Yet Another Global Banking Scandal

Just when we thought that the global banking industry couldn’t possibly produce another financial scandal, guess what happened last week?

Yes! Yet another scandal emerged from Wall Street, according to the Wall Street Journal. Or perhaps we should refer to it as a potential scandal, given that the federal government has only begun to launch its investigations.

This time around, the Fraud Section of the United States Justice Department and the Commodity Futures Trading Commission are looking into allegations that the banks manipulated (or “rigged”) their sales of government Treasury Bonds. The banks help the federal government sell its debt securities in order to finance its deficits.

If proven true, would this represent a new and unusual type of illegal activity? Not really. In fact, the accusations represent a somewhat archaic and musty version of Wall Street brazenness.

That’s because the very first banking scandal in American history involved the manipulation of debt securities that were issued by the United States Treasury. In 1792, a former Treasury official named William Duer and his accomplices drove up the prices of the government bonds that were issued to help refinance the loans that were first incurred during the American Revolution.

Duer briefly became wealthy as he drove up the valuations of the securities, but the inevitable subsequent market collapse (known to history as the Panic of 1792) drove him into bankruptcy. He spent years in a debtor’s prison, and eventually died there.

Alexander Hamilton, America’s first Treasury Secretary, led the government’s effort to quell the panic. But fear of the future damage that might be wrought by further financial manipulations compelled two dozen major Wall Street brokers to establish a set of rules for regulating market behavior. This contract, known as the Buttonwood Agreement, served as the founding document of the New York Stock Exchange.

So if you’re concerned about the federal government’s ability to investigate and decipher innovative criminal financial activities in this new age of derivatives and flash crashes, you need not worry about the latest global banking scandal. There is actually nothing innovative at all about rigging the Treasury bond market, a scheme that was first hatched 223 years ago.