The article is light on the description of what actually happened but there is a section about the impact of his action and whether he relised the impact.
One thing to understand is that there was not one but two distinct manipulations of Libor.
The first is the one this article refers to, which is before the financial crisis, swap traders influencing the libor submitters to move their contribution to the fixing by a tiny amount, often a couple of basis points, to fit the massive future positions they were sitting on. Completely unethical and illegal but unlikely to have any noticable effect on the market, kind of like stealing a penny from a million bank accounts. It’s still stealing, but the impact on the market is limited.
The second manipulation was of a different nature. It is at the height of the financial crisis, when banks were failing as a result of bank runs every week, libor submitters, probably under instruction / tacit consent from their management and regulators, low balled their contribution to the libor fixing to not appear to be struggling to fund themselves (by having a high cost of borrowing) since these contributions were public and investors were trying to infer what bank was next to fail. These low balling were probably in the 50-300 basis point range, ie with a material impact on the wider maket (borrowers should have paid significantly higher interest rates during that period). And this is the one whistle blowers complained to regulators about, falling into deaf ears.
The first, and unquestionably illegal, was what Tom Hayes did i.e. collusion between actors at multiple banks to move Libor. I don't think he should have got the sentence he did but prison was definitely justified.
The second was swaps traders getting their own setters to go in high or low. I'm not at all sure this was illegal. Given that Libor was completely broken at the time, I'm not even sure I'd argue that it was unethical. As there was, essentially, no uncollateralised inter-bank borrowing, any figure was wrong. And, as you say, the effect was minor and not particularly directional.
I think your second point, the systemic low balling of Libor by senior management, is, by far, the most important. It's also the one that has had the least public attention. What is particularly problematic about it is the influence that governments had. Because of the latter, I'm sure that it won't ever be properly investigated.
The article is wrong in a couple of substantial matters. Firstly: "as far as I can tell, he is the only banker currently in jail for crimes committed during the financial crisis." Wrong - the Barclays Swap traders are doing time. @teamJayMerchant is in HMP Wandsworth. Secondly: "the ultimate people who drive behavior at banks are actually the shareholders." I own some banking shares and I wish I didn't. Long experience of working in the banking sector has convinced me that banks are run for the benefit of the senior management. Shareholders, like customers, are just convenient chumps to be gouged at every turn.
Interesting. Have you see "The Big Short"? Towards the end there's some scenes where banks aren't paying out on Credit Default Swaps (I think) even though the mortgages were failing. The movie didn't really touch on why this was happening. Was this caused by the second manipulation that you mentioned?
>To me, that’s a really unhealthy sign, because the thing that would scare some of these bank CEOs is not losing some money or losing their jobs; it’s the prospect of being perp-walked in front of TV cameras in handcuffs, or the prospect of possibly losing your liberty in front of a jury of your peers. That is a terrifying thing. To me, the great missed opportunity of the financial crisis was that prosecutors didn’t do that a single time with a CEO or a top executive of any major financial institution. They might have lost those cases, but at least it would have struck some fear in the hearts of people. That’s just a tremendous missed opportunity, in my opinion.
Ah yes, I love when my government hassles innocent people to make a point to everyone else.
> Ah yes, I love when my government hassles innocent people to make a point to everyone else.
I also love it when some people are just "Too Big To Jail (TM)"
> Those investigations uncovered substantial evidence "that senior bank officials were complicit in the illegal activity."
> On Tuesday, not only did the US Justice Department announce that HSBC would not be criminally prosecuted, but outright claimed that the reason is that they are too important, too instrumental to subject them to such disruptions. In other words, shielding them from the system of criminal sanction to which the rest of us are subject is not for their good, but for our common good.
> The New York Times Editors this morning announced: "It is a dark day for the rule of law." There is, said the NYT editors, "no doubt that the wrongdoing at HSBC was serious and pervasive." But the bank is simply too big, too powerful, too important to prosecute.
I think the implication is that they aren't innocent, but bear responsibility for the activity; either directly, por by setting the culture and governance arrangements.
The book might show how big FinTech houses were behind this but the article is light in that regard. The moments where people feel they can ask inside their own bank 'can guy move the LIBOR just a few thou' and not realise that's an otfense, breaks Chinese walls, breaks bounds.. and then institutionalization sets in...and you're off and running.
Those moments felt to me like 'its not a conspiracy, it's Lowe grade decision making by people who aren't reminded of their obligations' so maybe the book tells it better.
Always a bit of a sad moment, when the journo realised they like their subject. How do you maintain objectivity once you humanize the devil? Gitta Serenyi had that with Albert Speer.
"The mastermind of the LIBOR scandal was a guy named Tom Hayes, a mildly autistic mathematician"
How convenient is to have such people around /s. Developers should learn from stories like this as well -- don't do anything illegal, even though your superiors tell you so, because when shit hits the fan, you will be the one held accountable.
It's unfortunately a much more convenient narrative than blaming the people that actually benefitted the most (i.e., bank CEOs).
"This is part of the reason I love Hayes as a central character for this book — because he’s not your cookie-cutter banker out of central casting. This is a guy who is much happier going home after a day of work and having a bucket of fried chicken and an orange juice and watching Seinfeld reruns than he is going out to Michelin-starred restaurants or a swanky club. To me, his massive social awkwardness — the fact that he would go to a dinner party, and sit next to a stranger, and start talking to her very loudly about his dandruff problem — he had no idea how to behave in normal society."
Political and cultural ostracism has real world consequences. They've found their scapegoat and they're piling on. It's pretty disgusting actually.
I honestly find these two statements hard to reconcile:
Enrich: I do want to make clear that [Hayes] is not an innocent victim here. He is someone who was participating, and he was not acting properly. He was acting illegally, and I think deserves to be punished. I just find it galling that he is alone in being punished.
Also Enrich: This is part of the reason I love Hayes as a central character for this book — because he’s not your cookie-cutter banker out of central casting. This is a guy who is much happier going home after a day of work and having a bucket of fried chicken and an orange juice and watching Seinfeld reruns than he is going out to Michelin-starred restaurants or a swanky club. To me, his massive social awkwardness — the fact that he would go to a dinner party, and sit next to a stranger, and start talking to her very loudly about his dandruff problem — he had no idea how to behave in normal society.
That makes him slightly endearing as a character, I think, but it also kind of helped explain how he stumbled into this. He was just completely unable to pick up on any subtle cues or social boundaries that normally would help moderate someone’s behavior.
So he deserves punishment for doing something bad when he is inherently dependent on others to help him separate the right thing from wrong?
They escape goated this guy. They had an excel file they had a wide range of people fill in their values that went into the LIBOR number. Tom Hayes sent things over email which helped them scape goat him. When Tom Hayes was hired, they trained him how to do this LIBOR rigging process. He did bad things also but he was just a part of a system
Traders, unlike engineers, are paid commensurate with their performance and worth to their employer. He had plenty of freedom in choosing his trades and LIBOR manipulation was to his direct personal financial benefit. Hardly a scapegoat.
What is surprising to me is that LIBOR setting was not based on actual transactions but on the assumptions what I would pay bank X to borrow money. The perceived punishment for lying was laughable too. All around this just invites actors with bad incentives.
I believe as of today LIBOR is set based on actual transactions. But who was the genius who created the original LIBOR? Perhaps it all started as something hacky in the 60s and they could not foresee how important LIBOR would become?
I don't doubt what they did was immoral, but most of the articles I've seen skip over the murky aspect of what exactly was illegal.
Thinking of an absurd parallel, if you had a dinner club and had to say how much you were going to pay before the restaurant was picked, it's hard to see how manipulating your decision to influence the restaurant chosen would be illegal if there wasn't some firm agreement in the process being deterministic or formally defined. And that wouldn't change even if others were making money on the back of the restaurant choice!
What I'd like to see explained is how LIBOR went from an ill-defined process to one where the way some participants set it was no longer legal. What had the participant banks signed up to do /not do which they then failed to do?
Or is the illegality all on the part of those trading on it? (ie insider trading, given that it was based on non-public information)
My bank was involved with the LIBOR scandal but they won't let my wife pay small amounts of cash into my account just in case we're up to something dodgy.
If I temporarily have a large amount of cash in the account then they send me brochures trying to lure me into some premium 'exclusive' club which feels more than slightly greasy.
I would switch banks but it's a lot of hassle. Plus I don't get the sense that any of them would be working for me. They're working for the regulator, or for the forces of darkness, or for someone else.
Early in 2008, on principle, we switched from a 'Too Big To Fail' bank to a credit union. It was a pain, and is occasionally inconvenient, but that pain is outweighed by the satisfaction in reading the headlines and being glad I'm not funding them anymore.
[+] [-] cm2187|8 years ago|reply
One thing to understand is that there was not one but two distinct manipulations of Libor.
The first is the one this article refers to, which is before the financial crisis, swap traders influencing the libor submitters to move their contribution to the fixing by a tiny amount, often a couple of basis points, to fit the massive future positions they were sitting on. Completely unethical and illegal but unlikely to have any noticable effect on the market, kind of like stealing a penny from a million bank accounts. It’s still stealing, but the impact on the market is limited.
The second manipulation was of a different nature. It is at the height of the financial crisis, when banks were failing as a result of bank runs every week, libor submitters, probably under instruction / tacit consent from their management and regulators, low balled their contribution to the libor fixing to not appear to be struggling to fund themselves (by having a high cost of borrowing) since these contributions were public and investors were trying to infer what bank was next to fail. These low balling were probably in the 50-300 basis point range, ie with a material impact on the wider maket (borrowers should have paid significantly higher interest rates during that period). And this is the one whistle blowers complained to regulators about, falling into deaf ears.
[+] [-] lucozade|8 years ago|reply
I'd argue that there were three.
The first, and unquestionably illegal, was what Tom Hayes did i.e. collusion between actors at multiple banks to move Libor. I don't think he should have got the sentence he did but prison was definitely justified.
The second was swaps traders getting their own setters to go in high or low. I'm not at all sure this was illegal. Given that Libor was completely broken at the time, I'm not even sure I'd argue that it was unethical. As there was, essentially, no uncollateralised inter-bank borrowing, any figure was wrong. And, as you say, the effect was minor and not particularly directional.
I think your second point, the systemic low balling of Libor by senior management, is, by far, the most important. It's also the one that has had the least public attention. What is particularly problematic about it is the influence that governments had. Because of the latter, I'm sure that it won't ever be properly investigated.
[+] [-] osullivj|8 years ago|reply
[+] [-] EnFinlay|8 years ago|reply
[+] [-] ikeboy|8 years ago|reply
Ah yes, I love when my government hassles innocent people to make a point to everyone else.
[+] [-] 21|8 years ago|reply
I also love it when some people are just "Too Big To Jail (TM)"
> Those investigations uncovered substantial evidence "that senior bank officials were complicit in the illegal activity."
> On Tuesday, not only did the US Justice Department announce that HSBC would not be criminally prosecuted, but outright claimed that the reason is that they are too important, too instrumental to subject them to such disruptions. In other words, shielding them from the system of criminal sanction to which the rest of us are subject is not for their good, but for our common good.
> The New York Times Editors this morning announced: "It is a dark day for the rule of law." There is, said the NYT editors, "no doubt that the wrongdoing at HSBC was serious and pervasive." But the bank is simply too big, too powerful, too important to prosecute.
https://www.theguardian.com/commentisfree/2012/dec/12/hsbc-p...
[+] [-] Angostura|8 years ago|reply
[+] [-] Lazare|8 years ago|reply
[+] [-] ggm|8 years ago|reply
Those moments felt to me like 'its not a conspiracy, it's Lowe grade decision making by people who aren't reminded of their obligations' so maybe the book tells it better.
Always a bit of a sad moment, when the journo realised they like their subject. How do you maintain objectivity once you humanize the devil? Gitta Serenyi had that with Albert Speer.
[+] [-] kbart|8 years ago|reply
How convenient is to have such people around /s. Developers should learn from stories like this as well -- don't do anything illegal, even though your superiors tell you so, because when shit hits the fan, you will be the one held accountable.
[+] [-] AndyMcConachie|8 years ago|reply
"This is part of the reason I love Hayes as a central character for this book — because he’s not your cookie-cutter banker out of central casting. This is a guy who is much happier going home after a day of work and having a bucket of fried chicken and an orange juice and watching Seinfeld reruns than he is going out to Michelin-starred restaurants or a swanky club. To me, his massive social awkwardness — the fact that he would go to a dinner party, and sit next to a stranger, and start talking to her very loudly about his dandruff problem — he had no idea how to behave in normal society."
Political and cultural ostracism has real world consequences. They've found their scapegoat and they're piling on. It's pretty disgusting actually.
[+] [-] vanderZwan|8 years ago|reply
Enrich: I do want to make clear that [Hayes] is not an innocent victim here. He is someone who was participating, and he was not acting properly. He was acting illegally, and I think deserves to be punished. I just find it galling that he is alone in being punished.
Also Enrich: This is part of the reason I love Hayes as a central character for this book — because he’s not your cookie-cutter banker out of central casting. This is a guy who is much happier going home after a day of work and having a bucket of fried chicken and an orange juice and watching Seinfeld reruns than he is going out to Michelin-starred restaurants or a swanky club. To me, his massive social awkwardness — the fact that he would go to a dinner party, and sit next to a stranger, and start talking to her very loudly about his dandruff problem — he had no idea how to behave in normal society.
That makes him slightly endearing as a character, I think, but it also kind of helped explain how he stumbled into this. He was just completely unable to pick up on any subtle cues or social boundaries that normally would help moderate someone’s behavior.
So he deserves punishment for doing something bad when he is inherently dependent on others to help him separate the right thing from wrong?
[+] [-] HashThis|8 years ago|reply
[+] [-] stefan_|8 years ago|reply
[+] [-] LittlePeter|8 years ago|reply
I believe as of today LIBOR is set based on actual transactions. But who was the genius who created the original LIBOR? Perhaps it all started as something hacky in the 60s and they could not foresee how important LIBOR would become?
[+] [-] nmstoker|8 years ago|reply
I don't doubt what they did was immoral, but most of the articles I've seen skip over the murky aspect of what exactly was illegal.
Thinking of an absurd parallel, if you had a dinner club and had to say how much you were going to pay before the restaurant was picked, it's hard to see how manipulating your decision to influence the restaurant chosen would be illegal if there wasn't some firm agreement in the process being deterministic or formally defined. And that wouldn't change even if others were making money on the back of the restaurant choice!
What I'd like to see explained is how LIBOR went from an ill-defined process to one where the way some participants set it was no longer legal. What had the participant banks signed up to do /not do which they then failed to do?
Or is the illegality all on the part of those trading on it? (ie insider trading, given that it was based on non-public information)
[+] [-] dbuder|8 years ago|reply
[deleted]
[+] [-] freech|8 years ago|reply
Huh? That's not what inefficiency means. It means that an asset costs more (or less) then it's worth.
[+] [-] truculation|8 years ago|reply
If I temporarily have a large amount of cash in the account then they send me brochures trying to lure me into some premium 'exclusive' club which feels more than slightly greasy.
I would switch banks but it's a lot of hassle. Plus I don't get the sense that any of them would be working for me. They're working for the regulator, or for the forces of darkness, or for someone else.
[+] [-] pjmorris|8 years ago|reply
[+] [-] weavie|8 years ago|reply