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> two distinct manipulations of Libor I'd argue that there were three. The first, and unquestionably illegal, was what Tom Hayes did i.e. collusion between ac

> two distinct manipulations of Libor I'd argue that there were three. The first, and unquestionably illegal, was what Tom Hayes did i.e. collusion between actors at multiple banks to move Libor. I don't think he should have got the sentence he did but prison was definitely justified. The second was swaps traders getting their own setters to go in high or low. I'm not at all sure this was illegal. Given that Libor was completely broken at the time, I'm not even sure I'd argue that it was unethical. As there was, essentially, no uncollateralised inter-bank borrowing, any figure was wrong. And, as you say, the effect was minor and not particularly directional. I think your second point, the systemic low balling of Libor by senior management, is, by far, the most important. It's also the one that has had the least public attention. What is particularly problematic about it is the influence that governments had. Because of the latter, I'm sure that it won't ever be properly investigated.

Lazare 9y ago
Indeed. It's widely accepted (although as far as I know, not quite proven), that the third manipulation was done with the full knowledge of (and, many would say, at the instigation of) the Bank of England. Whether it's "legal" or not is almost beside the point; it's not going to be punished. And it took place in a (hopefully) completely unique scenario, so hopefully there's little risk of moral hazard.
cm2187 9y ago
I am not sure I understand the distinction you make between your 1 and 2. The swap traders had no way to manipulate the libor fixings directly, they had to go through their libor submitters. You are right that they appear to have been colluding to do so between banks. On the low balling, interestingly I am not sure the impact on the market was nefarious. It was certainly material but I do not believe that when borrowers and lenders referenced Libor in their loan contract, they really meant to index their interest rate paid on the 3 month credit risk of a bank. I think they did on the assumption that large international banks had near zero credit risk for 3 months borrowing (which was true until 2007) and that Libor was a convenient way to measure a 3 month risk free rate on top of which they would add a credit risk margin. When Libor started shooting up in 2008, it was not because of the general levels of interest rates (central banks were slashing interest rates at the same time) but because of bank credit risk. So though contractually borrowers should have paid a higher interest rate during that period, the low balling probably had the effect to make the interest rate closer than what borrowers and lenders probably intended when they referenced Libor in their contract.
- osullivj 9y ago
  Yes - and around that time the switch to SONIA, EONIA and away from LIBOR fixings started.
  - lucozade 9y ago
    There wasn't really a move away from Libor fixings. They were, and still are, very important in the derivative markets. There was a move towards collateralised transactions so the overnight rates become more important for funding than the unsecured rates.
- lucozade 9y ago
  > I am not sure I understand the distinction you make between your 1 and 2 The difference is that collusion between banks is cartel price fixing and is very illegal. The majority of reported cases of traders requesting rate moves did not fall into this category unlike the Hayes case. For the cases where the traders were just asking their own setters to move the rate, there was no collusion. They work for the same company and not even in separate, Chinese walled departments. Also, in the intra-bank cases, I don't recall seeing any where the setters were actually breaking BBA rules. The problem was that the rules were meaningless when there was no uncollateralised borrowing. > I am not sure the impact on the market was nefarious You're making a lot of assumptions. What is clear is that the interventions were material and directional. And that would have had an effect on both institutional and retail customers. That's usually the time when regulators get all medieval.
ajb 9y ago
Maybe I'm misreading your comment, but what was the third?
- slivym 9y ago
  1. Banks colluding to fix Libor 2. Swap traders influencing their own banks Libor. 3. Banks fixing their Libor contribution to mis-represent the health of their business (possibly egged on by a government that doesn't want banks to fail)
  - res0nat0r 9y ago
    There's a book written about this entire subject which just came out late last year: The Spider Network: The Wild Story of a Math Genius, a Gang of Backstabbing Bankers, and One of the Greatest Scams in Financial History. It was well written and very interesting if folks are more interested in the folks involved and how all of this went down and their personalities etc. https://amzn.com/0062452983 https://amzn.com/0062452983
qwerty456127 9y ago
> but prison was definitely justified IMHO prison is never justified for people that pose no physical danger to others. A reasonably big (as big as he can actually afford) fine and ban on working on government and financial positions could be enough.
- mieseratte 9y ago
  IMHO we need to impose incredibly stiff penalties on those who perform such large, damaging crimes that undermine societal trust. These criminals do not care about being slightly less rich, and imposing penalties is likely to just result in the consumer getting shafted to make up for the loss. We should bring back the stockade and public execution for these pirates.
  - erikpukinskis 9y ago
    > These criminals do not care about being slightly less rich That's not what was suggested. What was suggested was "as big as he can actually afford and a ban on working on government and financial positions". That's called "punitive damages" when they scale to what the criminal can bear, rather than what damage they caused. I do think these criminals would care about losing _most_ of their money and being barred from working in their field.
    - mieseratte 9y ago
      They'll just get some bullshit gig at a think-tank or as an "advisor" from one of their crony friends they helped prop up. Maybe a nice $400,000 speaking gig here and there at Goldman Sachs. Sure the odd man might get tossed aside as a token gesture to demonstrate how they're just as subject to rule of law as us common folk, but to think that these confidence men will just accept their fate and fade into obscurity is laughable.
      - erikpukinskis 9y ago
        They don’t have to fade into obscurity. The point is just to make it painful. People avoid pain. Implicit in your comment is that these people have a network that will make them whole no matter what. A) That’s only true for the very top. B) Even if they are made whole, the more times the network has to “make someone whole” it gets harder to justify the criminality. Over time the network will start leaving people out to dry. Also, your comment is unnecessarily dismissive. Your position is valid, you can just state it without trying to insult my intelligence and we can carry on a conversation.

Lazare 9y ago

Indeed. It's widely accepted (although as far as I know, not quite proven), that the third manipulation was done with the full knowledge of (and, many would say, at the instigation of) the Bank of England. Whether it's "legal" or not is almost beside the point; it's not going to be punished. And it took place in a (hopefully) completely unique scenario, so hopefully there's little risk of moral hazard.

cm2187 9y ago

I am not sure I understand the distinction you make between your 1 and 2. The swap traders had no way to manipulate the libor fixings directly, they had to go through their libor submitters. You are right that they appear to have been colluding to do so between banks. On the low balling, interestingly I am not sure the impact on the market was nefarious. It was certainly material but I do not believe that when borrowers and lenders referenced Libor in their loan contract, they really meant to index their interest rate paid on the 3 month credit risk of a bank. I think they did on the assumption that large international banks had near zero credit risk for 3 months borrowing (which was true until 2007) and that Libor was a convenient way to measure a 3 month risk free rate on top of which they would add a credit risk margin. When Libor started shooting up in 2008, it was not because of the general levels of interest rates (central banks were slashing interest rates at the same time) but because of bank credit risk. So though contractually borrowers should have paid a higher interest rate during that period, the low balling probably had the effect to make the interest rate closer than what borrowers and lenders probably intended when they referenced Libor in their contract.

osullivj 9y ago
Yes - and around that time the switch to SONIA, EONIA and away from LIBOR fixings started.
- lucozade 9y ago
  There wasn't really a move away from Libor fixings. They were, and still are, very important in the derivative markets. There was a move towards collateralised transactions so the overnight rates become more important for funding than the unsecured rates.
lucozade 9y ago
> I am not sure I understand the distinction you make between your 1 and 2 The difference is that collusion between banks is cartel price fixing and is very illegal. The majority of reported cases of traders requesting rate moves did not fall into this category unlike the Hayes case. For the cases where the traders were just asking their own setters to move the rate, there was no collusion. They work for the same company and not even in separate, Chinese walled departments. Also, in the intra-bank cases, I don't recall seeing any where the setters were actually breaking BBA rules. The problem was that the rules were meaningless when there was no uncollateralised borrowing. > I am not sure the impact on the market was nefarious You're making a lot of assumptions. What is clear is that the interventions were material and directional. And that would have had an effect on both institutional and retail customers. That's usually the time when regulators get all medieval.

ajb 9y ago

Maybe I'm misreading your comment, but what was the third?

slivym 9y ago
1. Banks colluding to fix Libor 2. Swap traders influencing their own banks Libor. 3. Banks fixing their Libor contribution to mis-represent the health of their business (possibly egged on by a government that doesn't want banks to fail)
- res0nat0r 9y ago
  There's a book written about this entire subject which just came out late last year: The Spider Network: The Wild Story of a Math Genius, a Gang of Backstabbing Bankers, and One of the Greatest Scams in Financial History. It was well written and very interesting if folks are more interested in the folks involved and how all of this went down and their personalities etc. https://amzn.com/0062452983 https://amzn.com/0062452983

qwerty456127 9y ago

> but prison was definitely justified IMHO prison is never justified for people that pose no physical danger to others. A reasonably big (as big as he can actually afford) fine and ban on working on government and financial positions could be enough.

mieseratte 9y ago
IMHO we need to impose incredibly stiff penalties on those who perform such large, damaging crimes that undermine societal trust. These criminals do not care about being slightly less rich, and imposing penalties is likely to just result in the consumer getting shafted to make up for the loss. We should bring back the stockade and public execution for these pirates.
- erikpukinskis 9y ago
  > These criminals do not care about being slightly less rich That's not what was suggested. What was suggested was "as big as he can actually afford and a ban on working on government and financial positions". That's called "punitive damages" when they scale to what the criminal can bear, rather than what damage they caused. I do think these criminals would care about losing _most_ of their money and being barred from working in their field.
  - mieseratte 9y ago
    They'll just get some bullshit gig at a think-tank or as an "advisor" from one of their crony friends they helped prop up. Maybe a nice $400,000 speaking gig here and there at Goldman Sachs. Sure the odd man might get tossed aside as a token gesture to demonstrate how they're just as subject to rule of law as us common folk, but to think that these confidence men will just accept their fate and fade into obscurity is laughable.
    - erikpukinskis 9y ago
      They don’t have to fade into obscurity. The point is just to make it painful. People avoid pain. Implicit in your comment is that these people have a network that will make them whole no matter what. A) That’s only true for the very top. B) Even if they are made whole, the more times the network has to “make someone whole” it gets harder to justify the criminality. Over time the network will start leaving people out to dry. Also, your comment is unnecessarily dismissive. Your position is valid, you can just state it without trying to insult my intelligence and we can carry on a conversation.