I’ve just finished reading the book “Rigged”, by BBC journalist Andy Verity. It’s essentially the series of radio programmes he made - and which I commented on here a year or so ago - fleshed out in book form, and is, he claims, the full story of the LIBOR rigging scandal of 2007/08, and the later fall-out and the trials and sentences handed down to the traders accused and convicted of ….well, that’s rather the point: convicted of what, that warranted the draconian sentences that many received?
Effectively, what those traders were accused of was allowing their daily LIBOR submissions to be influenced by the commercial interests of the banks for whom they worked. I’ve written before about the the way LIBOR, which was originally an indicative rate produced daily by the BBA, was then allowed to replace base rate as the basis for the interest rate charged on myriad derivative contracts. I’m not going to repeat all that here, but in summary, it should have been glaringly obvious that a benchmark arrived at simply by asking various market participants where they estimated the market to be, would be open to commercial interest. But then, there was the unfortunate - for the prosecution of individuals - fact that nowhere in the regulations was it stated that taking account of the bank’s own daily interest rate position (agglomerated from its own derivative trading activities) was not to be condoned. A bit tricky to use that as the basis for prosecution, then. So use was made of an old piece of legislation, outlawing conspiracy to influence the rate; that covered everyone who had ever referred to a rate fixing to anyone else…..quite a convenient catch-all…..
That’s all background. What Verity alleges is that the true rigging of the rate was done with the full approval of governments, central banks and the senior - very senior - management of many of the largest commercial banks. This was done because governments and central banks were so concerned that the financial system was on the verge of collapse that they needed - for the sake of stability - to make it seem that interest rates were lower than was in fact the case and that banks were happily lending to each other, which was largely not the case. Now, we may or may not believe Verity; personally, I think the weight of his documented evidence makes his case pretty well. We may feel that he makes some possibly misconstrued judgements on why the courts acted as they did. We may think that governments and central banks need to operate sometimes in the shadows, if circumstances are so severe that overt action could provoke precisely the cataclysmic event they are desperate to avoid. What we would also think - as I hope fair-minded individuals - is that covering your tracks by scapegoating traders who were doing their jobs, under instruction from their senior managers, in order at least in part to assuage the public demand for vengeance on bankers - particularly fairly well-paid ones - is morally wrong.
Read the book; you may come to a different conclusion from me, but my view is that Verity makes a strong case. There are a few passages which betray that he is a journalist not a financial trader, and you could quibble with some of the legal interpretation ( I think; but I’m not a lawyer), but what actually happened is that Tom Hayes, Peter Johnson et al were sent to prison for doing their jobs; doing what had been routine for years before and what would have been the logical expectation of any rational person given the set of circumstances in which they found themselves. They have been used as scapegoats to divert attention from what else was going on. I suspect actually that many people would be willing to accept the actions of the governments to avert a worsening of the crisis. Most of us who understand this stuff would, like the Irishman when asked the way to somewhere, say “I can tell you the way, but I wouldn’t start from here.” The seeds of this issue were sown some while ago, when LIBOR - derived as it was - stopped being an indicative number and started being a tradeable one.
“Rigged”, by Andy Verity, is published by Flint, an imprint of The History Press.