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Goldman Sachs (NYSE: GS) Currency Manipulation

Written By Brian Hicks

Posted November 8, 2013

Up until recently, Goldman Sachs (NYSE: GS) was one of the only major banks not dealing with a manipulation investigation.

That’s all over now. It has joined the ranks of the many banks under the suspicion that they have been manipulating rates or involved in other unscrupulous activities.

goldman buildingGoldman Sachs joins the investigations party with JPMorgan Chase (NYSE: JPM), Citigroup (NYSE: C), Britain-based Barclays (NYSE: BCS), Switzerland’s UBS (NYSE: UBS), Deutsche Bank (NYSE: DB), and Royal Bank of Scotland (NYSE: RBS).

Every bank has its own slew of suspicious activities. Goldman Sachs Group Inc. has been placed under scrutiny over possible manipulation of foreign-exchange rates. On top of that, the bank is also being investigated for messing with commodities, options trading, and technology systems and controls.

It’s not looking good for the securities giant. The more people look into the activities of Goldman Sachs, the more it looks as though it may be justified.

Back in June, Bloomberg reported that currency dealers came forward with information about relaying information about their positions. These were done across instant messages, so it’s likely there is a record of those conversations somewhere.

The messages reveal the bank may have been executing its own trades before its clients, which would manipulate benchmark rates for WM/Reuters, as it pushes trades before or during the 60 second window when the benchmarks are set.

The media reports traders are coming forward saying they conspired with other banks to manipulate foreign exchange rates. They used inside information about clients’ exchange transactions.

While this may be just talk, it’s what is leading suspicion into a full-fledged investigation. If the United States Department of Justice and Commodity Futures Trading Commission can find proof, what the traders are saying could be used as evidence.

What’s So Special About WM/Reuters Rates?

To understand the seriousness of this possible manipulation, you need to understand the importance of WM/Reuters rates.

Pension funds and money managers pay foreign exchange rates, and the amount they pay is determined by the WM/Reuters rates. Messing with those rates means altering the amount of money people have to pay. Those rates are also used by index providers FTSE Group and MSCI Inc. These determine the index valuations and affect currencies values.

Even if there is just a tiny nudge in the WM/Reuters rates, it could mean clients lose a lot if the move goes against them. Goldman Sachs knows this, but they were in it for themselves, not for their clients.

Along with the possible rate manipulation, Goldman is also under suspicion for its commodities trading. Users in the metal industry are accusing the bank of increasing the price of aluminum without good reason. Like with all other accusations, Goldman denies it was ever involved in the manipulation of rates or prices.

Where Goldman Will Go from Here

Goldman Sachs just revealed the news of its investigation Thursday as it discussed its poor trading performance. The banks is cooperating with the investigation, which is what it should be doing, as it could be at risk of losing a lot of money if its potential manipulation comes up as truth.

Many investors are wondering what all of these investigations mean for them. The biggest concern is the foreign exchange rates and whether investors have been robbed of money because of the alleged manipulation. It’s likely this has happened, and once more information comes out, there will more details into what exactly was done and how much the rates were changed.

The good news is that because of the investigation, if there has been manipulation, it should be over with. That means investors can invest in currencies knowing Goldman Sachs isn’t currently tipping the scales in its favor. That’s the biggest advantage right now.

Investing in foreign currencies can also be a good idea right now as the dollar is devalued. The Fed isn’t backing out of the stimulus anytime soon, so that will depress the dollar’s value, which will push up foreign currency values.

While investors may have gotten the short end of the stick, if Goldman has been conducting shady business, investors can now get what they deserve in a market that is favoring foreign currency.

 

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