How many Traders does it take to change a LIBOR?

Almost 10 years after the manipulation of the LIBOR benchmark was first detected to have happened (although there is ample evidence that misconduct had been going on for years prior to that) the first LIBOR trader, Tom Hayes, appeared in court this week [1].

In opening statements by the prosecution, Mr Hayes was described in court as being ‘thoroughly dishonest’ and driven by ‘greed’.

The collusion of multiple traders and brokers to manipulate LIBOR was certainly ‘dishonest’, breaking all the rules of the industry’s and individual firms’ codes of conduct [2].  Since 2014, such conduct has been made explicitly a criminal offense in the UK, though surprisingly it wasn’t at the time.

Without judging the case, it certainly appears that the ‘Senior Yen Trader ‘at UBS identified in recorded phone conversations was dishonest, urging his colleagues, ‘friends’ at other banks and brokers over 800 times to break rules for LIBOR submissions [2]. It should be noted that the recording was not part of a ‘sting’ but that telephone conversations are recorded as a matter of course on banks’ trading floors.

So if the prosecution is able to identify that Mr Hayes is the Senior Yen Trader in question, the game would appear to be up for him. But anyway, Mr Hayes has already admitted to being the person recorded.

However, Mr Hayes is not being charged with ‘dishonesty’ per se but with several counts of ‘conspiracy to defraud’ covering a period from 2006 to 2010. And conspiracy is a notoriously difficult charge to prove, although Mr Hayes has ‘sort of’ confessed admitting to the UK Serious Fraud Office (SFO) that he ‘was part of a system where rigging Libor was “commonplace”’ and that he was a “serial offender”.

While singling out the Senior Yen Trader as being central to manipulating LIBOR, he was not alone and regulators noted [2]

“The conduct of the dozens of Derivatives Traders and Trader-Submitters occurred openly and was pervasive at UBS on certain trading desks, even involving the participation or knowledge of desk managers and senior managers”

Manipulation of LIBOR appears to have been ‘business as usual’ not only in UBS but at several other banks also.

The prosecution’s case is that Mr Hayes was the Svengali or ‘Ringmaster’ in this crime, whereas the defendant will claim that everyone else was doing it and he shouldn’t be singled out. Mr Hayes’ defence has been boosted by massive fines totaling some $10 billion handed out at the end of May to five large banks for similar manipulation of the Forex markets [3].

Weeks of lurid claims and counterclaims are ahead of us.

So while we await the verdict, there is an opportunity to consider our own behaviour in this context.
The headlines are lurid. The main prosecutor attacked “the point is, you’re greedy, you want every little bit of money you can possibly get, because that’s how you’re judged”.

While not wishing to exonerate Mr Hayes, who didn’t just lose but appeared to throw away his moral compass, what is the evidence for ‘greed’? It boils down to the fact that he got a better offer (from Citigroup) and took it. Apparently “he planned to make as much money as he could”.

Trading is an extremely well-paid job but the career is also short and brutal.  On the trading floor, there is no loyalty to one’s employer, nor should it be said to the employee. UBS lured Mr Hayes from Royal Bank of Canada and in turn Citigroup lured him to their trading team.

To their credit Citigroup dismissed Mr Hayes, but only after a year whenever manipulation was disclosed. But the prosecutor notes that he was sacked ‘following a complaint about the amount he was manipulating Libor’. Note it was not the FACT that he was manipulating but the fact it was becoming too obvious.

In other words, it’s OK to cheat but don’t get caught!

Mr Hayes, as with other so-called Rogue Traders, will cry foul and claim that he is being made a scapegoat. And he has, because we need scapegoats.

When things go wrong there appears to be a deep-seated human need to find someone to put the blame on. The concept of a scapegoat or whipping boy is ancient, appearing in the Old Testament and pre-Christian Greek law.  It is well-established in human consciousness as providing a way in which our sins can be diverted to someone/ something else who will take any punishment due.

By assigning fault to someone else we can somehow convince ourselves that, with the scapegoat punished, the event will not happen again. This is a sort of confirmation bias convincing ourselves that, unlike the scapegoat, we are beyond reproach.

But scapegoating does mean that we don’t learn from our mistakes and go on to commit them, again and again.

Rain Man
Scapegoating of Mr Hayes has already begun. Terms such as ‘greedy’, ‘dishonesty on an enormous scale’ and ‘Ringmaster’ are designed to paint Mr Hayes as being beyond the pale and different to the rest of us.

We are being softened up.

The prosecutor claimed that Hayes was ‘dissatisfied’ with the amount he was being paid by UBS and left to join Citigroup. It’s outrageous, how can anyone be ‘dissatisfied’ with millions in bonuses, we are being nudged to ask (in much the same way that LIBOR was nudged for profit across many banks).

We also condemn with faint praise. Newspapers report that Mr Hayes was ‘so brainy yet socially awkward’ that he was nicknamed the ‘Rain Man’. The prosecutor said that Mr Hayes was had been diagnosed with mild Asperger’s syndrome, and he was a mathematician – QED. But what is mild Asperger’s?   Whatever it is, it sounds like he is different to us – normal people? That confirms our biases.

By the time that the 10 week trial is over, Hayes will be well and truly scapegoated and few will mourn his jail sentence.

This does not mean that Hayes is innocent, he has already admitted to dishonesty but by making him a scapegoat we do two things. First we take the heat off the managers who hired him knowing full well that the LIBOR market was rigged (they admitted as much in testimony to the UK Parliament).

But most of all, it lets us off the hook. It convinces us that the crime was so heinous and the criminal so perverted that we could never be part of anything remotely similar. But there were hundreds, probably thousands, who looked on at rampant misconduct in the LIBOR, Forex and earlier the Credit Rating manipulation scandals, and did nothing.

Why, because it is uncomfortable to stand up.  It is much easier to pick up a stone and pelt a scapegoat.

So how many Traders does it take to change a LIBOR? Not many – if everyone is looking the other way.

People Risk Management
The risk that an employee or group make bad decisions is a People Risk as it can lead to significant losses even the bankruptcy of the firm. In this case a myriad of decisions NOT to proactively seek out and punish obvious misconduct on the trading floors of large banks has resulted in significant fines and considerable reputation damage to the banks concerned.

This blog is one of a planned series that will discuss facets of People Risk in general and Decision-Making in particular [4]. It is obvious that managers and assurance functions, such as Risk Management, Audit, Compliance and Human Resources, must understand the concept of People Risk, particularly the influence of individual and group biases on decision-making, because badly-made decisions may result in significant damage to the firm.

[1] See first newspaper reports of the trial

[2] See McConnell P. J. (2013) ‘Systemic Operational Risk – The LIBOR Scandal’ Journal of Operational Risk Vol. 8 No 3 Fall And
McConnell P. J. (2014) ‘Analysing the LIBOR manipulation case: The operational risk caused by brokers misbehaviour’ Journal of Operational Risk, Vol. 9 No. 1

[3] See details of the Forex fines

[4] See Blacker and McConnell, 2015, ‘People Risk Management’, Kogan Page, London


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