Former UBS and Citigroup trader was first to be found guilty in global conspiracy to manipulate benchmark interest rate. Financial industry has been struggling to make the shift away from the US dollar rate. Financial institutions are under pressure to move faster on their switch from the scandal-hit benchmark.
Reform of lending rate embedded in everything from mortgages to derivatives poses huge challenges. Scandal-hit interbank lending rates need reform starting with greater accountability.
Central bank makes it tougher to borrow against the tainted benchmark. Setting a price would make it easier to run economic models and explain choices to voters.
Banks have until September to stop issuing cash products linked to sterling benchmark. Pegging is naturally centralised. Banker overseeing switch to Sofr says change is coming despite rate volatility. Anti-fraud agency criticised for not ending investigation sooner.
Manage cookies. If you think the same, join us. Libor scandal. Add to myFT Digest. Thursday, 4 November, Libor transition. US loan market begins shift away from tarnished Libor benchmark. Friday, 15 October, Capital markets. Libor deadline prompts surge in CLO issuance. Monday, 27 September, Traders take up derivatives tied to Libor replacement. There was so much public pressure on politicians and prosecutors after the crisis to find some individuals to hold to account for the massive harm that the banking industry caused to the country and to the economy, really to the world.
And prosecutors, instead of going after people at the top of the food chain — the CEOs and business leaders who are responsible for setting the culture at their institution, responsible for in many cases the practices of their institutions — instead of going after those guys, they uniformly went after a small group of relatively low-level people.
But what is crazy to me is that Tom Hayes is currently serving an year sentence in a maximum-security prison. And as far as I can tell, he is the only banker currently in jail for crimes committed during the financial crisis.
Some of them are undefeated. And they boast about that. That is a terrifying thing. They might have lost those cases, but at least it would have struck some fear in the hearts of people.
Knowledge Wharton: You got access to all kinds of data in the course of doing this book. Going through it, were there times where even you were surprised at the lengths that these bankers were able to go to? Enrich: Yes, absolutely. And one of the things that was really fun about this book, the goal was for it to read almost like fiction or like a thriller, not like a banking or finance book. To me, it was staggering seeing just the kind of depths of depravity that some of these bankers and traders demonstrated, some of the completely amoral, unethical things they were doing.
It was really interesting for me as a journalist to see this all connected to human faces. Knowledge Wharton: I understand that you still stay in touch with Tom Hayes family. He is in a deep, dark, angry depression, just raging at the world. His wife, Sarah, who is a lawyer by trade, is a little more emotionally balanced, I would say, than Tom. I do want to make clear that he 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. I think the culture of the industry has actually changed quite a bit in the past few years, partly as a result of how severe and stiff the penalties have been that are imposed on the banks.
The ultimate people who drive behavior at banks are actually the shareholders. And right now, the shareholders of banks are very worried about banks getting slapped with multibillion-dollar fines.
My concern is that as memories of these massive penalties fade and memories of the crisis fade, the pressure is going to return for banks to amp up their profits. At that point, the cultural stuff goes out the window, and the No.
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Measure content performance. Develop and improve products. List of Partners vendors. The scandal sowed distrust in the financial industry and led to a wave of fines, lawsuits, and regulatory actions.
Although the scandal came to light in , there is evidence suggesting that the collusion in question had been ongoing since as early as As a result of the rate fixing scandal, questions around LIBOR's validity as a credible benchmark rate have arisen and it is now being phased out.
His profit came from the spread between how much he paid for a security and how much he sold it for. In volatile times, the spread widened, reflecting the increased risk that the market might move against him before he had the chance to trade out of his position.
The thing that really set Hayes apart was his ability to spot price anomalies and exploit them, a technique known as relative value trading. It appealed to his lifelong passion for seeking out patterns. During quiet spells, he spent his time scouring data, hunting for unseen opportunities. If he thought that the price of two similar securities had diverged unduly, he would buy one and short the other, betting that the spread between the two would shrink.
Everywhere he worked, Hayes set up his software to tell him exactly how much he stood to gain or lose from every fraction of a move in Libor in each currency. Each time Hayes made a trade, he would have to decide whether to lay off some of his risk by hedging his position using, for example, other derivatives.
He liked to think of it as a living organism with thousands of interconnected moving parts. In a corner of one of his screens was a number he looked at more than any other: his rolling profit and loss. By the summer of , the mortgage crisis in the US caused banks and investment funds around the world to become skittish about lending to each other without collateral.
Firms that relied on the so-called money markets to fund their businesses were paralysed by the ballooning cost of short-term credit. On 14 September, customers of Northern Rock queued for hours to withdraw their savings after the bank announced it was relying on loans from the Bank of England to stay afloat. After that, banks were only prepared to make unsecured loans to each other for a few days at a time, and interest rates on longer-term loans rocketed.
Libor, as a barometer of stress in the system, reacted accordingly. By December it had soared to basis points. Everyone could see that Libor rates had shot up, but questions began to be asked about whether they had climbed enough to reflect the severity of the credit squeeze.
By August , there was almost no trading in cash for durations of longer than a month. In some of the smaller currencies there were no lenders for any time frame. Yet, with trillions of dollars tied to Libor, the banks had to keep the trains running. The individuals responsible for submitting Libor rates each day had no choice but to put their thumb and forefinger in the air and pluck out numbers. A game of brinkmanship had developed in which rate-setters tried to predict what their rivals would submit, and then come in slightly lower.
If they guessed wrong and input rates higher than their peers, they would receive angry phone calls from their managers telling them to get back into the pack. On trading floors around the world, frantic conversations took place between traders and their brokers about expectations for Libor. Nobody knew where Libor should be, and nobody wanted to be an outlier.
Even where bankers tried to be honest, there was no way of knowing if their estimates were accurate because there was no underlying interbank borrowing on which to compare them. The machine had broken down. Vince McGonagle, a small and wiry man with a hangdog expression, had been at the enforcement division of the Commodity Futures Trading Commission CFTC in Washington for 11 years, during which time his red hair had turned grey around the edges.
While his classmates took highly paid positions defending companies and individuals accused of corporate corruption, McGonagle opted to build a career bringing cases against them. He joined the agency as a trial attorney and was now, at 44, a manager overseeing teams of lawyers and investigators. McGonagle closed the door to his office and settled down to read the daily news. In a development that has implications for borrowers everywhere, from Russian oil producers to homeowners in Detroit, bankers and traders are expressing concerns that the London interbank offered rate, known as Libor, is becoming unreliable.
That was having the effect of distorting Libor, and therefore trillions of dollars of securities around the world. They feared if they were honest they could go the same way as Bear Stearns , the year-old New York securities firm that had collapsed the previous month. The big flaw in Libor was that it relied on banks to tell the truth but encouraged them to lie.
They were prevented from deviating too far from the truth because their fellow market participants knew what rates they were really being charged. Over the previous few months, that had changed. Banks had stopped lending to each other for periods of longer than a few days, preferring to stockpile their cash. After Bear Stearns there was no guarantee they would get it back.
With so much at stake, lenders had become fixated on what their rivals were inputting. Any outlier at the higher — that is, riskier — end was in danger of becoming a pariah, unable to access the liquidity it needed to fund its balance sheet.
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