LIBOR rigging

This appeal from Tom Hayes’ conviction for “LIBOR rigging” follows the US acquittals in 2022 of Matt Connolly and Gavin Black of equivalent charges relating to the same actions, and centres on a two-limbed question:

1. What do the LIBOR and EURIBOR fixing rules mean and, given they were found in a previous trial to mean one thing, while the appellants believed them to mean another,
2. Whose job was it to decide what they meant? Was it, in other words, a matter of fact or law?

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“If the law supposes that,” said Mr. Bumble,… “the law is a ass—a idiot. If that’s the eye of the law, the law is a bachelor; and the worst I wish the law is that his eye may be opened by experience—by experience.”

— Charles Dickens, Oliver Twist

US courts, in acquitting Connolly and Black, had considered them to be matters of fact. The English court considers contractual interpretation of contracts to be a matter of law. This seems right, though it leaves something out, which is what did the parties believe the rules to mean?

Under the intellectual theory of the common law that goes only to mitigation and not liability, though — as we will see — in a market where plainly everyone shared an opinion, different from the judge’s one, about what the “LIBOR Definition” meant, this risks rendering the law “a ass”.

There is also the odd spectre of the law of contract forming the backdrop to criminal culpability: usually, the rozzers will stay out of a contractual dispute even if fraud is alleged, preferring that to be a matter of civil loss and not one requiring the machinery of the state. LIBOR being primarily of interest to third parties to the “contract” those considerations are not present, but still one must apply contractual principles to contractual matters, and not criminal ones.

Everyone was at it

A fun game, if you have twenty minutes, is to google the names of the Seventeen LIBOR panel banks to see if any of them were not somehow implicated in so-called “LIBOR rigging”.

If you haven’t got twenty minutes, then the WSJ’s completely brilliant spider network will give you the answer in an instant.

Everyone was at it. This means either (a) there was a collossal conspiracy at which everyone was trying to rip off the general public for personal gain and, since their efforts would naturally cancel each other out, probably failing or (b) this is how everyone understood to the LIBOR system to work. It might not be edifying, but employees have fiduciary obligations to their shareholders, and if everyone acts according to those fiduciary obligations — or even their own personal self interests — the selfishness cancels itself out. This is exactly the logic of Adam Smith’s invisible hand.

The “LIBOR Definition”

The dispute comes down to the meaning of the rules LIBOR submitters were meant to follow when submitting their rates. The “LIBOR Definition” provided:

“An individual BBA LIBOR Contributor Panel Bank will contribute the rate at which it could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable market size just prior to 1100.”

Now, seeing as the different desks and functions of a universal bank borrow in different markets, from different counterparties and in different circumstances, clearly there will be no single unitary rate that the market will offer. The submitter will be confronted with a range of rates. Plainly it would be odd to submit a rate that was completely outside that range, but each of those rates counts as “a rate at which it could borrow funds”.

The judgment interpreted that as the lowest of the submitted rates in the range.

In the LIBOR Definition what is required is an assessment of the rate at which the panel bank “could borrow”. That must mean the cheapest rate at which it could borrow. A borrower “can” always borrow at a higher rate than the lowest on offer. But the higher rate would not reflect what the LIBOR benchmark is seeking to achieve, namely identification of the bank’s cost of borrowing in the wholesale cash market at the relevant moment of time. If in a stable and liquid market a submitting bank seeks and receives offers for a reasonable market size at the very time it is to make its submission, and receives offers ranging from 2.50% to 2.53%, it would accept the offer at 2.50%. It would be absurd to suggest that the LIBOR question could then properly be answered by a submission of 2.53%. The bank “could” borrow at that rate in the sense that it was a rate which was available, but that is obviously not what “could” means.

There is some economic logic to this argument, though it seems a brutal grounds for sending someone to prison for 14 years given how easy it would have been for those drafting the LIBOR rules to have put the matter beyond any doubt: namely, by inserting the word “lowest”:

“An individual BBA LIBOR Contributor Panel Bank will contribute the lowest rate at which it could borrow funds ...

And the argument here is not about economic reality, but legal meaning, and legal meaning follows natural, ordinary meanings, and in the world of contractual interpretation, they tend to be construed from the perspective of the person endeavouring to perform the contract and against the draftsperson’s interest, giving the benefit of the doubt to the reader.

As a matter of plain English, the court openly concedes that “could” does not logically rule out a higher rate, but implies it: “a borrower can always borrow at a higher rate than the lowest one on offer”.

But — per the wording in the LIBOR definition — there is not an unlimited upper bound to that: it is delimited by the range of “inter-bank offers in reasonable market size just prior to 1100”.

A submitted could not submit a rate higher than that actually offered range any more than it could submit a rate lower than the actually offered range.

To conclude this “could” does not mean that, therefore, involves implying a term into the contract. Inserting an adjective that the drafters of the rules could easily have included but chose not to.

Evidence was not led as to how the rules were drafted, and what flexibility the British Bankers’ Association had in mind. and after all, history has borne out that, sometimes, there are times where Banks and their regulators are rightly motivated by considerations other than the actual (lowest) rate at which one could borrow.

It is not often JC favours a US interpretation of things, but consider this from United States v Connolly and Black:

The precise hypothetical question to which the LIBOR submitters were responding was at what interest rate “could” DB borrow a typical amount of cash if it were to seek interbank offers and were to accept. If the rate submitted is one that the bank could request, be offered, and accept, the submission, irrespective of its motivation, would not be false.

See also

• LIBOR