Book Review of The Fix by Liam Vaughan and Gavin Finch

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Genre: Business
Author: Liam Vaughan and Gavin Finch
Title: The Fix: How Bankers Lied, Cheated and Colluded to Rig the World’s Most Important (Buy the Book)


Liam Vaughan and Gavin Finch’s The Fix: How Bankers Lied, Cheated and Colluded to Rig the World’s Most Important Number is a book about the London Interbank Offered Rate, otherwise known as LIBOR. The book delves into four aspects of LIBOR: 1) the creation and evolution of LIBOR; 2) the strategies used by traders, brokers, executives, regulators and governments to rig this benchmark, and their individual reasons for doing so; 3) the media initiated investigation of this scandal; and 4) the legal prosecution and decided verdicts.

LIBOR was initiated in 1969 when a Manufacturers Hanover banker introduced the idea of syndicated banks and variable loans in order to secure large dollar loans to emerging markets with the use of foreign lenders in an attempt to bypass more stringent U.S. regulations. This benchmark was quickly adopted into a vast array of other financial instruments and really took off with the laissez faire governmental financial deregulations that took place in the 1980s, specifically in England.

This deregulation invited more cutthroat attitudes from the United States and other areas to infiltrate overseas financial institutions. When the Chicago Mercantile Exchange (CME) switched their popular Eurodollar futures contract from their own benchmark to LIBOR, the United States put their stamp of approval on LIBOR as a preferred interest rate benchmark. It was clear that the CME benchmark was safer than LIBOR because its rate was set by random banks who had no knowledge as to whether their estimates would be used in the rate or not.

Multiple warnings surfaced as to the real possibilities that LIBOR could be manipulated due to the fact that the LIBOR bank rate-setters acted as self-policing bodies, as well as that these same banks might have financial profit-making temptations and incentives. Nevertheless, the U.S. regulator, the Commodity Futures Trading Commission (CFTC), felt that this new CME benchmark would be safe and impossible to rig.

The CFTC reasoned that LIBOR would be a secure interest rate benchmark for the CME Eurodollar futures contracts because of the following reasons: 1) a number of banks acted as rate-setters with the top and bottom quarter of outlying rates being dropped, and 2) extreme outliers would be easily identified and subsequently dealt with and punished by the other banks.

Vaughan and Finch dedicated a good portion of the book to a trader named Thomas Alexander William Hayes. Hayes was somewhat of a socially handicapped individual with a thirst for organization and a propensity to recognize mathematical patterns.

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Hayes was a risk taker, a big money maker, a willing LIBOR cheater, and one of the few in the LIBOR saga who was prosecuted, convicted and sentenced to a generous prison term. This book outlines his techniques to rig LIBOR which consisted primarily of providing financial incentives to brokers so they could be used as loyal conduits in influencing LIBOR rate-setters.

Hayes’ miscalculation was that he saw nothing wrong with nudging the benchmark when many of his superiors pervasively moved the interest rate in a much more augmented fashion.

Hayes had been well insulated while working for the Switzerland based bank, UBS, because the Swiss privacy laws were arguably the most impenetrable in the world. During the LIBOR investigation, however, a CFTC investigator traveled to Bern, Switzerland, with a well-connected CFTC attorney who was a friend to the Swiss Financial Market Supervisory Authority (Finma) general council. Through this connection, a deal was reached whereby UBS documents would be passed through Finma to the CFTC.

Hayes was no longer protected, as the incriminating evidence sealed his fate. When all hope was lost, Hayes decided to cooperate with the U.K.’s Serious Organised Crime and Police Act of 2005 that allowed prosecutors to strike a deal with a cooperating witness.

He provided investigators with hours of detailed testimony in exchange for being tried in England and not the United States. However, at the eleventh hour, Hayes decided to abandon his cooperation strategy.

Thus, when his attorney attempted to make Hayes appear as a choir boy in front of the jury, the prosecuting attorney surfaced Hayes’ untoward personality flaws. Subsequently, he was convicted and sentenced to a 14-year prison term.

The rigging of LIBOR led to financial gains for banks, traders and brokers. Governments also benefited with increasing revenues. After the 2008 financial crisis, manipulation of LIBOR was used by governments and banks to calm the public by presenting banks in better light than they actually were. Maintaining a low LIBOR benchmark indicated that banks were liquid and in fine shape.

Nothing could have been further from the truth.

Many banks had to be subsidized by their respective governments, and some were taken over or nationalized by their respective governments. In fact, the Bank of England coordinated with banks to keep their LIBOR submissions on the low side.

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The intent was to prevent the public runs on the banks, which were, in fact, cash strapped. LIBOR was even easier to rig at this time as banks were not loaning to each other either because of their liquidity of the fear that the counter-party bank might default. Nobody was sure where LIBOR should be set, and cheating became rampant.

This book demonstrated the differences between the U.S. regulators and the U.K. regulators. The U.S. regulators were more “by the book” while the U.K. regulators were more laid back and accepting of banking malfeasance.

The LIBOR investigation began with an April 2008 article in the Wall Street Journal that expressed concerns that LIBOR was becoming unreliable.

The Wall Street Journal followed with a May 2008 piece that pointed out that Credit Default Swaps Insurance had skyrocketed since the financial crisis, yet LIBOR remained stable.

This caught the eye of the CFTC and this body began investigating LIBOR fraud. The investigation went into full swing after a former CFTC agent joined a law firm, ultimately becoming Barclays’ attorney regarding the LIBOR investigation.

Through him, Barclays passed very incriminating evidence to the CFTC in exchange for ultimate leniency. By and by, this attorney abused his friendship with the U.K.’s Financial Services Authority (FSA) Head of Enforcement, and his law firm was unceremoniously replaced as Barclays’ council.

Prior to this, the FSA was unhelpful in the investigation but now was on board, and the investigation was in full swing. The evidence for tampering was impossible to defend.

The History and Context of LIBOR

The London Interbank Offered Rate (LIBOR) was established in 1969 to benchmark short-term cash borrowing rates between banks. Milo Zombanakis, a Manufacturers Hanover Banker, developed this idea to help Iran borrow $80 million through non-U.S. sources and bypass stringent U.S. financial regulations.

Understandably, foreign banks were apprehensive loaning such a large sum of money to a developing country that bore with it the accompanying risks of being out-of-pocket and non-liquid, while also risking potential rising interest rates on their fixed interest rate loan.

Zombanakis’ plan offered less risk for the foreign banks in two ways: the banks would be syndicated to remedy the severe out-of-pocket concerns, and the loans would be in a series of rolling deposits with interest rates recalculated every few months.

Little did Zombanakis know that these rolling deposits would infiltrate just about everything the financial market had to offer.

Soon after Zombanakis’ proposal, variable rate loans became popular and LIBOR was used in calculating interest rate charges. The floating rate eventually expanded beyond the loan market into the bond market as floating-rate notes, as well as into derivatives trading.

Derivatives trading allowed traders to “bet” their bank’s money where their positions rose and fell in reference to benchmark interest rates, specifically LIBOR. Its simplest form, the interest-rate swap, consisted of two parties agreeing to exchange interest payments on a set amount for a fixed period, with one paying the fixed interest rate and the other paying the floating rate.

These two parties had opposite expectations of future interest rates and utilized their position to monetize their prediction.

This arrangement had major benefits, including minimal upfront payments as traders were “exchanging” the principle of the loan, allowing them to speculate on interest rate movements at a cheaper cost in comparison to investing in other options, such as government bonds.

With the widespread adoption of LIBOR, the British Bankers Association (BBA) consulted the Bank of England to establish a panel of banks whose estimates of loan costs, based on their financial environment, would be pooled and averaged each day. Ten currencies were included and the top and bottom “outlier-bank” submissions were stripped to bypass fraudulent behavior.

After U.K. Prime Minister Margaret Thatcher implemented her “Big Bang” financial deregulation in 1986, the market for derivatives, bonds and syndicated loans soared in popularity.

The deregulation opened opportunities for retail banks to establish integrated investment banks that could make markets, advise clients, sell securities and place their own side debts. Furthermore, the deregulation allowed foreign banks to take over U.K. firms, resulting in more cutthroat and aggressive ideologies from big U.S. and international lenders.

In 1997, the Chicago Mercantile Exchange (CME) gave a “U.S.” LIBOR “stamp of approval” when it changed its Eurodollar futures instrument from its own benchmark to that of LIBOR. Prior to this change, the CME calculated its benchmark using a random survey of banks who were asked the rate at which they were willing to lend to prime banks, not knowing if their response would be included in the decided rate.

On the other hand, a self-selected, self-policing committee of the world’s largest banks set LIBOR.

Certainly, the CME rate would be safer and more difficult to rig than the LIBOR rate. It should also be noted that the CME traded Eurodollar futures contracts which were very popular as a hedge for traders against their over-the-counter (non-exchange) swap positions.

Despite two independent warnings that LIBOR might encourage cheating from Marcy Engle (Solomon Brothers Lawyer) and Richard Robb (DKB Financial Products interest-rate trader), the Commodity Futures Trading Commission (CFTC) in Washington, D.C. signed off on the CME’s decision to use LIBOR on their Eurodollar futures contracts.

The CFTC was confident that the LIBOR rate could not be manipulated since the top and bottom quarter of banks were discarded. Furthermore, the CFTC was convinced that any bank submitting outlying, dubious figures would be identified by their peers and dealt with accordingly.

Unfortunately, even though the outliers were stripped, it went unrecognized that LIBOR could still be influenced by pushing previously excluded rates back into the pack.

In fact, a lecture given by Professor Andrew Verstein at Yale Law School showed that the LIBOR reference rate could be affected by a single bank acting alone. Additionally, traders with enormous derivatives positions did not need major adjustments in the LIBOR rate to make huge profits. Instead, they only needed merely a few hundredths of a percentage point, which could easily go undetected. A bank with a $100 billion portfolio of interest-rate swaps could gain millions of dollars from a 1 basis point move.

The evolution of LIBOR also penetrated mortgages and student loans. Where LIBOR was set dictated how much interest U.S. homeowners paid on their mortgages each month. Poorer people with bad credit were affected disproportionately. With regards to the 2008 financial crisis, 90% of all Ohio subprime (variable interest rate loans) mortgages were indexed to LIBOR, double the proportion of prime loans.

Liam Vaughan and Gavin Finch’s, The Fix: How Bankers Lied, Cheated and Colluded to Rig the World’s Most Important Number catalogs how LIBOR, a critical benchmark, evolved from an innovative initiative into a fictional construct, dreamed up each day in the minds of bankers with a vested interest in where it was set.

This book highlights a group of traders and brokers who exploited a flaw in the system for financial gain.

However, Vaughan and Finch also make it clear that others were equally responsible regarding this fraud. Bank executives profited by making money without regard to forthrightness, regulators were weak or unwilling to perform their oversight duties, and even government officials potentially rigged the system in order to show the public how their policies saved the global financial system. As the book says, “No one was clean.”

Introduction to Thomas Hayes

A trader named Thomas Hayes was one of the few convicted amid the LIBOR saga.

Hayes, diagnosed with Asperger’s disease in his thirties, had the syndrome’s quintessential organization, pattern identifying, mathematical savant mind, along with a quick temper, poor hygiene and questionable social skills. Still, he was a big risk taker, a huge trader, and gigantic moneymaker.

Hayes outworked most traders, which equipped him to win on most trades; however, he wanted to decrease his risk as much as possible. With LIBOR, Hayes saw a way to cheat, and gladly embraced an untoward strategy to decrease his risk even more.

Despite his relative inexperience as a trader early in his career, Hayes recognized LIBOR rate-setters relied on brokers for information about bank liquidity and cash trading location.

Because of this insight, Hayes drew upon his past relationships with brokers to create a network that would nudge LIBOR rate-setters in the direction that suited his positions. Since brokers made money largely on commissions from buy and sell orders, coupled with Hayes being a high-volume trader, these brokers became his loyal lieutenants.

Hayes wanted “his” brokers to lie to the banks about the status of cash markets. He hoped that LIBOR rate-setters would blindly follow banks’ suggestions (especially the banks within Hayes’ network) and influence several rate-setters at once.

Hayes was working with momentum, targeting prominent banks to make it more likely that other LIBOR contributors would assume that the bigger banks had a better read of the cash market and just tag along with their submissions.

Hayes maintained a better relationship with brokers than most traders, who had a habit of looking upon brokers as second-class citizens.

Additionally, the biggest yen derivatives traders were based in Tokyo, (where Hayes worked and resided) and these traders had few ties to London brokers and rate-setters where Hayes knew the London market well.

A More In-Depth Look at Hayes’ Network

U.K. based Intercapital (ICAP) was a provider of post-trade risk services, the largest in the world, carrying out transactions for financial institutions rather than private individuals.

When traders changed employers, they “inherited” the brokers of the trader they replaced. In 2001, after Hayes’ UBS London internship, he joined the Royal Bank of Scotland (RBS) in interest rate derivatives, and “inherited” the best technical ICAP broker in London, Darrell Read who brokered yen derivatives and happened to be friends with Colin Goodman, an ICAP employee who emailed an unofficial, but closely monitored, daily LIBOR prediction titled the “run- through.”

The “run-through,” read by over 100 traders and brokers (including representatives from 13 of the 16 banks of the LIBOR panel), was supposed to be an impartial reflection of where cash was trading in the market. Because Hayes was such an aggressive trader in the yen market, he put hundreds of millions of dollars of trades per week through Read who earned a hefty commission on these trades.

Through the “greasing”, Read influenced Goodman to skew the “run-through” to benefit Hayes’ positions. Read also had influence with a friend at West LB, another LIBOR rate-setting bank. The commissions Read earned were so substantial that he dropped all his clients to be available to Hayes full time.

The size and frequency of Hayes’ trades led to such substantial profits that Read’s boss arranged a “LIBOR Service Fee” for Read to maximize his commission. As time went on, Hayes moved from RBS to the Royal Bank of Canada (RBC) in 2005 and again to UBS (Tokyo) in 2006 where he was given responsibility for UBS’s exposure to LIBOR, and he would brief his bosses at morning meetings on how he planned to influence the LIBOR rate that day.

UBS even started paying ICAP to skew Goodman’s Libor “run-through” to help Hayes make money for the company. The ICAP network was only one of many for Hayes.

Another very profitable arrangement was with RP Martin broker, Terry Farr. Farr was familiar with junior employees who input RP Martin’s LIBOR rates each morning.

Being a smaller firm, the commissions for brokers were uncapped and Hayes filtered huge trades to Farr to earn his loyalty and influence LIBOR rate-submitters.

Farr was compensated through “wash trades” where Hayes would simultaneously buy and sell identical financial assets in the market, creating artificial activity and allowing Farr to collect the associated commissions.

Stuart Wiley, a JP Morgan trader, acted as a counterparty to one of Hayes’ “wash trades” although the majority were carried out between Hayes and Neil Danzinger, a London-based RBS trader. Traders from Merrill Lynch and Rabobank declined to participate.

Hayes created a web of brokers, traders and even direct LIBOR rate-setters but the more interesting LIBOR relationship turned out to be at Hayes’ own bank, UBS. Even though the LIBOR rates were input in Zurich at UBS global headquarters, a mid-level manager in Singapore, Roger Darin, made the final LIBOR rate decision.

When Hayes was with RBC, Darin was sometimes the counterparty to Hayes’ deals.

On one occasion, Hayes was angry at the rate Darin had set and actually threatened to report him to the British Banker’s Association (BBA). In short, bad blood existed between the two men.

Investigative emails seemed to show that once Hayes became a UBS trader, Darin began skewing the bank’s LIBOR. Darin’s legal case was slowly moving through the courts at the time of the book’s writing, with Darin arguing that UBS managers told him to comply with Hayes’ requests, but Darin frequently pushed back.

While Hayes and Darin remained civil, Hayes’s bitterness grew because of his insatiable desire for absolute control. Darin, being the UBS yen LIBOR gatekeeper, stood in Hayes’ way. Starting in October 2008, Hayes began trying to bypass Darin, going straight to subordinate rate-setters in Zurich.

The subordinates, Rolf Keiser and Joachin Ruh, tried to nudge the rate for Hayes but, in the end, were loyal to their boss Darin. In the spring of 2009, the UBS cash side of the bank began ascending while the investment side descended. Hayes began worrying about his future at UBS.

Yvan Durcot, the head of cash business at the Zurich based UBS, was not fond of Hayes. Durcot was promoted to the head of the newly merged yen short-term interest-rate trading team, and the first thing she told Hayes was UBS would not honor the $2.5 million bonus he had been promised, and instead, he would be receiving $250,000.

The Effects of the Mortgage Meltdown

The 2008 mortgage crisis was ready-made for Hayes who generated over $80 million in revenue for UBS in 2008.

After the crisis, no LIBOR rate-setter had a clear sense of LIBOR’s true value and West LB as well as Citigroup followed Goodman’s advice to “run through” like sheep.

The LIBOR interest rates between the overnight and the 6-month used to differ by about 7 basis points, but during this time the rates differed by about 50 basis points.

In 2008 banks ceased lending to each other for longer than a few days, preserving their own liquidity. Following the Bears Sterns collapse, there was a real fear of bank default and thus no guarantee banks would get their loans back.

LIBOR’s fatal flaw was revealed through the competing priorities of reporting accurate information while surviving the financial crisis by presenting false information.

If a bank submitted a relatively honest “high” LIBOR, they risked being unable to access needed liquidity to fund their balance sheet from other less honest banks. In fact, the motivation for low-balling LIBOR was no longer for profit but merely to stay afloat.

Liquidity refers to the ease with which one can access a market to buy and sell assets.

Historically, whenever a trader wanted to buy or sell a share, bond, derivative or borrow cash, the trader could expect a counterparty willing to take the other side of the trade for risk or a small amount of interest.

By summer 2007, the mortgage crisis in the U.S. caused banks and investment funds around the world to become apprehensive about lending to each other without collateral because of possible bank defaults.

Firms that relied on the money markets to fund their businesses were paralyzed by the ballooning cost of short-term credit. Thus, banks were only prepared to make unsecured loans to each other for a few days at a time and interest rates on longer-term loans skyrocketed.

In August 2007, the spread between 3-month dollar LIBOR and the overnight indexed sway, a measure of the banks’ overnight borrowing costs, jumped from 12 basis points to 73 basis points and by December it had soared to 106 basis points.

No bank wanted to be a high outlier on LIBOR and if they were, their rate would be manipulated to a value more consistent with their peers.

Yet, nobody knew if the LIBOR rates reflected the severity of the credit squeeze. Even when bankers wanted to be honest, there was no way of knowing if their estimates were accurate since no alternative underlying interbank borrowing rate existed.

The machine had broken down and Hayes capitalized on LIBOR’s volatility. However, Hayes’ loyalty to UBS was diminishing as he began showing huge losses for the bank throughout 2009 and continued to feel resentment about management’s approach to his bonus.

No bank wanted to be a high outlier on LIBOR and if they were, their rate would be manipulated to a value more consistent with their peers. Yet, nobody knew if the LIBOR rates reflected the severity of the credit squeeze.

Even when bankers wanted to be honest, there was no way of knowing if their estimates were accurate since no alternative underlying interbank borrowing rate existed.

The machine had broken down and Hayes capitalized on LIBOR’s volatility. However, Hayes’ loyalty to UBS was diminishing as he began showing huge losses for the bank throughout 2009 and continued to feel resentment about management’s approach to his bonus.

Chris Cecere at Citigroup began to recruit Hayes to join the firm starting in June 2009. Cecere outlined a plan to build a world-beating derivatives business with Hayes at the center.

When Hayes told his boss Mike Pieri of the recruitment, Pieri advocated for Hayes to UBS management (as he always had in the past).

Armed with the fact that Hayes was now up $150 million for the year, Pieri emailed Durcot and co-CEO of the investment bank, Carston Kengeter, lobbying for Hayes. Durcot forwarded the email to Darin who refuted all of Pieri’s extolling points.

In the end, the money Hayes had accumulated for the firm won out and Hayes was promised another multimillion-dollar bonus.

Being stung once, Hayes demanded the promise be put in writing. The UBS executives refused and subsequently, Hayes’ wife Sarah Tighe (a corporate lawyer), encouraged him to consider a move to Citigroup.

At the same time, Hayes was losing significantly on UBS money gambled on a high LIBOR. Hayes knew Guillaume Adolph, a Deutsche Bank LIBOR setter, and asked him via text to increase LIBOR for July 14, 2009 and then crash the 6-month LIBOR.

The details of the instant message later provided evidence for investigators, as the text requested the following: if Adolph increased his 6-month yen submission in the coming days, Hayes would mobilize his network to help him with whatever he needed.

The difference with this request was that Hayes wanted the 6-month yen to crash, and fixing LIBOR weeks into the future when it was impossible to know where any bank would be able to borrow was incriminating and obvious rigging.

Adolph did as he was requested, saving Hayes about $2 million. Adolph was never charged with this crime but was fired by Deutsche Bank in 2011. Despite Adolph’s help, Hayes still lost millions for UBS and relations became even more strained.

To make matters worse, UBS changed the rate-setting of LIBOR to the asset and liability management (ALM) desk, a separate part of the business over which Hayes had absolutely no influence. Hayes quit UBS around September 2009.

Hayes joined Citigroup in December 2009 lured by a $3 million dollar signing bonus. He found rate setters at Citigroup very uncooperative, partly because the CFTC had begun an internal probe.

Hayes was frustrated with his inability to influence LIBOR even from former loyalists and was losing a great deal of money for Citigroup. He tried one too many times to influence the Citigroup rate setters and was handily reported to senior managers and compliance officers.

Hayes did not know about the internal investigation going on despite being monitored for weeks by Citigroup’s in-house and external lawyers.

Around July 2010, Hayes was told that the bank had been investigating him and had uncovered multiple instances of his attempting to manipulate yen LIBOR, not only with the bank’s own rate-setters, but also traders and interdealer brokers at other banks. Hayes was fired on the spot, but he did not go quietly.

Hayes explained, dripping with vitriol, that the CEO had final responsibility for every trading position of the bank and threatened to make a public fuss about this point. In the end, Citibank told Hayes that he could keep his $3 million dollar signing bonus. Hayes viewed this as hush money.

The Inception of the LIBOR Investigation

As 2009 began, the unethical actions of LIBOR manipulation were coming to light. In February 2008, Scott Peng, an analyst at Citigroup in New York, sent his customers a research note that estimated the dollar LIBOR submissions of the rate-setting firms were 20-30 basis points lower than they should have been.

This resulted from the fear of the banks as being perceived as a weak link in the fragile market environment. In March 2008, certain economists at the Bank for International Settlements, an umbrella group for central banks around the world, published a paper identifying unusual patterns in LIBOR rate-setting during the housing crisis.

In April 2008, Wall Street Journal journalist, Carrick Mollenkamp, released an article speculating banks practiced providing low LIBOR estimates to avoid tipping off the market while securing borrowing costs at a preferable rate.

Vince McGonagle, a manager overseeing the CFTC lawyers, brought this to the attention of Gretchen Lowe (a CFTC enforcement center senior deputy) and Ann Termine (a CFTC attorney) who both began quietly looking into the matter.

More steam was supplied to these regulators when, in May 2008, the Wall Street Journal ran a second story about how LIBOR and credit default swaps historically rose in lockstep during times of stress.

This contrasted with the current financial crisis, as credit default swaps insurance spiked while LIBOR saw only modest increases.

This evidence supported the theory that banks were not being honest about their predictions. The Wall Street Journal highlighted that Citigroup and UBS were leading offenders while a Barclays banker in England, Tim Bond, had admitted that his bank had felt forced into low-balling its LIBOR submissions.

Subsequently, the CFTC started targeting Bank of America, Citigroup, JP Morgan, UBS, and Barclays. Walt Lukken, the CFTC chairman, was skeptical about launching an investigation into LIBOR because he believed that U.K. regulators were responsible for LIBOR oversight, and didn’t sense any compelling evidence that would merit an investigation.

In July 2007, Lukken announced Steve Obie would succeed Greg Mocek as acting head of enforcement.

At the time, Obie was running the CFTC’s enforcement division in New York, but this promotion would move him to Washington, D.C. alongside McGonagle.

In 2009, Gary Gensler replaced Lukken as CFTC chairman. In his younger days, Gensler oversaw yen-based swaps, the very instruments that Hayes bought and sold.

Gensler conferred with Obie and was informed that a CFTC investigation was underway but had stalled, as the CFTC was busy looking into manipulation in the skyrocketing crude oil prices since the financial crisis, and the BBA, Financial Services Authority (FSA) and foreign banks were not cooperating with the CFTC.

Mocek left the CFTC in September 2008 becoming a partner at McDermott, Will & Emery. The firm had been appointed by Barclays to advise them on the CFTC’s LIBOR inquiry.

Mocek and Obie met and Mocek explained that Barclays’ staff had unearthed emails, phone recordings and instant messages that seemed to corroborate the CFTC’s suspicions that LIBOR was routinely being rigged by the rate-setting banks.

Additionally, Mocek told Obie that some of the conversation Barclays found involved derivatives traders in New York who pressured colleagues in London to change submissions to suit their trading positions.

During the crisis, banks not only manipulated LIBOR to give the impression they were healthier than they actually were, but also to make money, which was a whole new category of malfeasance.

Around Christmas of 2009, Mocek, now Barclays’ attorney, started sending Barclays’ internal probe evidence to the CFTC.

In January 2010, Mocek gave the CFTC a case for the defense: 1) LIBOR was given no due oversight or attention by the BBA regulators; 2) traders had no rules to guide them regarding LIBOR; and 3) since the financial crisis, interbank lending had basically stopped and lenders had to rely on central banks to prop them up, thus banks could no longer give accurate LIBOR estimates when there were no figures for comparison.

All that being said, Mocek was able to identify rogue elements, which he said he would “deal with without mercy.”

These rogue elements at Barclays consisted of a small team of highly paid derivative traders in Manhattan focused on the dollar rather than the yen like Hayes.

Their strategy was to straightforwardly contact the individuals responsible for setting LIBOR at Barclays and tell them what number they wanted for different maturities to help their dollar derivatives positions. Some of these traders also contacted acquaintances at other banks and asked them to make favorable submissions.

The leader of the pack was a suave, Indian born trader named Jay Merchant; (Styllianos Contogoulas and Ryan Reich were two subordinates who were at the time of this writing standing trial in London on charges of “conspiracy to defraud by rigging dollar LIBOR rates”). Their most important rate-setter was a 50-year-old Englishman named Peter Johnson.

In March 2009, Termine brought Obie a Barclays’ CD disk who relayed it to Gensler.

The CD contained an October 29, 2008 telephone conversation between Johnson and his boss, Mark Dearlove, Barclays head of money markets. Dearlove telephoned Johnson and told him to start lowering the bank’s LIBOR submission, specifically within sterling and dollars.

Dearlove prefaced the order by telling Johnson that he knew Johnson was not going to like this request but there was no choice. The order had come directly from the Bank of England and had been sanctioned by Jerry Del Missier, the executive running Barclays’ trading operations at the time.

The pivotal evidence for the case was a Barclays manager planning how the bank intended to falsify its LIBOR submission in order to save face. Bankers were being told by the U.K.’s central bank to rig LIBOR as part of a last-ditch effort to rescue the financial system from total collapse.

A second important piece of evidence came from a brief memo written by Barclays’ CEO Bob Diamond, which later became published.


Robert Edward Diamond, Jr. was hired by Barclays’ CEO, Martin Taylor in 1996. His arrival in the U.K. coincided with the advance of American firms in London due to the “Big Bang” light- touch regulatory environment.

Barclays, like all banks, had to deal with the LIBOR problem as the financial crisis deepened. Unlike other banks, Barclays’ Johnson and his fellow rate-setters seemed to reflect a truer, higher LIBOR submission.

Barclays’s 3-month dollar submissions were in the top fourth quartile of the 16 contributing banks about 89% of the time (closer to reality than their peers). At the same time, senior managers at Barclays were ordering employees to low ball their LIBOR submissions.

Internally at Barclays, two schools existed in which one wanted to submit accurate rates and the other wanted to avoid the stigma of always being a LIBOR outlier. On October 29, 2008, Paul Tucker, deputy governor of the Bank of England, called Diamond to relay concerns within the U.K. government about Barclays’ ability to stay afloat during the financial crisis.

Three weeks earlier it was announced that the U.K. Treasury would bail out RBS and Lloyds.

Barclays steadfastly refused state ownership and losing its independence. Barclays felt pressure from the Bank of England which advocated the model adopted by Sweden in 1992 and later by the U.S. in its Troubled Asset Relief Program (TARP), which involved forcing everyone to take state aid, thereby removing the stigma attached to any specific firm.

Despite Barclays’ relatively limited exposure to the mortgage market and the streamlining of their business, the bank was feeling an indiscriminate spread of rot across the entire financial sector with falling share prices. Tucker said the Bank of England was concerned about Barclays’ ability to access money and Diamond strongly disagreed.

When Tucker asked him why Barclays’ LIBOR numbers were higher than everyone else’s, Diamond argued that Barclays was the only bank being even vaguely honest about its borrowing costs.

At the time, Barclays was trying to secure a loan from the oil-rich country of Qatar. Diamond was convinced that factions of the British establishment and Barclays’ rivals were spreading rumors that the bank was in trouble, potentially causing the Qatar deal to fall through.

In a nutshell, the Bank of England wanted Barclays to artificially lower their LIBOR submissions and in return, the Bank of England would allow Barclays more time on the Qatar deal.

Diamond put this in a memo to Del Messier and John Varley, Barclays’ CEO at the time. Privately, at least one director at the Bank of England felt Tucker was justified in issuing the order if it meant buying Barclays more time to avoid nationalization, potentially saving U.K. taxpayers billions of pounds.

When CFTC investigators cross-referenced LIBOR figures with the recording and memo, they saw that the instruction had been followed. The 3-month dollar LIBOR submission fell 60 basis points to 3.4%, the biggest one-day percentage drop in more than a month.

The sterling figures followed a similar pattern. So through the non-published telephone call to Dearlove and the published Diamond memo, the Bank of England was now involved with LIBOR tampering. Additionally, Barclays did secure the loan from Qatar and the Abu Dhabi sovereign wealth fund, assuring its avoidance of nationalization.

Johnson, the veteran cash trader, pleaded guilty to help traders rig LIBOR, but pushed back on the Dearlove request.

For Johnson, it was one thing to nudge the rate up and down by merely a fraction of a basis point to suit traders’ positions, but he felt it was over the line when his managers asked him to knowingly lie by suggesting the bank’s borrowing costs were 30 basis points lower.

Along this same vein, Hayes miscalculated that nudging LIBOR a few basis points was no big deal when people in much higher positions were fixing LIBOR by as much as 70 basis points.

The CFTC knew that the Barclays tape, which suggested that managers at Barclays were ordering the low-balling of LIBOR to financially benefit traders, constituted fraud, and steeper punishments would be warranted.

A civil legal case would, most likely, evolve into a criminal one and the CFTC did not possess the power to indict, set up grand juries or send people to jail.

Thus, in April 2010, the U.S. Department of Justice became involved. The DOJ point man for the CFTC was Robertson Park, who invited his boss, Denis McInerney, the newly appointed head of the fraud section, to come on board. Lowe and Termnie carried out the CFTC day-to-day responsibilities for the LIBOR investigation.

The American public was eager for justice during the criminal prosecution of high-rolling bank executives over the recent mortgage fraud crisis.

The DOJ, however, felt obligated to consider the collateral consequences of any enforcement action. Their argument was that prosecuting banks and their executives would have a destabilizing effect on firms (which employed thousands) and the broader economy.

Lanny Breuer, the head of the DOJ criminal division, was fixated on public perception LIBOR and saw the LIBOR scandal as an opportunity to penalize banks, such as Citigroup, Barclays, UBS and RBS, that escaped prosecution for their part in causing the financial crisis.

The Financial Services Authority (FSA), the U.K. financial regulator ultimately responsible for overseeing the banks, remained disengaged. Thomas Huertas, the FSA director for banking supervision decided to not investigate LIBOR rigging.

Huertas actually tried to discredit the May 29, 2008 Wall Street Journal article by pointing out trivial errors. The FSA became no more than a delivery conduit passing evidence from banks to the CFTC.

It was well known that if the Conservative Party took control, they would most likely abolish the FSA and grant more power for regulating the financial system to the Bank of England. Mocek, Barclays’ attorney, was a friend with the FSA’s Head of Enforcement, Margaret Cole, but Cole felt Mocek was campaigning too strongly to get the FSA to suppress the case against Barclays.

She complained to Obie, who had been trying to get Cole to take a stronger hand in LIBOR, and Barclays’ in- house counsel, successfully replacing the firm of McDermott, Will & Emery with Sullivan & Cromwell.

The Aftermath of the LIBOR Scandal

On May 6, 2010, two years after the initial LIBOR alert, the FSA formally launched an investigation into LIBOR.

With the DOJ and FSA on board, the CFTC sent letters to the 16 banks on the dollar LIBOR panel, urging them to submit evidence and make staff available for interviews.

Banks hired powerful attorneys who slowed legal progress. One bank, in particular, proved unforthcoming-Swiss bank, UBS. Swiss privacy laws were some of the strongest in the world and UBS lawyers maximized their protection with these laws.

Obie, accompanied by Phyllis Cela, one of CTFC’s most connected attorneys, traveled to Bern to meet with Urs Zulauf. Zulauf, an acquaintance of Cela’s, served as general counsel of Finma, the Swiss Financial Market Supervisory Authority.

Obie and Cela explained that they needed Finma’s help getting UBS to cooperate with the investigation. Shortly after this meeting, a compromise was reached between the CFTC and UBS. UBS documents would be passed to the U.S. agencies via Finma, thereby circumventing Swiss privacy laws. Hayes was now in the cross hairs.

Hayes was fired by Citigroup and drafted a letter to the company, stating that his wrongdoings were no different than that of senior levels at Citigroup Global Markets Japan (CGMJ), and claimed that management had known about his actions previously but never expressed concern.

The U.S Department of Justice conspired with Hayes’ former junior at UBS, Mirhat Alykulov.

Despite the friendly relationship with Hayes, Alykulov cooperated with the DOJ in exchange for eradication of his prosecution. Alykulov phoned Hayes, allowing the DOJ to monitor and record the call, trying to get him to confess his plans to lie to the authorities. Hayes was too careful.

The next attempt to take Hayes down was made by the CFTC. UBS hired Allen and Overy, a British law firm, to help deal with the CFTC’s initial LIBOR inquiry. The law firm, however, failed to uncover incriminating e-mails and spotlight their importance.

Instead, authorities from the CFTC stumbled upon documents sent between Pieri and UBS executives. Pieri was advocating for a larger bonus for Hayes due to his “strong connections with LIBOR setters in London” and a rebuttal that regardless of Hayes’ network, executives “find it embarrassing when he calls up his mates to ask for favours on high/low fixings.”

Further investigation directly connected Hayes to more than 2,000 documented requests for rate-setters to fix the LIBOR rate. It turned out that he had intended to alter LIBOR 75% of the time he was in the office. Hayes had sealed his fate.

Seeing all hope was lost, Hayes decided to cooperate with the U.K.’s Serious Organised Crime and Police Act of 2005 and provided investigators with hours of detailed testimony in return for being tried in England and not the U.S. However, at the eleventh hour, Hayes reneged his cooperation.

His attorney did the best he could to make Hayes appear as a “class act” in front of the jury, but the prosecuting attorney surfaced Hayes’ quick temper. Subsequently, he was convicted and sentenced to a 14-year prison term.

As for the banks, Barclays was the first to come forward. The bank was able to negotiate a non- prosecution agreement and dodge stiff fines by cooperating and agreeing to present fresh information. Barclays expressed guilt for pressuring LIBOR rate-setters into fixing inputs to suit the banks own derivatives positions and demanding rate-setters lowball their figures during the financial crisis.

However, the bank reached a non-prosecution arrangement with the U.S. government, agreeing to pay a fine of $453 million and remedy the way it estimated and scrutinized LIBOR.

UBS was the next to admit guilt, but had foregone its opportunity for leniency, as Barclays was first to confess. A few months later UBS reached a settlement in which it pled guilty at its Japanese subsidiary and incurred hefty fines.

Rabobank’s sentence constituted a two-year deferred prosecution agreement, essentially equivalent to a suspended sentence. The other banks followed. More than six banks faced close to $10 billion in fines, and individuals from each bank have been convicted of criminal charges.

In today’s financial environment, these banks have claimed that the lying, cheating and colluding are a thing of the past, and the market manipulation previously observed is no longer achievable. Whether or not this is the truth, only time will tell. would like to thank the Titans of Investing for allowing us to publish this content. Titans is a student organization founded by Britt Harris. Learn more about the organization and the man behind it by clicking either of these links.

Britt always taught us Titans that Wisdom is Cheap, and that we can find treasure troves of the good stuff in books. We hope this audience will also express their thanks to the Titans if the book review brought wisdom into their lives.

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