After Admiral Byng was executed in 1757 for failing to hold Menorca, Voltaire wrote “Dans ce pays-ci, il est bon de tuer de temps en temps un amiral pour encourager les autres”. After Tom Hayes’ LIBOR manipulation sentence was handed down by the judge a couple of weeks ago, one might have thought it was an example “pour decourager les autres”. I don’t know Tom Hayes, have never met him, and almost certainly never will. I have no idea if he is a nice man, great husband and father or a selfish, unpleasant egomaniac. What we do know, though, is that he is a criminal, who has committed an offence worthy of 14 years in gaol, because that’s what the judge has just decided.
So it must have been a pretty serious crime; after all, at 14 years we’re into the area of some pretty nasty violent offences against the person. Let’s just look at it for a moment. LIBOR is an important rate, because it underlies a huge volume of individual transactions, both retail and wholesale. The daily fix is the rate at which the banks which are in the consulted group are able to clear their borrowing and lending requirements. That rate then flows through to all the commercial transactions dependant upon it. Over the course of a year, the likelihood is that any specific bank will be as often on the borrowing side as the lending side. (That’s a statistical guess on my part, but I can’t see why it wouldn’t be right.) So on a daily basis, anyone setting out to gain an advantage by moving the rate in their favour would need to be able to outweigh those on the other side. That’s where the corruption element of the crime comes from - the need to have a big enough network to bring the right people onside. That’s where we read the somewhat unpleasant sequences of emails, texts and chatboxes offering incentives to “help out”. It’s morally wrong, and, although I’m not enough of a lawyer to be able to say whether or not it breaks the law, it’s pretty clearly unacceptable behaviour in a serious financial market. You could argue that the individual impact is actually quite small. I know the popular press glibly talked about the billions this scam had cost innocent borrowers, but in fact for movements overnight measured in annualised tenths of a percent, the capital amount would have to be very large to register significantly - and, bear in mind that it was probably up one day and down the next. That is not an excuse, of course, but it is worth keeping in mind. As far as domestic mortgages were concerned, I doubt the borrowers would be able to point to the costs.
None of that excuses the crime, of course. But consider this: since the scam has come to light, many banks have been fined eye-watering amounts by various regulatory bodies. Fair enough, you may say. Even if the individual cost was minimal, the agglomerated profit for the guilty banks was was not. Look at the reports of Hayes’ revenues for his employers; impressive numbers. The problem, though, is that fining banks (or indeed other corporates) for bad/illegal behaviour impacts in the wrong place. Those who pay the fines are, sadly, the shareholders since they are the ones who own the company and taking money away from it hits their value.
And Who Knew?
It’s difficult to believe that nobody any more senior than Tom Hayes knew what he was doing. If they didn’t, and the revenues quoted are anywhere near accurate, then they were not doing their jobs. ‘Not knowing’ the origins of a substantial income stream is not an acceptable way to run an operation. Either the people managing Hayes and his ilk knew what was going on and condoned it, or they were not fit to be filling their positions. There is no other possibility.
There is also another group who bear some responsibility in this sorry affair, and they have kept their heads well down, too. I refer, of course, to those who set the regulations; they were the ones who failed totally to understand what anybody involved in trading financial markets could have told them (which could have saved all this unpleasantness) - and that is that the only way to set a market-clearing benchmark which can be defended as honest is to base it on a traded number. Make players put their money where their mouths are, and life becomes far easier. If the rules had been better in the first place, the problem would not have arisen like this. That doesn’t excuse the behaviour; those who rigged the market committed immoral and - in terms of corruption - seemingly illegal acts. For that, they deserve punishment. However, and here I will make myself unpopular with those who believe all those who work in financial services are by definition totally evil, the sentence given to Tom Hayes is excessive; it smacks of vindictiveness and scapegoating, and although exemplary sentences are indeed a possible deterrent, the length of this one is wrong. It will hopefully be reduced on appeal. At the same time, wouldn’t it be nice to see some of the big boys held to account; as it is, they seem to slough it all off on the shareholders.
Still, maybe when the forex stuff comes out - which will make this look like a storm in a teacup, I believe - it won’t just be the foot soldiers who face the guns this time.