Andrew Bailey on the Death of LIBOR

The ailing LIBOR benchmark, underpinning $500-$800 trillion worth of financial contracts, has been in a state of malaise for many years. Despite the efforts of regulators to revive the sick scandal-ridden benchmark, which suffered from a series of problems related to cheating and misreporting, it is unsurprising that its slow death will finally come in about four years’ time. As the Chief Executive of the FCA Andrew Bailey recently explained the funeral is set for 2021. But some clearly want LIBOR to live longer. Bailey called LIBOR “a public good” but questioned its current usefulness. Among other things, LIBOR related misconduct resulted in civil claims and fines of £9 billion. And, of course, in the criminal context it resulted in “clustered criminality” of which convicted LIBOR rigger Tom Hayes is a prime example. Clustered criminality, which only reflects a very small part of the ills affecting financial services, is when there “is at least strong suspicion that a crime has been committed and although the culprits may not be immediately clear it seems likely that more than one person was involved.” A succinct account of bankers lying, cheating and colluding to rig LIBOR is found in The Fix where Liam Vaughan and Gavin Finch expose the ills gripping the financial world. Hayes, who operated as “Tommy Chocolate” in the midst of the financial crisis, worked in a culture where “your performance metric” is all about “the edge” and making “a bit more money” because that is “how you are judged”.

In The Spider Network, David Enrich tells the “wild story” of Hayes – who he dubs “a maths genius” – and the backstabbing banking mafia which operated a thoroughly crooked financial system. Breaking the silence in an exclusive interview with The Sunday Times, Hayes’s wife Sarah Tighe vowed to “never stop fighting for my autistic husband, the LIBOR fall guy”. Hayes, who achieved notoriety by miraculously dodging extradition to the US, was jailed for 14 years for fraud but his sentence was reduced to 11 years. Tighe is fighting for her husband’s release and said that she “went apeshit” when officials tried to seize her assets as well. Her morale will undoubtedly be strengthened by the news that former Rabobank traders Anthony Allen and Anthony Conti, who are both British and were convicted at first instance for rigging LIBOR, have had their convictions overturned by the US Court of Appeals for the Second Circuit in New York which found that constitutional rights against self-incrimination had been breached. Tom and Sarah will probably also find solace in the fact that the cycle of cheating was so extreme that even the Bank of England is now implicated in LIBOR manipulation.

LIBOR Roundup: Fraud, Misrepresentation and New Directions in Civil Proceedings

ICE Benchmark Administration, which took over LIBOR from the BBA in 2014, has published a roadmap for LIBOR and banks will no longer be able to manipulate the interbank rate once a new system comes into place this summer connecting the IBA’s computers to banks’ trading systems. “We built new systems to do the surveillance which run about 4m calculations every day, looking for collusion, or aberrant behaviour, or possible manipulation,” explained the IBA’s president Finbarr Hutcheson. He expressed confidence that traders will no longer be able to lie to improve their trading positions and said that anomalies would be investigated and reported to the FCA. The banks have paid billions in fines in relation to the benchmark’s manipulation. The Wheatley Review 2012 engineered and guided LIBOR’s transformation because the distorted benchmark, underpinning more than US$350 trillion in outstanding contracts, was “not fit for purpose”. But of course, the review’s author Martin Wheatley was ousted from office because of his overt aggressiveness, or his “shoot first” and “ask questions later” policy for bad banks. Under IBA oversight, daily LIBOR rates will be rooted in market transactions “to the greatest possible extent” by using a “waterfall” system devised to begin with transactions but relies on human input in circumstances when trading volumes decline.

IBA is extremely confident that the move will bring rectitude to the scandal ridden financial sector. Hutcheson said that coupled with the earlier changes, the roadmap will ultimately make LIBOR “one of the world’s most trusted, scrutinised and robust financial benchmarks.” Insofar as benchmark rigging from the old days is concerned, after the settlement (2014) in the series of reported judgments in the Graiseley Properties case, new claims have been brought and a series of fresh judgments were published in litigation arising out of disputes between the Property Alliance Group – a property developer with a portfolio worth about £200 million – and the Royal Bank of Scotland. RBS has been in the spotlight recently because of the fact that it has failed to generate profit for eight successive years and that its losses since the global financial crisis 2008 have exceeded £50 billion which is more than the £45 billion of taxpayers’ money used to bail out the ailing institution.

Benchmark Manipulation and Corporate Crime: Insights on Financial Misconduct

In the second innings things were different. The reverse swinging old ball meant that the Serious Fraud Office’s openers came back to the pavilion with a duck and those charged with misconduct and put in the dock began to eye up the opportunity of scoring a hat trick. Coupled with the reduction in Hayes’s sentence by the Court of Appeal (Lord Thomas of Cwmgiedd CJ, Sir Brian Leveson PQBD and Gloster LJ, see here) on the ground that he was not in a managerial position and suffered from autism, the fact that Darrell Read, Danny Wilkinson and Colin Goodman, Noel Cryan, Jim Gilmour and Terry Farr were found not guilty of LIBOR manipulation casts doubt over future successful prosecutions in benchmark rigging cases. Hamblen J directed the jury to convict the brokers if they had played a “significant” role in helping him rig LIBOR. Apparently they had not. The Court of Appeal’s refusal to grant Hayes permission to appeal to the Supreme Court may provide limited comfort to the SFO but the acquittal of the above brokers charged in the second “sham” LIBOR trial has reversed the momentum gained by the authorities. The brokers’ exoneration exposes the SFO to the accusation that it has been wildly swinging a sledgehammer to smash a nut. So, having tasted blood after Tom Hayes’s conviction, taking a gung-ho approach to weeding out the City’s “bad apples” seems to have backfired because the clever brokers had simply let Hayes believe whatever he wanted.

According to the brokers, the SFO “didn’t investigate it properly and didn’t listen”. Despite big increases to its funding, claims that the SFO’s director David Green QC has overseen a “string of successes” and that the extension of his contract for two years is a “boon” for justice are proving to be totally without merit. These days it is the SFO which is in the dock and Tom Hayes’s tormented father Nick Hayes used the opportunity to defend his son and said: “Today Tom Hayes stands tall. He refused to testify versus the LIBOR brokers and paid the price … I’m proud of him.” Of course, measured against such poor performance, the fact that the embattled agency wants a top-up of £21.5 million in emergency funds for “blockbuster” probes to bolster its dwindling fortunes amounts to expecting rewards for failure; it is completely unjustified.

Terminated: City Sheriff Shot Down

The tough talking Martin Wheatley finally decided to resign last month. But it was for the wrong reason, i.e. vanity. He was unhappy about his boss George Osborne’s refusal to renew his contract as head of the Financial Conduct Authority (FCA) in March 2016. Whilst Wheatley does not accept the excesses of his four year stint as City Sheriff, many in financial circles are nonetheless breathing a sigh of relief that his reign of terror is over. A trigger-happy sort of chap, unlike his iconic predecessors (e.g. Howard Davies, Hector Sants etc) whose shoes he just couldn’t fill, Wheatley persistently failed to command the respect of the financial elite. The shot down sheriff will be temporarily replaced by his deputy Tracey McDermott (who will temporarily act as CEO from 12 September 2015) and Andy Haldane (the Bank of England’s Chief Economist) has been tipped as his permanent replacement. Wheatley, who became globally infamous for his fierce crackdown on the cheating that has historically infected financial services, reportedly said that he is disappointed to be leaving his job because he had some unfinished business to settle; apparently, the cure had not fully been delivered. The caped crusader’s legacy has been one of lumbering the banks with fines, authoring the Wheatley Review (which was germane to reforming LIBOR/benchmarks) and co-authoring the equally seminal Fair and Effective Markets Review with the Bank of England and HM Treasury.

Despite having resigned, Wheatley will apparently stay on at the FCA in an advisory role and he will be paid until July 2016 irrespective of his actual exit in January 2016. He received more than £700,000 in compensation last year. His work has been hailed as the blueprint for oversight of financial benchmarks and has come to form the bedrock of the conduct regime. Equally, his tenure had a lot to do with fear and loathing in the City and mischievous individuals in financial services must be hugely tickled that the terminator himself has been terminated. On the other hand, some were of the view, that his systemic efficiency was little more than a lot of huff and puff. For example, on the subject of third party rights the Court of Appeal – see the long read – thought that his FCA failed to follow proper legal channels and truncated procedures when wrongdoing was penalised and regulatory action was taken. As far as Gloster LJ (with whom Longmore and Patten LJJ agreed) could see, the wheels of justice had simply turned too fast and third party rights had suffered as a result: in other words, enforcement had become redolent of the law of the jungle, the judgment is being appealed to the Supreme Court.

Navinder Singh Sarao: Criminal Mastermind or Sacrificial Lamb?

This article examines the charges against Navinder Singh Sarao and it argues that he is put in an invidious position in comparison to traders protected by predatory global banks. The Parliamentary Commission on Banking Standards (PCBS) had dubbed bankers “the masters of the universe” because of their repetitious recklessness and disregard for customers and shareholders. Yet, the banks are routinely able to pay their way out of trouble. From that perspective, Sarao becomes a sacrificial lamb and a scapegoat in America’s quest for bringing abusers of the market to justice. Indeed, Nick Leeson – the historic “rogue trader” from two decades ago, who wrecked Barings Bank by losing £832 million and subsequently went to ground – was of the view that Sarao is a likely scapegoat and he may not have foreseen the consequences of his actions. But can we trust the words of Leeson, who in his professional career, seems to have been nothing short of a congenital liar? On the other hand, the information available in the public domain points to the existence of a double standard that puts Sarao in a relatively prejudiced position in comparison with other bent individuals who remain above the law and are treated leniently.

Applying the hierarchy devised by Roger McCormick in Seven Deadly Sins: ‘Retrospectivity, Culpability and Responsibility’ – save that Sarao was not a bank operative – it is apparent that Case 1: “Clustered Criminality” has controversially been put behind Case 5: “Individual Criminality”. Clustered Criminality, of which benchmark manipulation is a classic case, occurs “where there is at least strong suspicion that a crime has been committed and although the culprits may not be immediately clear it seems likely that more than one person was involved.” Individual Criminality, which the “rogue trader” classically exemplifies, is “where there is clear evidence that a crime has been committed by a bank employee and the culprit (usually acting alone) is identified.” Thus, recent events may be read as turning the hierarchy on its head by putting Case 5: “Individual Criminality” at the apex of culpability. The approach is questionable because

Changing Banking for Good: What is the Cure for Misconduct?

Not long ago, in the Changing banking for good (see Vol I and Vol II) report, the Parliamentary Commission on Banking Standards (PCBS), a body established in the wake of the LIBOR scandal, was horrified by shocking and widespread malpractice in the banking sector. It concluded that, in addition to bankers, governments and regulators have contributed to the degeneration of standards. The PCBS recommended wide-ranging changes relating to making senior bankers personally responsible and reforming bank governance by creating better functioning and more diverse markets. It also recommended reinforcing the powers of regulators to make sure that bankers do their job. Putting prolonged and blatant misconduct (which had been evident for a number of years) at the heart of the problem, the PCBS was of the view that its input would alleviate the industry’s woes – it said that the “challenge for government is to follow through on the commitment to far-reaching reform.” Update: an April 2016 sequel to this article dealing with the Panama Papers and Lord King’s new book The End of Alchemy (see my blogpost here) can be read on SSRN as Changing Banking for Good: Counting the Costs of Market Misconduct. In his book, Lord King calls banks “the Achilles heel of Capitalism.”

Almost two years on, unconvinced that the deficit of trust has been bridged, Dame Colette Bowe, of the Banking Standards Board (BSB) issued a general warning that the “banking industry must raise its game” because “trust in the system has been badly damaged and it’s no surprise that the public expects change after everything that has happened”. On the other hand, diminishing the weight of their own argument, they also offered a general concession

Consultation on New Benchmarks entering the Regulatory Perimeter

The Fair and Effective Financial Markets Review (FEMR or the “review”) – a triumvirate headed by Nemat Minouche Shafik (Bank of England) and co-chaired by Martin Wheatley (FCA) and Charles Roxburgh (HM Treasury) – has the twofold objective of (i) reinforcing confidence in the fairness and effectiveness of wholesale financial market activity conducted in the United Kingdom and (ii) influencing the international debate on trading practices, including highlighting issues that can only be addressed through co-ordinated international action. The review, which is expected to produce a final report by June 2015, focuses on both regulated and unregulated wholesale markets – such as fixed-income, currency and commodity markets, including associated derivatives and benchmarks – in relation to which most of the recent concerns about misconduct have arisen.

However, at the Chancellor of the Exchequer’s invitation, until the delivery of the final report in June 2015, the review has recommended a list of additional major benchmarks across the fixed income, currency and commodity markets (FICC) that should be included in the regulatory framework originally implemented in the wake of the LIBOR scandal. The review considers the Wheatley Review of LIBOR 2012 to be the blueprint for reform and recalls that Mr Wheatley had envisaged adding further benchmarks to the present LIBOR regime (see here). The ambit of the review includes matters such as trading practices, scope of regulation, supervision of firms and markets and the impact of recent and forthcoming regulation.

London School of Economics: Lunchtime Workshop on Benchmarking and Metrics for Bank Ethics and Behaviour

The Conduct Costs Project of the London School of Economics (LSE) is hosting its first Lunchtime Workshop on Benchmarking and Metrics for Bank Ethics and Behaviour on Wednesday 14^th May 2014. Confirmed Speakers include Tom Sleigh (Banking Standards Review), James Palmer (Herbert Smith Freehills LLP) and Tania Duarte (LSE Conduct Costs Project). Professor Roger McCormick – Director of the LSE’s Conduct Costs Project – will chair the event. Attendance at the Lunchtime Workshop is free of charge, but attendees must please book a place by sending an email to T.M.Maia-Campos-Duarte@lse.ac.uk no later than 2^nd May. The event shall take place at the LSE, New Academic Building, The Wolfson Theatre. Attendance is free. However, if you are interested in helping to fund the Project’s activities please get in touch with the Project Director Professor Roger McCormick at r.s.mccormick@lse.ac.uk or by telephone on 07802 604 316.

Tom Sleigh, Banking Standard Review

Tom works for Lloyds Banking Group (LBG), where he spent two years as Chief of Staff to the Managing Director for retail and wealth customer products. On joining he oversaw the expansion of the team to include Intermediary distribution, Halifax Share Dealing, Scottish Widows Bank and the Customer Insights research team, to become 3,000 staff strong across multiple UK sites.

Prior to this Tom was Chief Advisor to the COO at the BBC, and began his career at strategic consultancy Booz Allen Hamilton.

LBG seconded Tom to the Banking Standards Review, working for Sir Richard Lambert, with the goal of establishing a new body to raise standards of competency and conduct in UK banking.

ICE LIBOR and the Slippery Road Ahead

The head of the Financial Conduct Authority (FCA) is somewhat of a superstar in the world of finance and regulation. Unsurprisingly, Martin Wheatley makes a lot of speeches. He famously authored the Wheatley Review (the review) – the blueprint as regards reforming the world’s “most important number”, i.e. the London Interbank Offered Rate (LIBOR). Aiming to impress the government and the public, Wheatley’s rhetoric revolves around buzzwords such as accountability, conduct and governance.

Only late last year, speaking on modelling integrity through culture, he reiterated that:

Our own emphasis on conduct and culture is heralded by our work to strengthen benchmarks. We’ve been at the vanguard of establishing a regime that is practical, but that nonetheless results in a shift in firm behaviour and individual accountability. As I prepared to take on the task of chief executive of the FCA, I was also asked to review whether the revelations surrounding LIBOR required a wider policy response. The policy recommendations resulting from this review – now known as the Wheatley Review – have delivered a LIBOR regime that provides for accountability, strengthened governance and robust systems and controls around the submission of rates.

FSA: LIBOR Internal Audit Report

Punishing banks – Barclays, UBS and RBS – by imposing fines against them for manipulated LIBOR submissions has been a vexing issue for the Financial Services Authority (FSA). After receiving its final notice, Barclays told the Treasury Committee (see Fixing LIBOR: some preliminary findings) that – in order to avoid negative media comment (lowballing) – the issue that firms were making inappropriate LIBOR submissions was raised with the FSA on 13 occasions. Noting media and academic concern, the Treasury Committee highlighted that:

44. Barclays’ continuing manipulation of its own LIBOR setting took place against a background of media concern about the LIBOR setting process during the [financial] crisis. On 25 September 2007, an article by Gillian Tett in the Financial Times entitled “LIBOR’s value called into question” noted the complaint of the Treasurer of one of the largest City banks that “The LIBOR rates are a bit of a fiction. The number on the screen doesn’t always match what we see now.”

45. On 16 April 2008, the Wall Street Journal published an article called “Bankers cast doubt on Key Rate amid crisis” by Carrick Mollenkamp. This noted that: “The concern: Some banks don’t want to report the high rates they’re paying for short-term loans because they don’t want to tip off the market that they’re desperate for cash. The LIBOR system depends on banks to tell the truth about their borrowing rates.