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.
I am not sure I understand the distinction you make between your 1 and 2. The swap traders had no way to manipulate the libor fixings directly, they had to go through their libor submitters. You are right that they appear to have been colluding to do so between banks.
On the low balling, interestingly I am not sure the impact on the market was nefarious. It was certainly material but I do not believe that when borrowers and lenders referenced Libor in their loan contract, they really meant to index their interest rate paid on the 3 month credit risk of a bank. I think they did on the assumption that large international banks had near zero credit risk for 3 months borrowing (which was true until 2007) and that Libor was a convenient way to measure a 3 month risk free rate on top of which they would add a credit risk margin. When Libor started shooting up in 2008, it was not because of the general levels of interest rates (central banks were slashing interest rates at the same time) but because of bank credit risk. So though contractually borrowers should have paid a higher interest rate during that period, the low balling probably had the effect to make the interest rate closer than what borrowers and lenders probably intended when they referenced Libor in their contract.
> I am not sure I understand the distinction you make between your 1 and 2
The difference is that collusion between banks is cartel price fixing and is very illegal. The majority of reported cases of traders requesting rate moves did not fall into this category unlike the Hayes case.
For the cases where the traders were just asking their own setters to move the rate, there was no collusion. They work for the same company and not even in separate, Chinese walled departments.
Also, in the intra-bank cases, I don't recall seeing any where the setters were actually breaking BBA rules. The problem was that the rules were meaningless when there was no uncollateralised borrowing.
> I am not sure the impact on the market was nefarious
You're making a lot of assumptions. What is clear is that the interventions were material and directional. And that would have had an effect on both institutional and retail customers. That's usually the time when regulators get all medieval.
Indeed. It's widely accepted (although as far as I know, not quite proven), that the third manipulation was done with the full knowledge of (and, many would say, at the instigation of) the Bank of England.
Whether it's "legal" or not is almost beside the point; it's not going to be punished. And it took place in a (hopefully) completely unique scenario, so hopefully there's little risk of moral hazard.
2. Swap traders influencing their own banks Libor.
3. Banks fixing their Libor contribution to mis-represent the health of their business (possibly egged on by a government that doesn't want banks to fail)
There's a book written about this entire subject which just came out late last year: The Spider Network: The Wild Story of a Math Genius, a Gang of Backstabbing Bankers, and One of the Greatest Scams in Financial History.
It was well written and very interesting if folks are more interested in the folks involved and how all of this went down and their personalities etc.
IMHO prison is never justified for people that pose no physical danger to others. A reasonably big (as big as he can actually afford) fine and ban on working on government and financial positions could be enough.
IMHO we need to impose incredibly stiff penalties on those who perform such large, damaging crimes that undermine societal trust. These criminals do not care about being slightly less rich, and imposing penalties is likely to just result in the consumer getting shafted to make up for the loss. We should bring back the stockade and public execution for these pirates.
They'll just get some bullshit gig at a think-tank or as an "advisor" from one of their crony friends they helped prop up. Maybe a nice $400,000 speaking gig here and there at Goldman Sachs. Sure the odd man might get tossed aside as a token gesture to demonstrate how they're just as subject to rule of law as us common folk, but to think that these confidence men will just accept their fate and fade into obscurity is laughable.
They don’t have to fade into obscurity. The point is just to make it painful. People avoid pain.
Implicit in your comment is that these people have a network that will make them whole no matter what.
A) That’s only true for the very top.
B) Even if they are made whole, the more times the network has to “make someone whole” it gets harder to justify the criminality. Over time the network will start leaving people out to dry.
Also, your comment is unnecessarily dismissive. Your position is valid, you can just state it without trying to insult my intelligence and we can carry on a conversation.
I think yours is a defensible position, but I'm not sure I agree with it. Scammers, while not posing immediate physical danger to others, can still pose enormous harm to many people. Banning them from engaging in various financial positions may not prevent them from running scams from outside the normal financial system.
For this person, I think I could support just a fine and a ban on working in the finance industry. I think it's likely he regrets what he did, and is unlikely to cause further harm to society. But there are people like Bernie Madoff (and people who only aspire to be as big a scammer as Madoff) who I think pose a continued, further harm to society.
What would your proposed punishment be for someone who directly scams millions of dollars from elderly retired people, leaving them with nothing? A fine? Great - he’s been able to play with the pensioners cash for years before being caught, now he has to give some of it back?
Take all the millions (and more) from them leaving them only the amount of money necessary for humble survival (a cheap room rental and mediocre meals) and give the money back to the victims.
What makes you think there would be more money than what the scammer took? You think scammers are likely to reinvest their earnings and make more than what they spend? Doubt it.
Ok, let's spend $33000 more on them every ear just to torture them by keeping them in the horrible conditions of a prison for the sweet sense of revenge...
> What makes you think there would be more money than what the scammer took?
They probably had something before they have committed the scam and they also might have been getting their fancy salary during the scam too...
It is clear that fines or losing their job have not been effective deterrents for the men committing these crimes. Perhaps we could try actual enforcement of the law and see how it goes.
I agree that the blunt blade of crime -> prison time is probably not the most efficient or effective deterrent or rehabilitation in every case. However, we (in the States) have constitutional protection against "cruel and unusual punishment", which is what prevents judges from getting much more creative than varying lengths of incarceration. The first judge to start blazing this trail would probably just get shot down on appeal.
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.
I was a permie at BARC 2004-10 and bought shares in 05, 06, 07 using the employee discount system when they were around 700. I got one free for each paid, and the ones I paid for came out of pretax income, so effectively I paid ~30% of face price. But even at that entry I'm still underwater.
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?
I don't think it is related. The CDS in question was buying credit protection (i.e. insurance against a default) on a portfolio of subprime RMBS bonds. When a default occurs in that portfolio, the protection seller (the bank) must make whole the buyer of the protection as if he held the underlying bond (which in this case he didn't, it's like buying insurance on your neighbor's house, you get paid if it burns but you didn't suffer the loss yourself since you didn't own the house). But before that, both parties must post collateral to each other on the fair value of the CDS contract, which will ultimately converge to the payoff of the credit protection. This is to ensure that no party is taking risk on the other party defaulting before the maturity of the CDS (exactly like margin calls when you are buying a stock on margin).
Problem, the portfolio of subprime RMBS consists in a lot of small transactions, which don't necessarily have an active market, and that led to disputes between the protection seller and the protection buyer on what the CDS contract was really worth (you can't translate 1 for 1 a rise in delinquencies - % of subprime borrowers ceasing to make payments on their mortgages - and the ultimate loss suffered on the portfolio of mortgages after the property has been foreclosed and sold several months/years later). It mattered not just because the other party would have to post more collateral, but also because the other party would have to mark a loss if the agreed value was less than what it marked the position for in its books and records.
>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.
You've as a country determined that an institution is too important to your population and your country's stability to have it go bankrupt. But instead of growing your economy through it, you through actions deem it okay to siphon money to the private owners instead of the people paying for it through taxes.
They sort-of were nationalized. But it was done somewhat subtly.
The existing common equity (and IIRC preferred stock) in a number of entities was massively diluted by issuing new preferred stock and warrants to the US government.
Here are two examples, they were among the worst offenders. Look at the share price for Citigroup and AIG:
If you owned pre-crisis C common stock, you're still down about 84%. If you owned pre-crisis AIG common, you're still down about 95%. (that's approximate, done by eyeballing the charts). Edit: Yahoo Finance charts have been getting worse and worse, you need to click "Max" to see the proper timeline.
I don't follow UK equities closely, but I think the same thing happened to a number of UK banks at the time. E.g. RBS.
Unfortunately the whole thing was quite uneven. E.g. Goldman Sachs took advantage of the morons at AIG who sold them very cheap "insurance" such as credit default swaps. But Goldman was made whole. What should have happened is that Goldman should have been made to share the pain.
Edit: I'm of course talking about the '08 financial crisis in general. I don't agree that the Libor scandal was significant enough to nationalize the banks as punishment. I'd much rather see a few bad actors taken out back and shot. That would be much more salutary in terms of deferring future bad behavior.
Not necessarily an improvement. RBS was nationalised, in 2008 when it was failing. It's still majority state-owned. But since then as part of the bank attempting to return to profitability another scandal emerged - squeezing small business customers into bankruptcy in order to take their assets.
I can recommend the book Shredded: Inside RBS: The Bank that Broke Britain - by its account RBS actually seems to be worse behaved after their bailout than before. Before the bailout they were just incompetent, since then they have been downright malevolent.
The results of nationalisation depend on the people running the nation.
If they have questionable ethics, so will the industries they run.
The real problem isn't banking, it's neoliberalism's sanctification of individualistic greed. When collective morality decides that almost any behaviour is acceptable as long as a few people make a big profit, the political and moral consequences are unlikely to be positive.
I think the problem is if you set even the low bar and convict that guy, there will be legitimate questions as to why you aren't going after all of the CEOs and many of the people under them. Basically, everybody was guilty and you can't prosecute them all. Someone has to be left to run the banks.
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.
Sure, that quote might sound like that, but the article didn't.
The paragraph before:
> … One of the things I found interesting researching this book is that there are a lot of people out there, experts in law enforcement and criminal justice, who really think that the situation we’re now in is a direct result of a lack of ambition and creativity and guts among prosecutors in some of the biggest countries in the world, including the U.S. The thing is, prosecutors do not like to lose cases, so they’ve taken, in general, a very conservative approach to what cases they’re going to bring because they don’t want to gamble on losing. They’ve built up these very impressive win/loss records as prosecutors. Some of them are undefeated. And they boast about that.
They went after low-level guys because the big fish have better connections and better lawyers and much riskier in terms of publicity if you lose your case.
That sounds like the opposite of the "rule of law", to me at least.
The downside of prosecutors taking on cases that they have a good chance of losing is that a lot of innocent people get hassled.
You can argue for more or less false positives at the expense of false negatives. But saying they should prosecute, not because they're likely to win, but because it'll act as a deterrent, seems wrong. For one, having lots of cases that get thrown out also hurts public trust. For another, losing cases reduces incentives to settle.
Your point seems true in a universal context, but false in many limited or special contexts, like this one.
Making all prosecutors more likely to bring charges in cases they think they will lose sounds like a bad idea. The easy scary example is of prosecutors frequently bringing simple theft charges against people who just happened to be nearby a theft. It's obviously bad: huge numbers of potentially powerless, innocent people are exposed to extreme damage to their character, which they cannot fix and which may destroy their lives and health. The false positive dominates the situation, and its harm to society is clear.
In the specific case of top-level bank executives manipulating things like LIBOR, I think the balance just as clearly tips the other way. Consider the rarity of the crime, the impact of the crime, the size of the impacted group who may have charges brought against them (right or wrong), and the power of members of that group within society.
I posit that the crime is exceedingly rare (we're discussing a probable instance from over a decade ago), the impact of the crime is exceedingly high (by harming the entire financial apparatus of society, it can meaningfully cause real harm to millions, if not billions of people), the size of the group is exceedingly small (you could legibly write all of the potentially impacted people's names over decades on a small stack of A4 paper), and the power within society of members of the group is uniformly among the highest possible level in our society (they are by definition some of the richest and most well connected into the political, financial, and legal systems of the world).
Balance toward the false negative here implies that members of this class of potential perpetrator could feel more they are likely to get away with this specific crime. Balance toward the false positive implies that, when this massive crime is believed to have been committed, these few, powerful members are open to, let's say high chance of wrongful arrest, that they have the overwhelming ability to remedy the effects of via legal means after the fact.
The potential for meaningful harm to society seems to be decidedly on the side of allowing false negatives. In this specific, unbelievably narrow context, I am all for shifting the balance toward more prosecutions. I think that this is in line with the argument being put forward originally by the parent.
> bank CEOs specifically in charge of the operations that committed the crime
The article advocates prosecutors charging bankers even though they “might have lost those cases, but at least it would have struck some fear in the hearts of people.” If you lose the case, there was no crime. Charging people with unwinnable cases is bad.
They "might have" is the critical phrase. Not they "would have" the author is arguing that the prosecutors were overly cautious, not that they should handcuff random CEOs
> author is arguing that the prosecutors were overly cautious, not that they should handcuff random CEOs
OP is saying Enrich (the guy being interviewed) went too far when saying about cases that would be lost: “but at least it would have struck some fear in the hearts of people.” I agree with the point about prosecutorial conservatism. But part of the conservatism is a product of proper restraint. Drug crime prosecutors show the opposite end of the spectrum; our criminal justice system aspires to a default of innocence for a reason.
I think where disagree is that you are framing it as cases that would be lost, where as I am interpreting as talking about cases that may have been lost. The difficulty is that that "might" can be interpreted in different ways here. Thinking about it, I can see why your interpretation is reasonable. I think mine is a reasonable interpretation too, though.
your interpretation = "we wouldn't have won but we would have scared them"
my interpretation "we may not have won every case but the very fact that cases were prosecuted would have been valuable"
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.
> Political and cultural ostracism has real world consequences. They've found their scapegoat and they're piling on. It's pretty disgusting actually.
Why are you so sure he isn't responsible? Is it impossible for a mildly autistic mathematician that likes fried chicken and is socially awkward to have committed any crimes?
Not sure why you've decided to pick at this point, even the article itself says multiple times that he's far from innocent in all this, but it also seems obvious that he was not the lone-wolf mastermind of an enormous financial scandal spanning many countries and multi-billion dollar companies. It's possible to look at the narrative around a certain character in a story and intuit that something doesn't make a ton of sense, like in this case, why would someone who's doing well in life and enjoys the simple things, risk everything for gains they don't even care much about?
I partly blame media for that as well, because they tend to portray movie-like evil minded geniuses that are probably more appealing and easier to grasp for general reader than methodical, faceless, industrious scams and legal gray areas. This can be seen even more so in politics.
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.
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.
> two distinct manipulations of Libor
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.
I am not sure I understand the distinction you make between your 1 and 2. The swap traders had no way to manipulate the libor fixings directly, they had to go through their libor submitters. You are right that they appear to have been colluding to do so between banks.
On the low balling, interestingly I am not sure the impact on the market was nefarious. It was certainly material but I do not believe that when borrowers and lenders referenced Libor in their loan contract, they really meant to index their interest rate paid on the 3 month credit risk of a bank. I think they did on the assumption that large international banks had near zero credit risk for 3 months borrowing (which was true until 2007) and that Libor was a convenient way to measure a 3 month risk free rate on top of which they would add a credit risk margin. When Libor started shooting up in 2008, it was not because of the general levels of interest rates (central banks were slashing interest rates at the same time) but because of bank credit risk. So though contractually borrowers should have paid a higher interest rate during that period, the low balling probably had the effect to make the interest rate closer than what borrowers and lenders probably intended when they referenced Libor in their contract.
> I am not sure I understand the distinction you make between your 1 and 2
The difference is that collusion between banks is cartel price fixing and is very illegal. The majority of reported cases of traders requesting rate moves did not fall into this category unlike the Hayes case.
For the cases where the traders were just asking their own setters to move the rate, there was no collusion. They work for the same company and not even in separate, Chinese walled departments.
Also, in the intra-bank cases, I don't recall seeing any where the setters were actually breaking BBA rules. The problem was that the rules were meaningless when there was no uncollateralised borrowing.
> I am not sure the impact on the market was nefarious
You're making a lot of assumptions. What is clear is that the interventions were material and directional. And that would have had an effect on both institutional and retail customers. That's usually the time when regulators get all medieval.
Yes - and around that time the switch to SONIA, EONIA and away from LIBOR fixings started.
There wasn't really a move away from Libor fixings. They were, and still are, very important in the derivative markets.
There was a move towards collateralised transactions so the overnight rates become more important for funding than the unsecured rates.
Indeed. It's widely accepted (although as far as I know, not quite proven), that the third manipulation was done with the full knowledge of (and, many would say, at the instigation of) the Bank of England.
Whether it's "legal" or not is almost beside the point; it's not going to be punished. And it took place in a (hopefully) completely unique scenario, so hopefully there's little risk of moral hazard.
Maybe I'm misreading your comment, but what was the third?
1. Banks colluding to fix Libor
2. Swap traders influencing their own banks Libor.
3. Banks fixing their Libor contribution to mis-represent the health of their business (possibly egged on by a government that doesn't want banks to fail)
There's a book written about this entire subject which just came out late last year: The Spider Network: The Wild Story of a Math Genius, a Gang of Backstabbing Bankers, and One of the Greatest Scams in Financial History.
It was well written and very interesting if folks are more interested in the folks involved and how all of this went down and their personalities etc.
https://amzn.com/0062452983
> but prison was definitely justified
IMHO prison is never justified for people that pose no physical danger to others. A reasonably big (as big as he can actually afford) fine and ban on working on government and financial positions could be enough.
IMHO we need to impose incredibly stiff penalties on those who perform such large, damaging crimes that undermine societal trust. These criminals do not care about being slightly less rich, and imposing penalties is likely to just result in the consumer getting shafted to make up for the loss. We should bring back the stockade and public execution for these pirates.
> These criminals do not care about being slightly less rich
That's not what was suggested. What was suggested was "as big as he can actually afford and a ban on working on government and financial positions".
That's called "punitive damages" when they scale to what the criminal can bear, rather than what damage they caused.
I do think these criminals would care about losing _most_ of their money and being barred from working in their field.
They'll just get some bullshit gig at a think-tank or as an "advisor" from one of their crony friends they helped prop up. Maybe a nice $400,000 speaking gig here and there at Goldman Sachs. Sure the odd man might get tossed aside as a token gesture to demonstrate how they're just as subject to rule of law as us common folk, but to think that these confidence men will just accept their fate and fade into obscurity is laughable.
They don’t have to fade into obscurity. The point is just to make it painful. People avoid pain.
Implicit in your comment is that these people have a network that will make them whole no matter what.
A) That’s only true for the very top.
B) Even if they are made whole, the more times the network has to “make someone whole” it gets harder to justify the criminality. Over time the network will start leaving people out to dry.
Also, your comment is unnecessarily dismissive. Your position is valid, you can just state it without trying to insult my intelligence and we can carry on a conversation.
I think yours is a defensible position, but I'm not sure I agree with it. Scammers, while not posing immediate physical danger to others, can still pose enormous harm to many people. Banning them from engaging in various financial positions may not prevent them from running scams from outside the normal financial system.
For this person, I think I could support just a fine and a ban on working in the finance industry. I think it's likely he regrets what he did, and is unlikely to cause further harm to society. But there are people like Bernie Madoff (and people who only aspire to be as big a scammer as Madoff) who I think pose a continued, further harm to society.
What would your proposed punishment be for someone who directly scams millions of dollars from elderly retired people, leaving them with nothing? A fine? Great - he’s been able to play with the pensioners cash for years before being caught, now he has to give some of it back?
Take all the millions (and more) from them leaving them only the amount of money necessary for humble survival (a cheap room rental and mediocre meals) and give the money back to the victims.
What makes you think there would be more money than what the scammer took? You think scammers are likely to reinvest their earnings and make more than what they spend? Doubt it.
This is no punishment at all.
Ok, let's spend $33000 more on them every ear just to torture them by keeping them in the horrible conditions of a prison for the sweet sense of revenge...
> What makes you think there would be more money than what the scammer took?
They probably had something before they have committed the scam and they also might have been getting their fancy salary during the scam too...
Fancy salary? Where did you get the idea that con men have fancy salaries? You're literally saying that fraud should have no consequences.
It is clear that fines or losing their job have not been effective deterrents for the men committing these crimes. Perhaps we could try actual enforcement of the law and see how it goes.
I agree that the blunt blade of crime -> prison time is probably not the most efficient or effective deterrent or rehabilitation in every case. However, we (in the States) have constitutional protection against "cruel and unusual punishment", which is what prevents judges from getting much more creative than varying lengths of incarceration. The first judge to start blazing this trail would probably just get shot down on appeal.
wasn't there a judge somewhere that gave people a choice between a "creative" punishment and a traditional one? I found at least one example at http://abcnews.go.com/US/ohio-judge-unusual-punishments-peop...
Unsure what the legal justification is though
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.
"... are run for the benefit of the senior management."
Replace the ellipsis with almost any organization - theocracies on down.
I maintain that this feature is the real purpose of all human organizations. With some dither for the smallest.
> I own some banking shares and I wish I didn't.
I'm really curious what you mean by that. Is it just that they bring good money, or why don't you get rid of them?
I was a permie at BARC 2004-10 and bought shares in 05, 06, 07 using the employee discount system when they were around 700. I got one free for each paid, and the ones I paid for came out of pretax income, so effectively I paid ~30% of face price. But even at that entry I'm still underwater.
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?
I don't think it is related. The CDS in question was buying credit protection (i.e. insurance against a default) on a portfolio of subprime RMBS bonds. When a default occurs in that portfolio, the protection seller (the bank) must make whole the buyer of the protection as if he held the underlying bond (which in this case he didn't, it's like buying insurance on your neighbor's house, you get paid if it burns but you didn't suffer the loss yourself since you didn't own the house). But before that, both parties must post collateral to each other on the fair value of the CDS contract, which will ultimately converge to the payoff of the credit protection. This is to ensure that no party is taking risk on the other party defaulting before the maturity of the CDS (exactly like margin calls when you are buying a stock on margin).
Problem, the portfolio of subprime RMBS consists in a lot of small transactions, which don't necessarily have an active market, and that led to disputes between the protection seller and the protection buyer on what the CDS contract was really worth (you can't translate 1 for 1 a rise in delinquencies - % of subprime borrowers ceasing to make payments on their mortgages - and the ultimate loss suffered on the portfolio of mortgages after the property has been foreclosed and sold several months/years later). It mattered not just because the other party would have to post more collateral, but also because the other party would have to mark a loss if the agreed value was less than what it marked the position for in its books and records.
Ah gotcha. Thank you for the explanation!
>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.
https://www.theguardian.com/commentisfree/2012/dec/12/hsbc-p...
I am still angry that banks too big to fail were not nationalized at this time.
Bingo.
You've as a country determined that an institution is too important to your population and your country's stability to have it go bankrupt. But instead of growing your economy through it, you through actions deem it okay to siphon money to the private owners instead of the people paying for it through taxes.
They sort-of were nationalized. But it was done somewhat subtly.
The existing common equity (and IIRC preferred stock) in a number of entities was massively diluted by issuing new preferred stock and warrants to the US government.
Here are two examples, they were among the worst offenders. Look at the share price for Citigroup and AIG:
https://finance.yahoo.com/quote/C?p=C https://finance.yahoo.com/quote/aig/?p=aig
If you owned pre-crisis C common stock, you're still down about 84%. If you owned pre-crisis AIG common, you're still down about 95%. (that's approximate, done by eyeballing the charts). Edit: Yahoo Finance charts have been getting worse and worse, you need to click "Max" to see the proper timeline.
I don't follow UK equities closely, but I think the same thing happened to a number of UK banks at the time. E.g. RBS.
Unfortunately the whole thing was quite uneven. E.g. Goldman Sachs took advantage of the morons at AIG who sold them very cheap "insurance" such as credit default swaps. But Goldman was made whole. What should have happened is that Goldman should have been made to share the pain.
Edit: I'm of course talking about the '08 financial crisis in general. I don't agree that the Libor scandal was significant enough to nationalize the banks as punishment. I'd much rather see a few bad actors taken out back and shot. That would be much more salutary in terms of deferring future bad behavior.
No, no shooting.
They should have just let the market work and the banks go under.
It would have been a financial loss but a moral victory. An important lesson about carefully choosing who you trust.
Too many ex-Goldman execs are in positions of political power for that company to ever be punished in any meaningful way.
Not necessarily an improvement. RBS was nationalised, in 2008 when it was failing. It's still majority state-owned. But since then as part of the bank attempting to return to profitability another scandal emerged - squeezing small business customers into bankruptcy in order to take their assets.
http://www.telegraph.co.uk/business/2017/09/07/nicky-morgan-...
I can recommend the book Shredded: Inside RBS: The Bank that Broke Britain - by its account RBS actually seems to be worse behaved after their bailout than before. Before the bailout they were just incompetent, since then they have been downright malevolent.
The results of nationalisation depend on the people running the nation.
If they have questionable ethics, so will the industries they run.
The real problem isn't banking, it's neoliberalism's sanctification of individualistic greed. When collective morality decides that almost any behaviour is acceptable as long as a few people make a big profit, the political and moral consequences are unlikely to be positive.
I think the problem is if you set even the low bar and convict that guy, there will be legitimate questions as to why you aren't going after all of the CEOs and many of the people under them. Basically, everybody was guilty and you can't prosecute them all. Someone has to be left to run the banks.
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.
Yes, that paragraph felt quite horrifying to me. Does the whole "rule of law" thing mean nothing to the author?
The "rule of law" isn't about committing a crime, it's whether or not you are prosecuted and potentially sentenced for it.
And this quote is specifically advocating for actions meant to embarrass bank CEOs, nothing to do with crime.
Sure, that quote might sound like that, but the article didn't.
The paragraph before:
> … One of the things I found interesting researching this book is that there are a lot of people out there, experts in law enforcement and criminal justice, who really think that the situation we’re now in is a direct result of a lack of ambition and creativity and guts among prosecutors in some of the biggest countries in the world, including the U.S. The thing is, prosecutors do not like to lose cases, so they’ve taken, in general, a very conservative approach to what cases they’re going to bring because they don’t want to gamble on losing. They’ve built up these very impressive win/loss records as prosecutors. Some of them are undefeated. And they boast about that.
They went after low-level guys because the big fish have better connections and better lawyers and much riskier in terms of publicity if you lose your case.
That sounds like the opposite of the "rule of law", to me at least.
The downside of prosecutors taking on cases that they have a good chance of losing is that a lot of innocent people get hassled.
You can argue for more or less false positives at the expense of false negatives. But saying they should prosecute, not because they're likely to win, but because it'll act as a deterrent, seems wrong. For one, having lots of cases that get thrown out also hurts public trust. For another, losing cases reduces incentives to settle.
Your point seems true in a universal context, but false in many limited or special contexts, like this one.
Making all prosecutors more likely to bring charges in cases they think they will lose sounds like a bad idea. The easy scary example is of prosecutors frequently bringing simple theft charges against people who just happened to be nearby a theft. It's obviously bad: huge numbers of potentially powerless, innocent people are exposed to extreme damage to their character, which they cannot fix and which may destroy their lives and health. The false positive dominates the situation, and its harm to society is clear.
In the specific case of top-level bank executives manipulating things like LIBOR, I think the balance just as clearly tips the other way. Consider the rarity of the crime, the impact of the crime, the size of the impacted group who may have charges brought against them (right or wrong), and the power of members of that group within society.
I posit that the crime is exceedingly rare (we're discussing a probable instance from over a decade ago), the impact of the crime is exceedingly high (by harming the entire financial apparatus of society, it can meaningfully cause real harm to millions, if not billions of people), the size of the group is exceedingly small (you could legibly write all of the potentially impacted people's names over decades on a small stack of A4 paper), and the power within society of members of the group is uniformly among the highest possible level in our society (they are by definition some of the richest and most well connected into the political, financial, and legal systems of the world).
Balance toward the false negative here implies that members of this class of potential perpetrator could feel more they are likely to get away with this specific crime. Balance toward the false positive implies that, when this massive crime is believed to have been committed, these few, powerful members are open to, let's say high chance of wrongful arrest, that they have the overwhelming ability to remedy the effects of via legal means after the fact.
The potential for meaningful harm to society seems to be decidedly on the side of allowing false negatives. In this specific, unbelievably narrow context, I am all for shifting the balance toward more prosecutions. I think that this is in line with the argument being put forward originally by the parent.
It was meant to punish bank CEOs specifically in charge of the operations that committed the crime.
> bank CEOs specifically in charge of the operations that committed the crime
The article advocates prosecutors charging bankers even though they “might have lost those cases, but at least it would have struck some fear in the hearts of people.” If you lose the case, there was no crime. Charging people with unwinnable cases is bad.
They "might have" is the critical phrase. Not they "would have" the author is arguing that the prosecutors were overly cautious, not that they should handcuff random CEOs
> author is arguing that the prosecutors were overly cautious, not that they should handcuff random CEOs
OP is saying Enrich (the guy being interviewed) went too far when saying about cases that would be lost: “but at least it would have struck some fear in the hearts of people.” I agree with the point about prosecutorial conservatism. But part of the conservatism is a product of proper restraint. Drug crime prosecutors show the opposite end of the spectrum; our criminal justice system aspires to a default of innocence for a reason.
I think where disagree is that you are framing it as cases that would be lost, where as I am interpreting as talking about cases that may have been lost. The difficulty is that that "might" can be interpreted in different ways here. Thinking about it, I can see why your interpretation is reasonable. I think mine is a reasonable interpretation too, though.
your interpretation = "we wouldn't have won but we would have scared them"
my interpretation "we may not have won every case but the very fact that cases were prosecuted would have been valuable"
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.
> Political and cultural ostracism has real world consequences. They've found their scapegoat and they're piling on. It's pretty disgusting actually.
Why are you so sure he isn't responsible? Is it impossible for a mildly autistic mathematician that likes fried chicken and is socially awkward to have committed any crimes?
Not sure why you've decided to pick at this point, even the article itself says multiple times that he's far from innocent in all this, but it also seems obvious that he was not the lone-wolf mastermind of an enormous financial scandal spanning many countries and multi-billion dollar companies. It's possible to look at the narrative around a certain character in a story and intuit that something doesn't make a ton of sense, like in this case, why would someone who's doing well in life and enjoys the simple things, risk everything for gains they don't even care much about?
I partly blame media for that as well, because they tend to portray movie-like evil minded geniuses that are probably more appealing and easier to grasp for general reader than methodical, faceless, industrious scams and legal gray areas. This can be seen even more so in politics.
Captain America punches Campaign Finance in the face, freeing the American people from the grip of expanding monopolies and anti-consumer practices!
The media ain't what caps on RMS in every HN thread in which he is mentioned.
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?
It started in the mid 80s according to Wikipedia.
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)
If you ask a bunch of traders to give you a fake number and then cry that it's a fake number I have no sympathy.
> first, you identify inefficiencies in the market: weaknesses, loopholes, things like that
Huh? That's not what inefficiency means. It means that an asset costs more (or less) then it's worth.
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.
If you are in the Uk, switching accounts is a lot easier than it used to be. https://www.currentaccountswitch.co.uk/howtoswitch/Pages/How...