There is a story in financial circles about a scandal that happened before, during and after the banking collapse of 2008. Every few months, it peeps its head over the parapet and walks into the mainstream media, before scurrying back into the shadows. This is the LIBOR scandal, and nobody seems to understand it. It is so complex, certainly on a par with the dreaded packaged home loans that brought down Lehmans and RBS, that even financial experts struggle over the details. Due to a quirk in the British legal system, this scandal is personified by one man. That man is Tom Hayes. That the British legal system has chosen to punish one single individual for the mistakes of countless banks, and many more bankers, makes a very interesting read.
The LIBOR, the London Interbank Offered Rate, is now so famous that it is more commonly written down as Libor. The complexities begin as soon as you understand that its name is false, a mere quirk of history. This is not the last time we will use the word quirk. It has little to do with London any more, and it is a whole series of rates, not just one. At its height, Libor was quoted in 10 currencies. So, are there 10 rates? No. Each rate was quoted at a range of durations, 15 of them. So the Libor was once 150 different rates, all set daily from London. Even now, after some minor reforms, there are 5 currencies and 7 durations. 35 different rates. This information is vital. Knowing it puts you ahead of all non-specialist journalists.
Incredible though it may seem, the system for setting the Libor at the time of this crisis had evolved over decades. The system finally went live in January 1986. By 1991, there were rumours that the rates were being rigged. The system is so fragile, that it is safe to assume it was being rigged from the very moment it winked into existence. That the system was so easily cheated makes it all the more surprising that it wasn’t ever rigged in such an obvious way as to bring about reform. What is astounding is that there is very little evidence that those tried most recently for rigging it even succeeded.
Of the many people associated with Libor rigging by rumour, only a handful have been prosecuted. Most of the cases have not resulted in charges, but some others have resulted in jail terms. The problem with justice, which will be clear to those caught in its web, is that it moves very slowly. It wasn’t designed for a world of Twitter and 24-hour rolling news. Just as one trial ends, another reaches appeal. As one appeal is won, another is lost. Tom Hayes, the first to be convicted, had one appeal turned down but has won the right to have his case reviewed. The Criminal Cases Review Commission (CCRC) is one of the avenues you can pursue if you have been wrongfully convicted and lost an appeal. It is very difficult to persuade them to hear your case again, but Tom Hayes has succeeded.
There are many good books that take apart and carefully examine the Libor scandal. Many of them cover Tom Hayes in detail. Indeed, Tom and his family cooperated in several interviews with David Enrich for The Spider Network. I found the book far better than its close rival, The Fix. They contain some heady details of high rollers, big bonuses and excess. But they don’t come close to helping you understand the culture of investment bank trading desks. For that information, I’m afraid you must peg your nose and dive deeply into the riveting page turner that is Cityboy by Geraint Anderson.
How did you find Cityboy? It’s a beauty, isn’t it?
It’s time for me to come clean. I take a very keen personal interest in these stories because I used to work for one of the same banks that employed Tom Hayes. I have seen first hand the antics and pressures placed on traders. Only in London, though. One can assume that the antics that happen out of sight, in Tokyo and Hong Kong, are way spicier. And it is Tokyo, trading in Japanese yen, that was the stage for the Tom Hayes drama.
It is a cocktail for disaster. If Shakespeare were alive today, he would be the screenwriter for his best and yet least plausible tragedy. Take someone who is young, and impressionable. Make sure he has a couple of quirks that make it very hard to interact with people. You might be thinking Rain Man. That would be a coincidence, because Rain Man was one of Tom’s many, many nicknames.
Imagine Dustin Hoffman, chatting away in the California sun. Imagine him sitting in the Tokyo rain, wolfing down sushi as he patters out his genius to anyone who will listen. To Rain Man, Libor looked just like a game. But the funny thing is, this Rain Man, the real Rain Man, was not involved in setting Libor. Imagine that. That is not disputed by anyone, by the way, even the prosecution.
What Tom Hayes did, perhaps, say the prosecution, is attempt to coerce some other people into maybe one day manipulating the yen Libor. It turns out that very many of the people he tried to coerce simply ignored him. All of the people who actually did set the yen Libor deny manipulating it to help Tom Hayes, a quirky genius who seemed to operate on a different plane.
This is why so many of them got off: there is a difference, as we all know, between boasting in emails and chat systems and actually carrying our boasts out. We’ve all done it. How many of you would enjoy your emails being printed in the international press and used in court against you? What about stuff you wrote in your 20s, when email was newish and as far as anyone knew it was private communications between colleagues in a private company? How would you have coped with a 7-figure salary in your 20s? I am sure, I am certain, that you would have carefully saved it in a retirement plan or bought shares, or given it to charity, and been very careful and sensible in your accounting of every penny. To think what I would have done with a million pounds or so at 29 makes me shiver, and not in a good way.
So the next time a Libor trial hits the headlines, you will know that the accused were involved in a web of international rates, perhaps as many as 150. Many of the excesses that are progressing through our courts do not refer to dollar or sterling Libor. Which means that no innocent punters were affected, no mortgages were bothered. There are not many mortgages here or in the US denominated in yen, you see. And of those who bragged that they were rigging the rate, how many do you think actually did it? And is boasting about trying to rig a rate that nobody even understands truly a crime? Technically, it is. And the law has been toughened up.
Put yourself in Rain Man’s shoes. All of your colleagues and managers know what you are doing because you told them. Nobody told you it was wrong. Nobody tried to stop you. The more money you made, which incidentally was a much smaller number than the millions you made for your bosses, the more they encouraged, rewarded and promoted you. If the whole barrel is rotten, is it fair to punish the smallest, youngest and most vulnerable apples?
This story is not over. A trial of 6 bankers, due to start in September, has been delayed until January 2018. They are charged with manipulation of a different rate, the EURIBOR. That is a whole other kettle. Some day soon, Tom Hayes will have his next appeal heard. This writer has everything crossed for him.