Tag: LIBOR

Weekend Reading: The Spider Network

When I was a junior corporate lawyer, I sat in a debt training session. One of the partners mentioned LIBOR. The explanation confused me. But as a young lawyer I didn’t know very much about the workings of high finance.

It turns out that the benchmark is hodgepodge of figures voluntarily submitted by banks with little market check or control. I’ve heard plenty of stories in the news. For a detailed look, I recently read The Spider Network: The Wild Story of a Math Genius, a Gang of Backstabbing Bankers, and One of the Greatest Scams in Financial History.

LIBOR—the London interbank offered rate, determines the interest rates on trillions in loans worldwide. LIBOR is supposed to reflect the interest rate at which member banks could borrow from one another that day. LIBOR is a global benchmark used to price all types of debt from credit cards, to variable rate mortgages, to complex derivatives and to corporate loans.

Very few people knew exactly how the rate was calculated. (That included that partner giving my training.) Even among the member banks there was widespread confusion as to its exact definition.

David Enrich of The Wall Street Journal manages to make Libor interesting in The Spider Network. His key to the story is telling the story of UBS interest rate derivative trader, Tom Hayes. This socially inept, if not autistic guy, is set up to be the fall guy for the LIBOR scandal.

Banks had lots of internal conflicts on their LIBOR submission. The rate a bank submits is indication of its credit worthiness. If it submits a rate that is higher than its peers, people may wonder if there is a problem at the bank.

The other major conflict is that the banks have traders, like Tom Hayes, who could make money or lose money on their positions depending on whether LIBOR goes up or down.

“LIBOR is a widely utilized benchmark that is no longer derived from a widely traded market. It is an enormous edifice built on an eroding foundation—an unsustainable structure,” stated CFTC Chairman J. Christopher Giancarlo in his opening remarks at the CFTC’s Market Risk Advisory Committee meeting last week. At the same meeting  Commissioner Rostin Behnam identified noted that “LIBOR has been subject to pervasive fraud, abuse, and manipulation. Since June 2012, the CFTC has levied sanctions of more than $3.3 billion for LIBOR-related misconduct.”

I would recommend The Spider Network to learn more about the LIBOR mess.

 

The Obnoxious LIBOR Emails

compliance and email

It seems clear that the LIBOR figures were subject to manipulation. Many banks are under investigation. The Royal Bank of Scotland agreed to pay $610 million in fines to UK and U.S. regulators for its role in the Libor rate-rigging scandal. As part of that settlement, the U.K.’s Financial Services Authority released emails and other communications between traders, employees who submitted Libor rate information, and in some cases, traders and other employees outside the three banks. They tell a sad tale of manipulation and fraud.

Trader C: “The big day [has] arrived… My NYK are screaming at me about an unchanged 3m libor. As always, any help wd be greatly appreciated. What do you think you’ll go for 3m?”
Barclays Submitter: “I am going 90 altho 91 is what I should be posting”.
Trader C: “[…] when I retire and write a book about this business your name will be written in golden letters […]”.
Submitter: “I would prefer this [to] not be in any book!”

Rarely do you find the email that exonerates you. It’s always the email with something stupid that makes you and your company look bad. Sometimes, the communication is out of context. Sometimes, it’s just the stupidity of the sender who thinks the message is as ephemeral as a nod in the hallway.

Martin Lomasney created a famous saying on the importance of discretion: “Never write if you can speak; never speak if you can nod; never nod if you can wink.”

From one trader to another broker:

“if you keep 6s [i.e. the six-month Japanese Libor rate] unchanged today… I will f***ing do one humongous deal with you … Like a 50, 000 buck deal, whatever. I need you to keep it as low as possible … if you do that … I’ll pay you, you know, 50,000 dollars, 100,000 dollars … whatever you want … I’m a man of my word.”

He may have been a man of his word. But he was not a man of honor or ethics. He sought blatant market manipulation for his own gain. Foolishly, we wrote it down, leaving his mark of dishonor for all to see.

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