Another day goes on and another head rolls off the chopping block. This time, the smutty world of banking claimed its largest head with Bob Diamond following swiftly from the Chairman, Agius
After Barclays decided (what a bad PR move) to be the first to admit to this almost universal and equally deceitful banking practice, a few lambs had to be given to the slaughter. See here for the FSA’s 44 page damning review concluding to the £67m fine. The banking practice in question is the manipulation of the LIBOR rate.(The rate at which banks lend to each other and the rate at which mortgage and savings products are based from). From what the FSA discovered, those who bid to set the LIBOR rate were manipulated by other desks in the same company that had huge financial bets resting on the daily rate that was given. Interest derivatives traders (and swaps traders) wold continually ask the setters to increase or decrease their bids (manipulate the damn market) in return for more business, Bollinger bottles or a better bottom line for the good of their bank.
Trader F: “Pls set 3m libor as high as possible today”
Submitter: “Sure 5.37 okay?”
Trader F: “5.36 is fine”
Of course this practice is akin to an Equity Capital Markets desk telling the equity sales team that they are going to be starting a capital increase (certainly dropping the shares) in the next few days and the sales team telling their clients to get out. The difference is that In this case the rules are clearly written in black and white. Once the investor or employee becomes an insider they must not act on the information given or their actions constitute insider trading. In the LIBOR case, the rules are equally true but unfortunately not stated in black and white.
What I find incredible is how blatant all parties involved were. Even if you wanted to engage in illegal behaviour for the good of your personal bank account, at least have the decency not to record it on public channels!!!! You don’t see mob bosses talk about their extortion targets in front of police stations do you??? In fact, it is this fact that leads me to question how legal or illegal the perpetrators thought this practice was.
***Obviously not the actual guilty traders – actually actors***
A Short History
LIBOR fixing began in 1986 this is 14 years before the Financial Markets and Services Act (FSMA2000) came into force. FSMA effectively definded market abuse and insider trading and give clear guidelines as to what was right and wrong. Although morally wrong, LIBOR manipulation was not technically illegal back in the Wild Western times of the 80s and 90s. When FSMA came in, only the most overt forms of market abuse and insider trading were clearly defined. Equity rules were clear and concise but nothing specific was written about LIBOR rate setting – I know, I know, I know it was implied but let me just play devils advocate for the moment.
If you have done something for 14 years it becomes natural and as it has been unquestioned for so long, you wouldn’t even begin to suspect that the rules have changed. Even when FSMA came out, I doubt the various bank’s compliance teams were telling their rates traders to stop what they were doing. They simply continued as they always had done and nothing more was said about it. Nothing more was said for another 12 years!!!!
Maybe the traders were a bit more apprehensive in the early 00s but as time goes on and the FSA don’t say anything you begin to legitimize everything you do as legal (it’s simply human nature). Furthermore, if everyone in the whole market place is doing the same thing – you begin to see a kind of deindividuation effect develop where the individual’s awareness of his own actions is reduced.
On top of this; as the business line became more and more profitable, new, fresh faced city boys came into the industry and were exposed to this behaviour 24/7. If you see your and all your friend’s parents continuously breaking the law you would begin to see their actions as legal. As new talent emerged they assumed that the old ways were the right ways.
Trader C : “The Big day has arrived, my NYK are screaming at me about an unchanged 3m libor. As always, any help would be greatly appreciated. What do you think you’ll go for 3m?”
Submitter: “I am going 90 although 91 is what I should be posting”.
Trader C: “…When I retire and write a book about this business, your name will be written in Golden letters”.
Submitter: “I would prefer this not to be in any book!”
Fair enough, some people realised that what they were doing wasn’t proper but answer me this – Why would this guy not want to be in a book but happily be in a recorded messaging channel (Bloomberg). If he knew what he was doing was illegal, you simply would not write it there!!! Therein lies my first theory – These people may be self obsessed profit maximisers but you can be assured that they aren’t stupid. The only reason why they could have written all of this (now obviously) incriminating stuff onto messaging terminals was because they believed that their actions were more immoral as opposed to clearly illegal. Well, this or deindividuation made them rationalise their actions as legal – it certainly worked for those who followed Hitler during WWII.
So moving on from the deeds – who should be punished and how should they be punished. I am afraid that the blame lies squarely with those implicated in the above messages, not Bob Diamond. Furthermore, it should also sit on the shoulders of the compliance officers that were in charge of managing these traders. If Bob Diamond got wind of this and decided to ignore it, think of how many people sat between Bob and the trader executing in the market. Concentrating on Barclays, 100 traders, a dozen risk and compliance officers, the head of each responsible desk and the head of the Fixed Income Team together should be hit with punishments.
The current FSA guidelines state that market manipulation leads to a prison sentence of up to 7 years and an unlimited fine
Every Time I meet people affiliated with the FSA (the 1 Percent has to as he would like to continue to be involved in the markets) they always tell me how they have been ostracised for doing a terrible job but now they are trying to do something about it. If you want people to take you seriously as a regulatory body – give people the prison sentence that you have threatened to give them.
Submitter: “Hi All, FYI I will be in noon’ish on Monday”
Trader B: “Noonish? Who’s going to put my low fixings in? Hehehe [muahahahaha]“
Submitter: “John Doe or Jane Doe will be here if you have any requests for the fixing”
I do not care what, why or how, this guy has just admitted to manipulating the market – how much easier can your job be. Print out the screen shot and send it to the guy along with a letter telling what time and date he has to report to Wormwood Scrubs.
The traders who admitted through recorded conversations are easy to convict but what about the compliance officers. These are the guys who have to flag things up if inappropriate market activities are going on. Unfortunately they did not exist – in the FSA report they commented on the lack of compliance controls in existence and how this meant the LIBOR issue was not flagged up until 2010. In my opinion, I will side with the banks on this one. The FSA have always left LIBOR a grey area and if they are the regulatory committee it is up to then to decide what is right and what is wrong.
You cannot just decide that a practice is wrong and then act amazed when the company hasn’t flagged it. Imagine that a scientific journal linked the consumption of chicken with hugely increased risks of trench foot. Everyone would shout from the rooftops “HOW DID THE FOOD STANDARDS AUTHORITY NOT KNOW ABOUT THIS” – They weren’t looking.
You cannot assume that every action you do is illegal or could be made illegal in the future.
If the buck stops with compliance and the FSA agree that the lack of compliance was an issue, how on earth can Bobby D be an appropriate head to throw to the masses?
Jail those directly responsible and in the future the FSA have to make things black and white. After all, we are all human and I am happy to bet that no matter who was put in those seats, everyone would have manipulated that market. With a lack of rules, human nature is to maximise your utility
** Quotes and extracts from the FSA report