
The brazenness of the LIBOR scam - fern12
http://knowledge.wharton.upenn.edu/article/libor-scandal/
======
cm2187
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.

~~~
lucozade
> 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.

~~~
qwerty456127
> 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.

~~~
mieseratte
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.

~~~
erikpukinskis
> 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.

~~~
mieseratte
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.

~~~
erikpukinskis
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.

------
ikeboy
>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.

~~~
21
> 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...](https://www.theguardian.com/commentisfree/2012/dec/12/hsbc-
prosecution-fine-money-laundering)

~~~
Iv
I am still angry that banks too big to fail were not nationalized at this
time.

~~~
PhantomGremlin
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/C?p=C)
[https://finance.yahoo.com/quote/aig/?p=aig](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.

~~~
tinokid
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.

------
ggm
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.

------
kbart
_" 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.

~~~
AndyMcConachie
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.

~~~
kbart
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.

~~~
jjoonathan
Captain America punches Campaign Finance in the face, freeing the American
people from the grip of expanding monopolies and anti-consumer practices!

------
LittlePeter
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?

~~~
nmstoker
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)

------
freech
> 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.

------
truculation
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.

~~~
pjmorris
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.

