Tag Archives: Libor

So Tom Hayes Is Guilty. Who Else Is?

By James Kwak

Tom Hayes was a trader at UBS and Citigroup who was very, very good … at rigging LIBOR. This week, he was convicted in the United Kingdom of conspiring to manipulate the benchmark interest rate and sentenced to fourteen years in prison.

There’s little doubt that Hayes was guilty as charged. In his defense, he argued that he had no idea what he was doing was wrong. But contrary to what some armchair attorneys think, that doesn’t matter. In general, the famous mens rea (guilty mind) requirement isn’t that you know you are breaking the law at the time; it suffices if (a) you know you are doing a thing and (b) that thing is against the law. There’s no question that Hayes knew he was conspiring to rig LIBOR, and that’s enough for the prosecution.

And on one level, it’s good that he was convicted and got a stiff sentence. That prospect should help deter criminal activity of all kinds by bankers and traders who have historically been shielded by prosecutors’ unwillingness to go after individual defendants (except in insider trading cases).

But … Tom Hayes as the evil architect of the LIBOR-fixing scheme? Not so much.

As in so many cases, there are only two logical possibilities. Either Tom Hayes’s bosses at UBS and Citi knew what he was doing, in which case they are guilty as well. Or they didn’t know about a widespread conspiracy being conducted across the electronic communications systems of some of the most technologically sophisticated companies in the world, in which case they are recklessly incompetent.

When it comes to Tom Hayes, there is a lot of evidence for the former. Apparently, when he was being recruited from UBS in 2010, he boasted to a Citi executive about how he rigged LIBOR. Back in 2007, that same executive had said in an internal email, “We will continue to pressure the brokers to talk [LIBOR] down and generally press lower” — when asked by a colleague to help lower Citi’s own LIBOR submissions. When Citi attempted to hire Hayes, his boss at UBS tried to arrange a large bonus for him to stay, citing his “strong connections with Libor setters in London.”

It’s hard to believe that senior executives at UBS and Citi didn’t know that LIBOR was being fixed. If they weren’t in on it directly, it’s likely that they turned a blind eye — precisely because they knew that it was good for the bottom line. Hayes himself generated $260 million in profits for UBS in just three years.

When people make that kind of money for the bank — in markets that are supposed to be highly competitive — executives don’t want to know too much about what they’re doing.

As time goes by, it gets harder and harder to figure out how much of the largest banks’ profits is due to their legitimate operations and how much is due to their tolerance of illegal activity (money laundering, rate fixing, bribery, etc.). Maybe bank executives are so inept when it comes to internal wrongdoing because they like things that way. They want their employees pushing the limits of the law to maximize profits. (“If you ain’t cheating, you ain’t trying.”) And when people like Tom Hayes get caught, the bank itself gets away with a slap on the wrist because it’s too big to jail — and the CEO gets away by claiming ignorance. It’s a win-win strategy.

[Also posted on Medium.]

The Federal Reserve And The Libor Scandal

By Simon Johnson

On June 1, 2008, Timothy F. Geithner – then president of the Federal Reserve Bank of New York – sent an e-mail to Mervyn A. King and Paul Tucker, then respectively governor and executive director of markets at the Bank of England. In his note, Mr. Geithner transmitted recommendations (dated May 27, 2008) from the New York Fed’s “Markets and Research and Statistics Groups” regarding “Recommendations for Enhancing the Credibility of Libor,” the London Interbank Offered Rate.

The recommendations accurately summarized the problems with procedures surrounding the construction of Libor – the most important reference interest rate in the world – and proposed some sensible alternative approaches.

This New York Fed memo stands out as a model of clear thinking about the deep governance problems that allowed Libor to become rigged.

At the same time, the timing and content of the memo raises troubling questions regarding the Fed’s own involvement in the Libor scandal – both then and now. Continue reading

The Market Has Spoken – And It Is Rigged

By Simon Johnson

In the aftermath of the Barclays rate-fixing scandal, the most surprising reaction has been from people in the financial sector who fully understand the awfulness of what has happened. Rather than seeing this as an issue of law and order, some well-informed people have been drawn toward arguments that excuse or justify the behavior of the Barclays employees.

This is a big mistake, in terms of both the economics at stake and the likely political impact.

The behavior at Barclays has all the hallmarks of fraud, pure and simple – intentional deception for personal gain, causing significant damage to others. Continue reading

Lie-More As A Business Model

By Simon Johnson.  For more discussion of these issues, listen to NPR’s All Things Considered, July 7, 2012.

On Monday, Bob Diamond – the CEO of Barclays, one of the largest banks in the world – was supposedly the indispensable man, with his supporters claiming he was the only person who could see that global megabank through a growing scandal.  On Tuesday morning Mr. Diamond resigned and the stock market barely blinked – in fact, Barclays’ stock was up 0.3 percent.  As Charles de Gaulle supposedly remarked, “the cemeteries are full of indispensable men.”

Mr. Diamond’s fall was spectacular and complete.  It was also entirely appropriate.

Dennis Kelleher of Better Markets – a financial reform advocacy group – summarized the situation nicely in an interview with the BBC World Service on Tuesday.  The controversy that brought down Mr. Diamond had to do with deliberate and now acknowledged deception by Barclays’ staff with regard to the data they reported for Libor – the London Interbank Offered Rate (with the abbreviation pronounced Lie-Bore).  Mr. Kelleher was blunt: the issue in question is “Lie More” not Libor.  (See also this post on his blog, making the point that this impacts credit transactions with a face value of at least $800 trillion.) Continue reading