Review: Libor revealed dark underbelly of trading

LONDON (Reuters Breakingviews) - “Holy shit,” U.S. Department of Justice fraud investigator Robertson Park exclaimed in 2010, as he listened to a two-year-old recording of a call between former Bank of England Deputy Governor Paul Tucker and Bob Diamond, then chief executive of Barclays.

The Barclays headquarters building is seen in the Canary Wharf business district of east London February 6, 2013. REUTERS/Neil Hall

Park’s expletive effectively marked the start of a criminal probe into how banks had rigged a benchmark rate that underpins many of the world’s financial products. The scandal has come to symbolise all that was wrong with the banking industry in the recriminations that followed the 2008 financial crisis.

The prosecutor’s reaction is just one of several dramatic moments found in rival books on the saga. Despite the technical nature of the subject, both “The Fix”, by Liam Vaughan and Gavin Finch, and David Enrich’s “The Spider Network” are page-turners.

The London Interbank Offered Rate is a daily benchmark which affects the pricing of loans, bonds and derivatives worth trillions of dollars. Yet its foundations were ramshackle. The rate was determined by a pared-down average of submissions from a self-selected, self-policing committee of banks based on their estimates of how much they would pay to borrow from each other. When Libor rates first went awry, the theory was that banks were submitting falsely low estimates in an attempt to show strength during the crisis. An examination of bank communications led to the discovery of the phone call between Tucker and Diamond, which investigators saw as evidence that some banks were trying to influence Libor.

They later found, however, that individual traders had been pushing the estimates around in an attempt to boost their own bottom lines and inflate bonuses. This behaviour predated the crisis and, in many cases, continued afterwards. Banks eventually paid billions of dollars in fines.

Both books parade a cast of deceitful or inept bankers, brokers and regulators. Trader Tom Hayes became the best-known culprit when he was sentenced to 14 years in prison – later reduced to 11 years – for his role in the scandal. But neither account spares senior executives or regulators.

“The Spider Network” in particular captures the seedy community of which Hayes was a part. (Disclosure: I worked as a voice broker between 2010 and 2012, though in equity derivatives rather than rates.) The trader, who is autistic, took Enrich into his confidence as he began to be interrogated by British authorities. Thus the book opens with a lurid account of Hayes and fellow Citigroup traders carousing obnoxiously in a quiet bar at a Japanese ski resort.

The story is replete with irony: Sandy Hayes, Tom’s mother, worked for former UK Prime Minister Gordon Brown, who ushered in a period of light-touch financial regulation. Meanwhile Chris Salmon, his uncle, inspired him to get into investment banking and later became the Bank of England executive director tasked with making Libor respectable again.

“The Fix”, at fewer than 200 pages, may leave some readers wanting more. But its skewering of regulators makes it an essential account. The UK Financial Services Authority is pilloried for failing to probe Libor despite receiving warnings up to two years before it finally opened proceedings. The incompetence of the British Bankers’ Association, which oversaw the benchmark, is also stunning. Meanwhile the UK Serious Fraud Office gets a deserved kicking for its failure to get dates right in evidence presented at the trial of brokers who helped Hayes, which may have been a factor in their acquittal.

The only thing missing are any obvious victims. Manipulation by Hayes and others moved rates by only tiny amounts, which swelled their bonuses but had little wider economic impact. Indeed, Hayes’ own analysis of his trading suggests that his victims were other banks rather than pension funds or retail investors.

Both books could have said more about how to prevent future market-rigging cases. The warped incentives that pervade the trading business are on full display. As erstwhile trader Alexis Stenfors describes it, this is a world more akin to ruthless gladiatorial contests than the profit-maximising rationality of economic models. However, regulators are now trying to force banks to change their bonus structures and set firmer trading protocols.

Unlike other inside accounts of life on the trading floor, the two books do not romanticise the characters: even in Enrich’s personally-informed account, it is hard to feel much sympathy for Hayes. This cold-nosed approach has produced two well-balanced, justice-seeking narratives.


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