The evidence read like overheard pub talk, because it mostly was. “Coffees will be coming your way,” one trader promised, in exchange for a fiddled number. “Dude. I owe you big time!… I’m opening a bottle of Bollinger,” a second messaged. One kept diary notes so he would not forget to rig the fix the following week: “Ask for High 6M Fix,” entered into his calendar the way another man might write “Buy milk”. The small change was buying influence over the most important figure in finance, the benchmark for about $800 trillion in instruments, from complex interest-rate derivatives to plain mortgages.
LIBOR, the London inter-bank offered rate, was an anachronism that still ran the world. Each day a panel of banks submitted estimates, for ten currencies and 15 maturities, of what it would cost them to borrow; the dollar rate was fixed at 11am from a panel of 18, the top four and bottom four estimates thrown out, the rest averaged. The rot was structural. “There is no reporting of transactions, no one really knows what’s going on in the market,” said a former senior trader involved in setting the rate at a large bank. The instruments stacked on top were the deeper problem: “You have this vast overhang of financial instruments that hang their own fixes off a rate that doesn’t actually exist.”
Two separate rackets ran through it. The first belonged to the derivatives desks, nudging the daily fix to suit their books; at Barclays a normal day’s interest-rate moves alone could swing £20m, $40m at the time, and settlements with the Financial Services Authority and the Department of Justice recorded manipulation on hundreds of occasions. Bob Diamond, the chief executive who resigned on July 3rd, answered with a staff memo noting “on the majority of days, no requests were made at all” – a defence rather like an adulterer pleading fidelity on most days. The second racket was quieter: through the crisis years, banks submitted borrowing estimates 30 to 40 basis points too low so as not to look weak; Barclays, consistently high, massaged its numbers down just enough to be discarded from the calculation without drawing attention. “I would sort of express us maybe as not clean, but clean in principle,” a Barclays manager told the FSA on a recorded call.
By the summer of 2012 the affair had stopped being parochial. Regulators in Britain, America, Canada, Japan, Switzerland and across the EU were investigating; as many as 20 big banks had been named in inquiries or lawsuits; corporations and their lawyers were sizing up claims that could cost the industry tens of billions. One multinational bank chief reached for the epochal comparison: “This is the banking industry’s tobacco moment,” a nod to the litigation that cost the American tobacco industry over $200 billion back in 1998.
The season around it was a blistering one for the City. That same month HSBC in London had admitted enabling money laundering by Mexican drug cartels, JP Morgan’s traders had run up a potential $9bn, and the Square Mile’s old motto, “my word is my bond”, had curdled into bait. The real subject, one City commentator argued, was expatriate trader culture: banks anchored nowhere, competing cut-throat, regulated on a trust that no longer existed. The Barings collapse had raised the flag back in 1995 and been ignored; now the traders’ own calendars were doing the confessing. Industry veterans were blunter about how old the game was: “Fifteen years ago the word was that LIBOR was being rigged,” one said, and “the regulator was asleep, the Bank of England didn’t care”.
Fourteen years on, the record reads uncomfortably in both directions. The traders moved the fix by a basis point or two when they cheated for profit; the bigger distortion came from banks lowballing reports of their own health during the crisis, with the question of official winking unresolved: Bob Diamond’s notes of a call with the Bank of England’s Paul Tucker were read by colleagues as a nudge, and the next day Barclays’ submissions came in lower. The rate that anchored $800 trillion was, at bottom, a gentleman’s guess. The old trader’s warning still hangs over every benchmark built on bankers’ word: “With traders, if you don’t actually nail it down, they’ll steal it.”
Sources
- HSBC, Libor and the cynical ethos of international banking | Charles Geisst | The Guardian
- The LIBOR Scandal Reveals the Rotten Heart of Finance – Business Insider
