Back in July 2012, in the pages of ‘Metal Bulletin’, I wrote an article entitled ‘Libor Lies’; it was written as the scandal of Libor rigging by certain people at certain banks and brokers was just hitting the headlines. I’ve now just finished reading a book called ‘The Spider Network’, by David Enrich, which, while being broadly the story of the scam, is more particularly the tale of one of the main participants, sometime RBS/RBC/UBS/Citigroup interest rate trader Tom Hayes. Hayes is the man found guilty by the court, who was initially (subsequently slightly reduced on appeal) sentenced to fourteen years, of which more later.
The title page of the book refers to it as “the wild story of a maths genius, a gang of backstabbing bankers, and one of the greatest scams in financial history”. Well, there are a few propositions there. It is, in a sense, I guess a ‘wild story’; ‘maths genius’ is probably an exaggeration - we’re not talking Newton or Fermat, for example; ‘backstabbing bankers' - yes, I’d go with that one; ‘greatest scams in financial history' - no, really not.
But it’s a well-written - if occasionally hyperbolic - book, which manages to give some clarity to the curiously complicated tale of motivation, misunderstanding and blindness to reality which lay behind the manipulation. First, a bit of a recap. In the dim and distant past, before the British Bankers Association launched their daily Libor fix, any contract which needed an interest rate reference level in its pricing necessitated the parties finding agreement on how that reference could be produced. Bankers familiar with that time have confirmed to me that that could be a complicated and time-consuming process, so the arrival of Libor - published every day from input submitted by the same group of banks - was a welcome short-cut. In time, though, as well as being used as a reference price in loan documentation, which was how it was originally conceived, it began to play a part in tradable interest rate derivative products; broadly, hedging and speculative products. So increasingly, the derivative trading desks of the banks perceived that they had a direct financial interest in where to rate was set each day; their profit or loss could swing, possibly a lot, if the positions were big enough, according to where the interest date reference was set.
So, surprise, surprise, they began to exert pressure on those submitting the rates to the BBA to move the submissions in a direction which would suit their trading book. That’s kind of the starting point for what followed.
Enrich takes us through Tom Hayes’ progress, from back office junior to big swinging UBS and Citigroup trader in Tokyo. The picture he paints is of a sharp dealer, with a quick mathematical brain, and an awkward personality and difficulties in social contact. This is attributed - with what degree of medical certainty is unclear - to a low-level instance of autism. Whatever the extent of that, it’s clear that Hayes is not a normal, sociable trader, and limits his business circle mostly to a small group of London’s finest(?) IDBs and a very select number of traders at other banks. As he becomes the biggest interest-rate derivative trader in the Tokyo market, so he begins to understand that he can apply pressure through that limited group of contacts to move the Libor fixing in ways which will assist his open trading positions. To those who grew up with a tradable reference price fixing, as used by the LME and precious metals, it seems naïve to expect anything else from a system which relied on no more than relatively junior employees telephoning in their subjective view of what their bank’s overnight lending rate would be; nevertheless, the BBA seemed happy with it.
Anyway, I’m not going to rehash the whole book; it’s worth reading. But there are a couple of points that are worth making. First is the sheer venality of the IDBs; they make a great play of convincing Hayes that they were pressuring their contacts at other Libor-submitting banks to move rates as he was asking - in return for business from Hayes (including pointless wash deals) paying large amounts of commission, which then reached their remuneration - yet at his trial, they assured the judge and jury that they had done nothing, merely told Hayes they were helping while sitting on their hands. The truth is probably somewhere in the middle.
Secondly, it’s interesting that Hayes didn’t - and presumably still doesn’t - think he did anything wrong. The practice, he says, was widespread, and he was employed to maximise profits for his employer; he just used the means at his disposal. Who knows what the actual cost was, and what the excess profits were? For sure, a number of banks saw more generated from the interest rate and money market derivative desks than they anticipated or budgeted, but trying to quantify what was produced by manipulation is pretty much impossible, as it is to try and assess how much was lost by those on the wrong end. All we can say is that Libor was being used in a way which was inappropriate, considering what it actually represented. It may have been the jewel in the BBA’s crown, but it was unfit.
The last point I’d make is that Tom Hayes got a very long sentence. Frankly, fourteen years (later reduced on appeal to eleven) seems to me very, very heavy-handed. I have a nasty feeling that he has served in a way as a scapegoat for lots of egregious behaviour which led to the 2008 crisis, yet has not really been punished.
Anyway, I’d recommend this book; it reads like a thriller, and it shines a light into the seedy side of some financial trading. For sure, the IDBs don’t come out of it well.
The Spider Network, by David Enrich, is published by W H Allen.