A book about an obscure financial benchmark known as the London Inter-Bank Offered Rate might not seem, at first, the sort everyone would rush out to buy, or ask their loved ones for as their birthday approached. But, Edinburgh tax commentator Gerry Brown says, if they work in financial services, they may wish to consider it…
Liam Vaughan and Gavin Finch – who write about financial crime for Bloomberg and Businessweek – begin their new book, called The Fix, with a description of a clandestine, hotel-bar meeting with an anonymous derivatives trader, who revealed to them that LIBOR, the all-important London Inter-Bank Offered Rate, had “broken down”.
“It was supposed to be a measure of how much lenders paid to each other to borrow cash, but since the [2008 global financial crisis], banks no longer lent to each other at all,” this derivatives trader explained.
“LIBOR had become a fictional construct, dreamed up each day in the minds of a group of bankers with a vested interest in where it was set.
“The world’s most important number was a fraud.”
Obscure finance term
At the time this conversation took place, the term LIBOR was even less well known than it is today. It had been widely assumed that it was calculated on the basis of publicly available information – an average of published rates.
By the “noughties”, banks’ input into the LIBOR-setting process had come to involve the quoting of rates that were subjective rather than objective in nature – what rates suited the banks had become the question.
And by the time the financial crisis hit, banks were quoting a LIBOR figure for public consumption which bore no resemblance to the rates actually being used for inter-bank borrowing.
Then, Vaughan and Finch tell us, on 16th April 2008, the Wall Street Journal carried the front page headline: “Bankers Cast Doubt on Key Rate Amid Crisis”.
“One of the most important barometers of the world’s financial health could be sending false signals,” the WSJ article went on, suddenly shining a spotlight on a long-overlooked area of international finance – and in the process, setting off a firestorm that would rage, off and on, for the next seven years.
Before long, regulatory authorities on both sides of the Atlantic had launched major investigations into the what was being called the “fixing” of LIBOR; these in turn led to the eventual imposition of substantial fines on many financial institutions, and the departure of a number of key banking industry executives.
One of the best-known casualties of this, as bank-watchers may recall, was Bob Diamond, who at that point – in 2012 – was chief executive of the giant Barclays banking group.
Who was doing the actual fixing? Who were the footsoldiers?
The saga now known as “the LIBOR scandal” dragged on for years, arguably ending on 3 August 2015. That was when, after a trial lasting 47 days, a London-based trader named Tom Hayes was convicted on eight counts of conspiracy to defraud, in relation to the manipulation of the Japanese Yen London Interbank Offered Rate (“Yen LIBOR”). He was sentenced to a total of 14 years imprisonment – the only person in connection with the scandal to serve time. (The sentence was reduced on appeal to 11 years.)
Although indicted for numerous offences of conspiracy with others, both named and unnamed, in the event, Hayes – through whose eyes much of this story unfolds – stood trial on his own.
The prosecution’s case was that, between 2006 and 2010, Hayes, together with others, had agreed a deal to manipulate the Yen LIBOR rate in order to advance his trading interests; the profits of the bank for which he worked; and indirectly, the rewards he would receive in the form of bonuses and status. All of these benefits would come as a disadvantage to those who were the counterparties to the affected trades.
Before his downfall, Hayes was a “star trader”. He is described here by the authors as an anti-hero, “a brilliant, obsessive, reckless, irascible math prodigy who transformed rate-rigging from a blunt instrument into a thing of intricate, terrible beauty”.
I can’t accept that the rate-rigging described here is a thing of any kind of “beauty”, intricate and terrible or not – there were too many losers, not just the counterparties to the trades, but the shareholders in the banks touched by these trades, and by extension, millions of small investors, many of whom were exposed through their pension funds.
But I found this book a fascinating read. And it helps that the authors manage to keep the story moving at pace.
And despite the complexity of the subject matter, the intertwining of the corporate and individual story lines, and the number of characters involved, Vaughan and Finch keep the reader on track to the inevitable conclusion. And for those who want to dig deeper, they provide 13 pages of notes.
In my opinion, everyone currently working in the financial services industry, or even simply impacted by it, should read this book, if only to remind themselves that, as George Santayana famously said, “those who cannot remember the past are condemned to repeat it”.
The Fix: How Bankers Lied, Cheated and Colluded to Rig the World’s Most Important Number
By Liam Vaughan and Gavin Finch
Wiley Bloomberg Press
List price, UK: £19.99 (US$32.50)
This review originally appeared in the April 2017 issue of International Investment, which may be viewed online by clicking here.