The Serious Fraud Office (SFO) criminal prosecution against former UBS and Citigroup yen derivatives trader Tom Hayes was a resounding success in obtaining the unprecedented 14 year jail term for rigging Libor between 2006 and 2010. The verdict represents public sentiment against banks as much as the lone individual who was the first to stand trial in the most prolific financial rate rigging conspiracy in history. There is no doubt that Hayes is the first of a number of scapegoats for an array of international banks whose senior bankers have maintained the script “I know nothing” and walked away without liability leaving the traders – the more mid tier members of the organisations to take the fall.
No senior management liability found
No one is excusing the conduct of Hayes or that he was exposed as a “ring leader” in a vast conspiracy for fixing Libor, but what is amazing in the circumstances is that not one senior banker in either the UK or the USA has been brought to book or held criminally or civilly liable for a banking culture that permitted Hayes and other traders to walk into a toxic culture “ring” in the first place.
Andrew Tyrie, Chairman of the Treasury Committee, former Chairman of the Parliamentary Commission on Banking, has described the circumstances succinctly. “Libor rigging was only possible because senior managers turned a blind eye to the culture of the trading floor”. I would only add that the major banks allowed it to occur because they put the pursuit of profit and competition against each other above everything else. Traders such as Hayes were just the foot soldiers in a rate rigging contest that had obviously been around for a long time prior to their involvement. Not only that, securities regulators failed to get involved or expose the circumstances until the global financial crisis meltdown in 2008. In many other jurisdictions, regulators are still behind the eight ball, only investigating rate rigging in 2014, 2015 which is too late and too slow for any conduct to be brought to account.
Turning a blind eye
Senior bankers were clearly responsible for allowing the culture of rigging Libor to proceed, yet chose to ignore the rigging. It is clear why the UK Government has introduced criminal liability for senior bankers marking a turning point in financial regulation in the UK. Although Hayes at his trial, told the Court that his senior managers were aware of his conduct, the problem for the SFO would have been the lack of direct evidence to involve them in the conspiracy. Even if these senior bankers cannot be pursued criminally, they should be banned from the industry for their failure of oversight and their failure to ensure there was a proper culture on the trading floor.
The Libor rigging was perpetuated as a result of the negligent failures in bank governance and the failure to ensure that there were proper procedures in place. 2 The Libor scandal has claimed a number of high profile jobs with Barclays Chief Executive, Bob Diamond and its Chairman, Marcus Agius who both resigned in the ensuing political fire storm, however, they left with multi-million dollar payouts and benefits. Both blamed the “reprehensible” conduct of traders and Marcus Agius referred to “the failure of compliance to escalate issues” during his testimony before the Parliamentary Enquiry in 2013, again, sticking to the usual script that they knew nothing.
Although all the evidence has not come out, many of the press releases from the Department of Justice (DoJ) in the USA bear out how flagrant the benchmark rigging was and casts doubt on the fact that senior management would not have been aware of such trades that were in the many millions of dollars and depended on interest rates being at certain levels for profitability. Some banks failed to co-operate with regulatory investigations into Libor for a number of years. For example, Deutsche Bank officials were accused of misleading investigators and the bank’s records keeping was shown to be inaccurate and tapes of telephone calls were destroyed with other recordings failing to be produced. A similar situation is occurring in Australia where ASIC has not been able to obtain important documents from the ANZ and has publicly asked the bank to co-operate.
The emails between traders evidenced a fairly casual business as usual approach to rate rigging. Taking in all the evidence, it’s hard to believe that a number of traders between banks and firms colluded for so long, yet the information stayed on the trading floor and that there was a total failure of compliance of all banks to escalate issues to senior management. It would be a great shame if the Libor scandal was just left at the doorstep of the traders but this appears to be the reality of the law.
Libor fines reach US$9 billion
The list of banks involved such as Barclays, RBS, UBS, Rabobank, Deutsche Bank, HSBC, Credit Agricole, Society Generale, Lloyds Banking Group, ICAP and Citigroup show how interconnected they, and their traders, were in rigging the Libor and other benchmarks. In all, there are nearly twenty institutions under scrutiny by the USA and the UK regulators about possible rate fixing for financial gain. It is alleged that some banks rigged multiple benchmark rates allowing its traders to reap higher profits at the expense of unsuspecting counterparties.
So far, regulators have netted approximately US$9 billion in penalties with more on the way and where thirty-one individuals (twelve in the UK) have been criminally charged in a wide range of a number of countries.
The first regulatory penalty scalp was in 2012 when Barclays paid US$450 million in fines to stave off possible criminal charges by the DoJ, the Commodities Futures Trading Commission (CFTC) and the Financial Conduct Authority (FCA). In 2013, RBS paid US$615 million in fines to the FCA, CFTC and DoJ, entering into a deferred prosecution agreement in the US related to one count of wire fraud. Its Japanese securities business pleaded guilty to one count of wire fraud tied to rigging Yen Libor. Again, in 2013, Rabobank paid US$660 million in fines to the DoJ and FCA for illegally manipulating four different interest rates. The most recent is 3 Deutsche Bank which was fined a record US$2.5 billion for rigging Libor and ordered to dismiss sevenal employees and was accused of being obstructive towards regulators in their investigations.
There are so many issues and facts surrounding Libor that it’s hard to believe that the banks’ senior management were not across the issues as banks acted similar to cartels in not only rigging Libor, but other benchmarks. Perhaps the situation is best summed up by the former Deputy Governor of the Bank of England’s, Sir Paul Tucker, who, in his 2013 testimony, before a parliamentary enquiry, said “the Libor scandal is a cesspit”.
Although the new senior management regime will be introduced next year and will hold senior management accountable for their lines of responsibility within the business, there are many practical impediments to the new provision with the emphasis on the notion of personal responsibility for reckless decision making. However, in Libor, the trouble has been that senior managers have kept to the script that they know nothing and the regulators have been at odds to prove otherwise. Hence, we have been left with the unpalatable situation where Hayes and other traders will take the fall for an irresponsible banking culture that went to the very top of each bank that compromised the integrity of the globally used interest rate benchmarks – undermining financial markets worldwide.