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Speaker 1: Federal prosecutors have subpoenaed several big banks as part of

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Speaker 1: criminal investigations into possible manipulation of the fourteen trillion dollar

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Speaker 1: US treasuries market. Ubs BNP, Power, BAH and the Royal

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Speaker 1: Bank of Scotland got subpoenas last month, according to people

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Speaker 1: familiar with the matter. The Johnstice Department has been examining

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Speaker 1: the U S treasuries market for about two years, and

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Speaker 1: in twenty fifteen, several lawsuits were viled against the twenty

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Speaker 1: two primary dealers who serve as the backbone of treasury trading,

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Speaker 1: alleging that traders at these banks have colluded to rig

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Speaker 1: bond auctions since about two thousand seven. Our guests are

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Speaker 1: Bloomberg News reporter Tom Schoenberg and Robert Hockett, a professor

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Speaker 1: at Cornell Law School. Bob, perhaps you can start with

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Speaker 1: a brief explanation about what are called when issued securities

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Speaker 1: and the auction process. Sure, so, when issued securities are

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Speaker 1: you can sort of think of them as a kind

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Speaker 1: of futures contract for US treasuries. The idea here is

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Speaker 1: that the Treasury typically what happens does Congress authorizes uh

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Speaker 1: and then the Treasury announces an intention to issue an

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Speaker 1: additional issuance of treasury securities, but before they actually issued them,

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Speaker 1: they announced that they intend to do so, and sometimes

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Speaker 1: not as much gets issued as is initially planned. So

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Speaker 1: what happens the market essentially adjusts to that particular institutional

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Speaker 1: fact by offering essentially a kind of forward or futures

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Speaker 1: contract with respect those treasuries, whereby somebody who wishes to

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Speaker 1: buy treasuries before they have officially been issued, but after

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Speaker 1: knowing or hearing that they're going to be issued UH

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Speaker 1: in contract effectively to buy basically for a right to

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Speaker 1: purchase the securities from a dealer bank once they in

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Speaker 1: fact are issued UH. And the advantage of this particular

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Speaker 1: institution that of the win issued market is basically two fold.

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Speaker 1: Um the first, as it gives people it gets the

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Speaker 1: Treasury Department itself as well as others are kind of

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Speaker 1: heads up as to how much demand there might be

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Speaker 1: for the issuance that is being contemplated. And secondly, and relatedly,

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Speaker 1: then it provides a certain degree of stability to that

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Speaker 1: market because people have a bit more certainty, in effect,

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Speaker 1: as to what prices of those securities are likely to

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Speaker 1: be once they are issued because of course, the wind

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Speaker 1: issued market serves as a kind of gauge of anticipated demand. Tom,

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Speaker 1: you're the one who wrote the story yesterday about these subpoenas.

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Speaker 1: Tell us what we know about what federal investigators are

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Speaker 1: looking at? Sure, well, you know, first came out a

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Speaker 1: couple of years ago that they were starting to look

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Speaker 1: into this market, and that king kind of shortly after

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Speaker 1: the Justice Department had settled with a number of banks

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Speaker 1: in a collusion case regarding uh, the currency markets, where

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Speaker 1: they were also looking at trading desks there. Uh. The

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Speaker 1: subpoenas now, uh, you kind of show that this investigation

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Speaker 1: uh is beginning to ramp up, with the Department likely

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Speaker 1: sort of settling on a specific sort of legal theory,

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Speaker 1: uh that they want to they want to dig further into, Bob, Now,

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Speaker 1: correct me if I'm wrong on this, But it seems

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Speaker 1: that in order to decide that there was trader to

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Speaker 1: trader communication at least in one of the lawsuits filed,

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Speaker 1: they looked back at auction data between and then decided

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Speaker 1: the chance of what was happening was lower than one percent.

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Speaker 1: Explain what they did. Yeah, So so this is the

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Speaker 1: the idea that it's basically, Um, the trading I'm sorry,

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Speaker 1: the the the dealer bank that enters into these particular

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Speaker 1: contracts with people who would like to buy the treasuries

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Speaker 1: once they're actually issued, of course, charge a price for them. Right,

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Speaker 1: there's there's a there's a cost involve um and in

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Speaker 1: a sense, um, you've got in effect them that the

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Speaker 1: pricing that occurs in the whin issued market, uh is

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Speaker 1: it's not intended this way, but it functions as a

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Speaker 1: kind of vets in a way on what the actual

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Speaker 1: treasury security prices will be once they're actually issued out. Ordinarily,

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Speaker 1: what that means then if it's a truly efficient market,

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Speaker 1: and if there's no sort of illusion going on, in

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Speaker 1: about half the time the dealer bank that is selling

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Speaker 1: the win issued rights ought to end up sort of

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Speaker 1: losing on the difference between the price of the win

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Speaker 1: issued security on the one hand and then the actual

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Speaker 1: treasury security on the other hand. And then about half

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Speaker 1: the time the dealer banks should win on the on

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Speaker 1: that particular spread. In other words, about half the time

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Speaker 1: the win issued securities should sell to those who want

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Speaker 1: to buy the treasuries themselves at a lower price than

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Speaker 1: the treasuries themselves ultimately end up selling for and about

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Speaker 1: half the time they should sell at a higher price. Now,

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Speaker 1: what this tension fund in Cleveland and others have alleged

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Speaker 1: is that, in fact, much more than half the time

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Speaker 1: the treasuries actually sell for less than the winns than

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Speaker 1: the win issued futurist type contracts on them, which basically

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Speaker 1: means the dealer banks are basically are recouping a significant

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Speaker 1: profit much often, much more often than they're making a laws.

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Speaker 1: And that suggests at least a sort of primate basic

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Speaker 1: case for some kind of collusions being afoot Tom just

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Speaker 1: about thirty seconds, but we can pick it up later.

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Speaker 1: Is it clear that that investigators are looking at collusion

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Speaker 1: among banks or is it possible that they're just talking

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Speaker 1: about the frauding company customers within a bank right this planet?

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Speaker 1: Is still a bit unclear, uh, Which, you know, if

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Speaker 1: they're pursuing a fraud theory uh or or an antitrust theory,

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Speaker 1: one would sort of each you know, if it's an

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Speaker 1: antitrust theory that they're looking at collusion fraud, they're looking

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Speaker 1: at some type of front running. We're talking about federal prosecutors,

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Speaker 1: co cuters, subpoena and several banks as part of criminal

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Speaker 1: investigations into possible manipulation of the fourteen trillion dollar US

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Speaker 1: treasury market. There have been several lawsuits filed against the

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Speaker 1: twenty two primary dealers who serve as the backbone of

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Speaker 1: treasury trading, and the analysis in those suits is similar

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Speaker 1: to recent investigations into whether banks coordinated to manipulate interbank

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Speaker 1: interest rates and aligned foreign exchange trades, which resulted in

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Speaker 1: billions of dollars and penalties. Our guests are Bloomberg News

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Speaker 1: reporter Tom Schoenberg and Robert Hockett, a professor at Cornell

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Speaker 1: Law School. Bob, if this investigation goes forward and we

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Speaker 1: have more fines and perhaps some admissions by the banks,

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Speaker 1: what kind of impact does this have on the confidence

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Speaker 1: in the treasury market? Yeah? I think, uh, clearly a

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Speaker 1: negative one. Uh. And that that makes this case I

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Speaker 1: think particularly important. UM. I think there are a couple

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Speaker 1: of things that especially worth especially worth noting here. I think, um, first, um,

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Speaker 1: the two cases that you mentioned before, and the inter

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Speaker 1: bank lending case, the foreign exchange rate case, also precious

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Speaker 1: medals in commodities cases as well. All three of those

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Speaker 1: have two factors I think in common with the current

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Speaker 1: case that makes them all four quite important. The earst

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Speaker 1: is that they all involved what I've written about elsewhere

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Speaker 1: uh and called a cities or systemically important prices and indicries.

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Speaker 1: That as to say, these are all essentially rates or

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Speaker 1: prices that service benchmarks in many other financial decisions that

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Speaker 1: people make, so they have a kind of a bar

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Speaker 1: ranging systemic significance. The second thing that they have in

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Speaker 1: common is that they all essentially involved very opaque over

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Speaker 1: the counter markets without a lot of participants, which means

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Speaker 1: that manipulation is much easier to do than you would

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Speaker 1: see in the case of a public exchange. Um. So,

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Speaker 1: the fact that this this same kind of problem has

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Speaker 1: been recurring over the earth and sort of being noted

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Speaker 1: over the last several years in a multiplicity of these

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Speaker 1: cases is itself, I think important and significant because it's

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Speaker 1: really out to the shape confidence in all markets that

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Speaker 1: have those particular attributes. But the second thing gets more

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Speaker 1: directly to your question, and that is, you know, the treasuries.

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Speaker 1: The treasuries, I'm sorry market is arguably the most important

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Speaker 1: of them all right. It's by far the world's largest

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Speaker 1: deep market, as you know, of treasuries are used as

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Speaker 1: a sort of a benchmark, is a kind of a

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Speaker 1: risk reasset, and many pricing models that are used to

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Speaker 1: price other sorces of securities. It's the ultimate and so

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Speaker 1: called safe assets that all the markets tend to rely upon,

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Speaker 1: and of course it keeps us borrowing costs very cheap

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Speaker 1: as well when everybody wants treasuries. So anything that shakes

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Speaker 1: confidence in the integrity of this of the of the

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Speaker 1: treasuries market is especially important, and especially apps I think

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Speaker 1: to concern the Justice Department and the government more broadly, Tom,

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Speaker 1: I want to ask you how those other investigations that

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Speaker 1: Bob was talking about, things like foreign exchange and currency manipulation,

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Speaker 1: how that might affect this investigation. At some of the

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Speaker 1: same companies, some of them are under very call cooperation

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Speaker 1: agreements with the Justice Department. What's the connection between those?

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Speaker 1: Sure you have you have a number of banks that

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Speaker 1: are you know, currently under you know, probation terms with

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Speaker 1: the with the government, UBS being one of those banks,

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Speaker 1: which is also one of the bank's subpoened. You have

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Speaker 1: their banks that are under you know, deferred prosecution agreements

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Speaker 1: with the government that require uh you know, these all

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Speaker 1: certain requirements commit no sort of additional crimes, cooperate with

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Speaker 1: any government investigations related to that kind of conduct, or

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Speaker 1: you know even sort of additional conduct. And so it's

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Speaker 1: very you know, always comes into play with these banks

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Speaker 1: when they kind of pick up investigation after investigation, and

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Speaker 1: then also really uh kind of you know, moves to

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Speaker 1: the Justice Department in terms of how they want to

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Speaker 1: deal with that when they start running into cases where

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Speaker 1: you potentially have a repeat offender. Um. You know we

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Speaker 1: saw uh in ubs having to plead guilty to libe

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Speaker 1: or uh manipulation after initially uh you know, getting an

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Speaker 1: agreement where they weren't going to be prosecuted for it

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Speaker 1: because of later conduct found in the currency manipulation case. Uh.

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Speaker 1: You know, the Justice Department obviously understands it that. You know,

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Speaker 1: if the banks are are kind of installing good compliance

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Speaker 1: and starting to try and take care of some of

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Speaker 1: these desks where there may have been historical sort of

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Speaker 1: you know, uh misconduct, Uh, they'll take that into some

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Speaker 1: type of account. But if they are feeling that the

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Speaker 1: banks are not assisting or abiding by those agreements, they

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Speaker 1: can come in and sort of pull an earlier agreement.

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Speaker 1: Next thing, you know, the bank is not just uh

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Speaker 1: having to pay fines or or enter into some type

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Speaker 1: of you know, plea guilty plea with the government for uh,

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Speaker 1: you know, one conduct. They're now having to do it

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Speaker 1: for earlier stuff they thought they were you know, out

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Speaker 1: of Bob speaking of the Justice Department, has anything changed

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Speaker 1: in this area with the Trump administration? Uh? Not so far, right.

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Speaker 1: I mean there's a lot of speculation, of course, is

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Speaker 1: to you know, how things might change when it comes

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Speaker 1: to finance regulation more broadly, uh and sort of pending

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Speaker 1: prosecutions or investigations more more narrowly. Um. You know, some

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Speaker 1: keep will think, given certain things that Mr Trump has

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Speaker 1: has said, and certain things that Mr Manution has said

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Speaker 1: out of Treasury that um, you know, maybe this is

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Speaker 1: going to be you know, not your mother's and fathers

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Speaker 1: Republican administration where finance is concerned, that they might actually

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Speaker 1: be a little bit tougher on on finance than or

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Speaker 1: on the financial markets or financial crime perpetrators than have

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Speaker 1: other Republican administrations. On the other hand, of course, you

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Speaker 1: get lots of people noting the opposite that there are

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Speaker 1: various sounds emanating out of the administration and certainly had

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Speaker 1: of Republicans in Congress that make it sound as though, well,

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Speaker 1: you know, we're going to sort of be easing up

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Speaker 1: on on on Wall Street. Um in comparison say to

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Speaker 1: the Obama administration U UM. And and again I think

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Speaker 1: it's still kind of up in the air what precisely

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Speaker 1: might happen. I could kind of go either way, but

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Speaker 1: certainly the fact that justice is pursuing this particular matter, now,

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Speaker 1: I mean, we gonna have to stop you. I'm going

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Speaker 1: to stop you there, Bob. That's Robert Hockett, professor at

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Speaker 1: Cornell Law School and Bloomberg News reporter of Tom Schoenberg.

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Speaker 1: Thank you both,