Interesting discussion on Tom Hayes, the man who was convicted of manipulating LIBOR( One of the more important borrowing rates).
The article seems to play up Hayes' Asperger’s as almost an excuse as to why he could do what he did with little emotion.
Just like breaking into a computer system, he used human engineering rather than hacking to rig LIBOR in his favor. He litterally became friends with the people who helped set LIBOR and asked them to help set LIBOR in the direction he wanted.
> For Hayes, it was a light-bulb moment. He knew that banks had always tailored their Libor submissions to benefit their own positions, but the system resisted tampering: no single institution could have much impact on the overall rate when 15 other banks were doing the same thing. But Hayes had worked at enough banks and befriended so many brokers that he realized he could sway several submitters at once. He could pull their strings without them even knowing it. And Hayes was on better terms with his brokers than most. They had in Hayes a kindred spirit—a state school Londoner with a cockney accent.
That's conflating two issues - UBS was setting their own number in their own interest. Hayes was bribing people at other banks to manipulate the rate. Both are bad, but Hayes was in another class of bad.
I disagree. Was Hayes acting solely on his own behalf, or on theirs as well? Were these or other attempts to manipulate Libor sanctioned by UBS? From another article:
"The document [that Hayes points to] instructs Libor submitters to clear their judgements on the rate with certain named traders. Defence lawyer Neil Hawes last week suggested the traders held derivatives positions dependent on Libor."
Not to mention that (as I understand it), he wasn't even trying to play the Nuremberg defence so much as claiming he'd assumed it was OK because people that could have didn't try to stop him.
The article if anything makes him seem like more of a patsy than a ringleader. He made everyone above and below him who was in contact with him exactly aware of what he was doing. Those above him new exactly what was going on and all they had to say to stop it was 'no'.
I wouldn't call him either a patsy or a ringleader. He seems like something in between -- a linchpin. LIBOR manipulation was already happening, those above him wanted it to happen, which means he wasn't the ringleader. But he was the guy who made the connections to make it happen more effectively, not a mere footsoldier, but a critical piece of the apparatus.
If manipulation was already happening how could he suddenly be the linchpin? Wouldn't it make more sense that he was one of many who paid to manipulate the rate and profit? I think he just found an opportunity others had already been exploiting. I'd call him the scapegoat who ended taking up most of the blame.
if he significantly increased the level of manipulation (by systematizing it and coordinating between multiple banks, when prior manipulation had been each of the banks working independently) he would absolutely qualify as a linchpin.
In the same way anyone who comes into a situation where they are more competent than the people they replace become a linchpin. If you come in and make a thing a lot better than anyone else in your organization is capable of making it, you become the go-to person for that thing.
If it was the biggest in history he likely wouldn't have been caught.
While the amounts he was trading seem pretty massive, the truth is there are some traders that handle much more money. Never mind the banks themselves, trading firms, governments, etc...
There's no doubt that, if larger actors wanted, they could run much larger scams and not get caught.
Tom Hayes only got caught because he wasn't big enough.
A larger scheme makes enough money to pay off those who might attempt to prosecute it. It's also generally more sophisticated, and has the means to hide misconduct.
Look at those who are successfully prosecuted - mostly traders, small firms, 'rogue' employees.
In one of the larger cases, SAC Capital, only a small number of SAC employees were convicted, despite it being 'common knowledge' that they engaged in insider trading, to the point that it was a central tenet to the firm's strategy, and traders brazenly collected insider information. And yet somehow, Steven A. Cohen has managed to escape punishment, as have the large majority of its traders.
Truly powerful actors are often able to use government policy as a means of achieving their schemes, either via influence or simply running the relevant portions of the government themselves.
Why bother taking pains to hide anything when what you're doing is technically legal? The best part is, said policy can later be propped up to appear as if it was actually in everyone's best interest.
I don't think fractional reserve banking really counts as a scheme or a conspiracy. It's not secret at all, completely legal and has been widely studied by economists. I think "banks create money out of nothingness" is also a mischaracterization. It's more like currency minted by the private sector.
That being said, I think there is something about it that fundamentally offends human sensibilities.
The only thing not quintessentially conspiratorial about it is that everybody knows about it and believes that it is actually happening.
It is not like currency minted by the private sector. That would be more akin to futures contracts settled by physical delivery or prepaid service contracts. The private sector has to back up its currency with actual goods or services. If you issue hemp futures, you had damned well better be a hemp farmer and insure your crop, and if you issue hemp scrip, you'd better have some actual reserves of hemp in your warehouse.
All that is backed by something, even if it is little more than a believable promise.
The promise that backs fractional reserve is that you can have your cake and eat it, too. If you make a deposit, you can withdraw 100% of it at any time, even though they will immediately lend 90% of it to someone else. That someone else will then bid against you for the same goods and services, using exactly the same money you are bidding with.
Lets say you deposit $100. You want a doodad from Jack Handy. Joe Blow also wants that doodad, and he has $0. But the bank manager is his brother-in-law, so he can qualify for a loan of any size. Ordinarily, you could get the doodad for $50. But Mr. Blow starts a bidding war with you, using your own money, and the final price is $60. If you win, you write a check for $60, and Jack Handy deposits $60. The bank has the same amount in reserves, and can issue the same amount in loans. If Joe wins, the bank lends him $60 of your money, writes a check for $60, and Jack Handy deposits it. The bank still has the same money in reserves, but has promised to pay the same $60 to both you and Jack. Thanks to the trick, you effectively lost $37.50 (100x60/160) for the doodad you didn't get, Jack effectively lost $12.50 ($50-37.50)--surprise! $60 of lender-inflated bank credit is worth less than the $50 in cash--and Joe is now paying the bank rent on the doodad.
The are not creating money out of nothing. They are creating credit out of their own debts, and screwing everyone else over hard in the process. They are literally the only winner in the above scenario.
> It is not like currency minted by the private sector. That would be more akin to futures contracts settled by physical delivery or prepaid service contracts. The private sector has to back up its currency with actual goods or services.
Well, except in the real world where, before banking regulators stepped in and stopped it, one of the common forms of privately-issued currency was by private banks issuing loans (including in the form of privately-printed banknotes) without regulated reserve requirements.
This is just like the movie Goodfellas, except Tom Hayes (a.k.a. "Henry Hill") was not smart enough to, in a timely manner, seek out the prosecution and rattle everybody out in exchange for entering the Witness Protection Program or some form of clemency.
From what I have read in different cases involving a criminal group or simply a group of teenagers vandalizing a place, it does help to be the first one to talk to the police. Once the police / prosecution has enough information to make a case, they don't need anybody else.
(For those who have not seen the movie, it's a good movie to watch.)
He did "enter a “supergrass” (informer) deal in the U.K." and ratted out everybody.
After ratting out everybody (and avoiding extradition to the US), he withdrew from the plea deal and gambled that the UK jury would be sympathetic.
On Oct. 9, as the SFO was finalizing its case against Hayes and his co-conspirators, a white envelope arrived. It was from Hayes’s lawyers. “As a matter of courtesy we are now in a position to advise that Mr. Hayes will plead Not Guilty to all Counts,” the letter said. “Accordingly he now formally withdraws from the process.” Having avoided extradition, the natural born trader was taking the biggest risk of his life, reneging on the deal and entrusting his fate to random jurors in a London courtroom.
Seems as though that was the worst gamble he ever made. His other gambles were with others' money (essentially just gambling his job) - this one was for 14 years of his life.
Off-topic nitpick: I wouldn't quite go that far with regards to your characterization of Hill. Hill entered the Witness Protection Program because he was convinced that Jimmy the Gent was going to kill him, and if I remember correctly, he had to be convinced to do so by the prosecutor of his case.
Bringing his Asberger's into the story? Really? Spending pages talking about Hayes' superhero bed sheet is offensive to him and demeaning to the real story here: LIBOR is decided by a bunch of banks calling up brokers at random?!
Journalism, especially long-form journalism, is just a spectacularly bad medium for talking about systems problems.
First, the article did not spend pages on his Asbergers - the vast majority of the article was devoted to describing the systemic problems in banking and the LIBOR rate.
Second, Hayes is the first person to be convicted, the article describes him in depth as a nod to the industry's and prosecution's argument that a few trading superstars are responsible for the corruption of the LIBOR. The article is quite sympethetic to their narrative of Hayes having the right combination of brains, risk-appetite, and carefree attitude that led him to take advantage of the system's problems, bolster his career and ultimately his arrest.
Third, Hayes' lawyers used his Asbergers in his defense. If anything the article is ignores that diagnosis and holds Hayes accountable for actions.
>Journalism, especially long-form journalism, is just a spectacularly bad medium for talking about systems problems.
>the real story here: LIBOR is decided by a bunch of banks calling up brokers at random
This. Am I missing something, or is it bizarre that LIBOR came to play such a significant role in the financial markets, given it's so hackable?
A facetious comparison would be how every year people bet on what colour hat the Queen will wear on Ladies Day at Royal Ascot. If suddenly trillions were being staked on this market, could you prosecute a courtier for handing her a strawberry bonnet?
It makes sense that the banks started setting LIBOR. It's the rate they lend to each other. Sometime they borrow, sometimes they lend. In theory, everybody voting on a fair rate results in a fair rate.
BUT... Other people saw this rate which looked like a really convenient benchmark, and started using it as a benchmark. Now you have all the makings of a conflict of interest.
So I read the whole thing. Are the only people being prosecuted the ones that influenced the bankers to lie about the borrowing rates? Why would you prosecute the ones who made the request, but not the ones who fabricated the rates?
Not knowing anything about the case, my guess is that to secure a criminal conviction your need hard proofs. These traders have been incredibly helpful by documenting on recorded chatrooms all their crimes. Unless their bosses have been stupid enough to do the same I wouldn't expect to see any of them in court.
I think there is a huge double standard with white collar crime where we worry if we are prosecuting the "right" people. Was this person the ring leader or just a foot soldier? Clearly what he did was wrong. If he were a poor drug dealer there would be little sympathy for the arguement that he was being overcharged. But with an upper class person who we can relate to, we worry the system is unfair.
How about having a system that is tough on white collar criminals, but imprefect? No one seems to mind a system like that for other crimes.
I think that's because they know the white collar criminal is going to have access to a good lawyer and they need a more solid case. If many of the charges end up being false, you are going to cast doubt on the whole case
Not to mention the government will waste millions of dollars and not get a conviction. I don't think the government could afford to prosecute every white collar crime because of the high cost of doing so.
My only real life experience with a "drug bust" was at a music festival where a cop came up to my friend and I, asked for our bag of weed, dumped it out, and then asked where we got it. We didn't tell him where we got it and I then thanked him for not issuing us a citation.
Just because we overcharge some doesn't mean we should expand that and overcharge even more. Overcharging, mandatory minimums, sentencing guidelines, etc. are the reason the US prison population dwarfs that of other nations. We need to focus on rehabilitation and prevention for crimes like the drug dealer you mentioned not expand our prison population further by excessively charging in more and more crimes.
Penalties for crimes that affect such large groups or even populations should be very harsh. Penalties for public services (police/politician corruption or actions) should be super harsh.
Police, institutional execs (bankers/doctors) and politicians should have a penalty structure that incentivizes appropriate behavior.
Just as they impose such rules downstream they should be subject to very harsh penalties when they exploit their positions.
In some ways, it feels like the punishment for the crime should be directly proportional to the level of responsibility the "criminal" had.
It seems like any bank boss who, where it can be proven, acknowledges and approves of his subordinate engaging in criminal activity should be sentenced to at least the same punishment as the trader himself.
The article does claim that other (typically upper middle class) traders often looked down on him because of his accent and education, e.g. "Hayes was on better terms with his brokers than most. They had in Hayes a kindred spirit—a state school Londoner with a cockney accent" and "Hayes, he said, seemed very 'barrow boy'—London finance slang for a low-class poseur."
Come to think of it, it would be interesting to compare the class backgrounds of those successfully prosecuted and those who got away scot-free, just to see how those in the old boy network fared.
I don't think it's a double standard. Most people would not be unhappy that he was punished to the full extent of the law (although generally I dislike "example" cases that are treated more harshly) if all of those involved were pursued, including those at more senior levels in the bank who were aware of and sanctioned the actions. You would not, by contrast, see prosecutors stop pursuing the top level drug dealers just because they got somebody to make an example of publicly.
I'm supposed to feel sorry for him? He defrauded people out of real money, just the same as if he'd picked their pockets on the street. He got 14 years for it — good.
I most likely traded with this guy in my days on an interest rate desk. I am now not in the least in doubt that price-fixing behaviour occurred in the market at the time, and possibly still does (investigations must have spooked people).
Back in those days, I was working at a fund that held positions in rates, equity index options, and currency derivatives. These are all instruments that depend on some sort of fix to determine a payout. I spent a LOT of time staring at Bloomberg charts when the fix was due. And over that time, I never shook the suspicion that people were systematically rigging these fixings. It was a time of very low volatility before the financial crisis, and yet you would see all these strange spikes on the third Friday of each month (equity index expiry) and often at 1600 (WM/Reuters Currency fix). It coincided with brokers saying such-and-such had a big position. Without being privy to the actual manipulation, there was always the plausible idea that the big player was hedging his risk, but it happened so often you tended to think it was a setup. With LIBOR, it was a bit different because we didn't have a line into the fixing desks.
I wonder how this will play out. Hayes is right that he is an unlikely fall guy. There can be no doubt his bosses understood how this was done. His boss would have been either a trader or a broker. He would have understood precisely why you would want to move the rate. They can also see the PnL statements and positions, so they know the dv01 (value of a basis point) of the fix. For the record, a million bucks per bp is not a huge amount. I know it sounds like a lot, but there are guys out there swinging 20M a day on average, and quite a lot more.
I'm also not shocked that Hayes says it's normal. Anyone who's ever sat on a trading desk has realised that if you could move the market at fixing time, you could make money. The article talks a lot about his Asperger's, and I guess you're meant to speculate that he didn't quite get that he was doing explicitly what other people would do with a wink and a nudge. It's not the first time I've heard rumours involving brokers and brown envelopes.
In any case, I hope the recent fixing scandals have lessened the temptation for people. It ruins the market when everyone suspects foul play.
Given the long process to bring this to justice, imagine all the ones that never get that far. It's much easier to convict someone of stealing bread from a 7-11.
Notice the targeting of key employees that aren't paid that much but wield a lot of influence? I'd guess this guy actually doesn't play the shadows game that well if he is Aspergers.
Imagine what goes on with people with better understanding, more money to bankroll them, better payoffs? Oh yeah, politics as usual.
You want know what my biggest gripe about the LIBOR scandal is? The fact that the fed chose the LIBOR as the market rate in the first place, effectively ceding a huge amount of monetary control to a set of private bankers, but not only that, ceding that control to the private bankers of another country, and not only that, but they knew the rate was being manipulated no later than 2007, and stuck with it and said nothing anyway!
I think the fed needs to be audited and the Federal Reserve Act should be gotten rid of and the power they have should rest with congress as the constitution states it should!.
Also, I think this is the most important part of this article: "who in turn were acting on instructions from the Bank of England." So the two top guys in the bank are secretly being prosecuted, and we don't know their names, but what about the Bank of England? Any prosecution against anyone there?
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[ 260 ms ] story [ 4246 ms ] threadThe article seems to play up Hayes' Asperger’s as almost an excuse as to why he could do what he did with little emotion.
Just like breaking into a computer system, he used human engineering rather than hacking to rig LIBOR in his favor. He litterally became friends with the people who helped set LIBOR and asked them to help set LIBOR in the direction he wanted.
> For Hayes, it was a light-bulb moment. He knew that banks had always tailored their Libor submissions to benefit their own positions, but the system resisted tampering: no single institution could have much impact on the overall rate when 15 other banks were doing the same thing. But Hayes had worked at enough banks and befriended so many brokers that he realized he could sway several submitters at once. He could pull their strings without them even knowing it. And Hayes was on better terms with his brokers than most. They had in Hayes a kindred spirit—a state school Londoner with a cockney accent.
"The document [that Hayes points to] instructs Libor submitters to clear their judgements on the rate with certain named traders. Defence lawyer Neil Hawes last week suggested the traders held derivatives positions dependent on Libor."
http://www.risk.net/operational-risk-and-regulation/news/241...
I think the idea behind the Nuremberg defense is that you can't refuse orders b/c it's the military and refusing orders can be punishable by death
While the amounts he was trading seem pretty massive, the truth is there are some traders that handle much more money. Never mind the banks themselves, trading firms, governments, etc...
There's no doubt that, if larger actors wanted, they could run much larger scams and not get caught.
Tom Hayes only got caught because he wasn't big enough.
Look at those who are successfully prosecuted - mostly traders, small firms, 'rogue' employees.
In one of the larger cases, SAC Capital, only a small number of SAC employees were convicted, despite it being 'common knowledge' that they engaged in insider trading, to the point that it was a central tenet to the firm's strategy, and traders brazenly collected insider information. And yet somehow, Steven A. Cohen has managed to escape punishment, as have the large majority of its traders.
Why bother taking pains to hide anything when what you're doing is technically legal? The best part is, said policy can later be propped up to appear as if it was actually in everyone's best interest.
"By creating money in this way, banks have increased the amount of money in the economy by an average of 11.5% a year over the last 40 years. "
That being said, I think there is something about it that fundamentally offends human sensibilities.
It is not like currency minted by the private sector. That would be more akin to futures contracts settled by physical delivery or prepaid service contracts. The private sector has to back up its currency with actual goods or services. If you issue hemp futures, you had damned well better be a hemp farmer and insure your crop, and if you issue hemp scrip, you'd better have some actual reserves of hemp in your warehouse.
All that is backed by something, even if it is little more than a believable promise.
The promise that backs fractional reserve is that you can have your cake and eat it, too. If you make a deposit, you can withdraw 100% of it at any time, even though they will immediately lend 90% of it to someone else. That someone else will then bid against you for the same goods and services, using exactly the same money you are bidding with.
Lets say you deposit $100. You want a doodad from Jack Handy. Joe Blow also wants that doodad, and he has $0. But the bank manager is his brother-in-law, so he can qualify for a loan of any size. Ordinarily, you could get the doodad for $50. But Mr. Blow starts a bidding war with you, using your own money, and the final price is $60. If you win, you write a check for $60, and Jack Handy deposits $60. The bank has the same amount in reserves, and can issue the same amount in loans. If Joe wins, the bank lends him $60 of your money, writes a check for $60, and Jack Handy deposits it. The bank still has the same money in reserves, but has promised to pay the same $60 to both you and Jack. Thanks to the trick, you effectively lost $37.50 (100x60/160) for the doodad you didn't get, Jack effectively lost $12.50 ($50-37.50)--surprise! $60 of lender-inflated bank credit is worth less than the $50 in cash--and Joe is now paying the bank rent on the doodad.
The are not creating money out of nothing. They are creating credit out of their own debts, and screwing everyone else over hard in the process. They are literally the only winner in the above scenario.Well, except in the real world where, before banking regulators stepped in and stopped it, one of the common forms of privately-issued currency was by private banks issuing loans (including in the form of privately-printed banknotes) without regulated reserve requirements.
That would still include stuff like payroll scrip redeemable only at the company store.
From what I have read in different cases involving a criminal group or simply a group of teenagers vandalizing a place, it does help to be the first one to talk to the police. Once the police / prosecution has enough information to make a case, they don't need anybody else.
(For those who have not seen the movie, it's a good movie to watch.)
After ratting out everybody (and avoiding extradition to the US), he withdrew from the plea deal and gambled that the UK jury would be sympathetic.
On Oct. 9, as the SFO was finalizing its case against Hayes and his co-conspirators, a white envelope arrived. It was from Hayes’s lawyers. “As a matter of courtesy we are now in a position to advise that Mr. Hayes will plead Not Guilty to all Counts,” the letter said. “Accordingly he now formally withdraws from the process.” Having avoided extradition, the natural born trader was taking the biggest risk of his life, reneging on the deal and entrusting his fate to random jurors in a London courtroom.
Journalism, especially long-form journalism, is just a spectacularly bad medium for talking about systems problems.
Second, Hayes is the first person to be convicted, the article describes him in depth as a nod to the industry's and prosecution's argument that a few trading superstars are responsible for the corruption of the LIBOR. The article is quite sympethetic to their narrative of Hayes having the right combination of brains, risk-appetite, and carefree attitude that led him to take advantage of the system's problems, bolster his career and ultimately his arrest.
Third, Hayes' lawyers used his Asbergers in his defense. If anything the article is ignores that diagnosis and holds Hayes accountable for actions.
>Journalism, especially long-form journalism, is just a spectacularly bad medium for talking about systems problems.
what is your alternative?
This. Am I missing something, or is it bizarre that LIBOR came to play such a significant role in the financial markets, given it's so hackable?
A facetious comparison would be how every year people bet on what colour hat the Queen will wear on Ladies Day at Royal Ascot. If suddenly trillions were being staked on this market, could you prosecute a courtier for handing her a strawberry bonnet?
BUT... Other people saw this rate which looked like a really convenient benchmark, and started using it as a benchmark. Now you have all the makings of a conflict of interest.
How about having a system that is tough on white collar criminals, but imprefect? No one seems to mind a system like that for other crimes.
I'm white and my friend is Mexican.
Police, institutional execs (bankers/doctors) and politicians should have a penalty structure that incentivizes appropriate behavior.
Just as they impose such rules downstream they should be subject to very harsh penalties when they exploit their positions.
It seems like any bank boss who, where it can be proven, acknowledges and approves of his subordinate engaging in criminal activity should be sentenced to at least the same punishment as the trader himself.
The article does claim that other (typically upper middle class) traders often looked down on him because of his accent and education, e.g. "Hayes was on better terms with his brokers than most. They had in Hayes a kindred spirit—a state school Londoner with a cockney accent" and "Hayes, he said, seemed very 'barrow boy'—London finance slang for a low-class poseur."
Come to think of it, it would be interesting to compare the class backgrounds of those successfully prosecuted and those who got away scot-free, just to see how those in the old boy network fared.
Back in those days, I was working at a fund that held positions in rates, equity index options, and currency derivatives. These are all instruments that depend on some sort of fix to determine a payout. I spent a LOT of time staring at Bloomberg charts when the fix was due. And over that time, I never shook the suspicion that people were systematically rigging these fixings. It was a time of very low volatility before the financial crisis, and yet you would see all these strange spikes on the third Friday of each month (equity index expiry) and often at 1600 (WM/Reuters Currency fix). It coincided with brokers saying such-and-such had a big position. Without being privy to the actual manipulation, there was always the plausible idea that the big player was hedging his risk, but it happened so often you tended to think it was a setup. With LIBOR, it was a bit different because we didn't have a line into the fixing desks.
I wonder how this will play out. Hayes is right that he is an unlikely fall guy. There can be no doubt his bosses understood how this was done. His boss would have been either a trader or a broker. He would have understood precisely why you would want to move the rate. They can also see the PnL statements and positions, so they know the dv01 (value of a basis point) of the fix. For the record, a million bucks per bp is not a huge amount. I know it sounds like a lot, but there are guys out there swinging 20M a day on average, and quite a lot more.
I'm also not shocked that Hayes says it's normal. Anyone who's ever sat on a trading desk has realised that if you could move the market at fixing time, you could make money. The article talks a lot about his Asperger's, and I guess you're meant to speculate that he didn't quite get that he was doing explicitly what other people would do with a wink and a nudge. It's not the first time I've heard rumours involving brokers and brown envelopes.
In any case, I hope the recent fixing scandals have lessened the temptation for people. It ruins the market when everyone suspects foul play.
It doesn't excuse the behaviour but I find hard to believe the desk heads knew nothing about it.
[Update]: that being said he probably paid for adding stupidity to his criminal behaviour by documenting his crimes on recorded chatrooms.
Notice the targeting of key employees that aren't paid that much but wield a lot of influence? I'd guess this guy actually doesn't play the shadows game that well if he is Aspergers.
Imagine what goes on with people with better understanding, more money to bankroll them, better payoffs? Oh yeah, politics as usual.
I think the fed needs to be audited and the Federal Reserve Act should be gotten rid of and the power they have should rest with congress as the constitution states it should!.
Also, I think this is the most important part of this article: "who in turn were acting on instructions from the Bank of England." So the two top guys in the bank are secretly being prosecuted, and we don't know their names, but what about the Bank of England? Any prosecution against anyone there?