For decades, we have been told that competitiveness among our utilities is crucial (and banking is a utility), in order to benefit us as consumers. The past few years have shown this to be patently not the case. We have witnessed the amalgamation and growth of an ever-decreasing number of companies and suppliers who are too powerful to be anything but indifferent to our concerns and calls from politicians - and now it is being suggested that they are prepared to collude illegally to rinse us for more money.

In effect, we have again what Margaret Thatcher and her neoliberal colleagues sought to reform, only with a far higher cost to the customer. If this Welsh Government is serious about working in the interests of people living here, it needs to explore new ideas to keep this unpleasant breed of capitalism from our doors.