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LIBOR rigging: Difference between revisions
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== The criminal charges == | == The criminal charges == | ||
Okay, so a picture is emerging. During the 1980s the “interest rate” transformed from being the intractable time cost of borrowing money — for lenders, a secondary risk to the repayment of principal — to a tradable asset class of its own, thanks to the emergence of [[interest rate swap]]s. | |||
This is a profound conceptual shift. Like the transformation from analogue to digital: you could lift interest rate information from the substrate in which, hitherto it was buried, in the same way that the information content of a book was suddenly abstracted from the paper it was printed on. But there was a difference: digital information, is logically prior to the substrate in which it is articulatd. An interest rate is not logically prior to a loan. It is a consequence of a loan. An interest rate cashflow implies a loan. | |||
As | In any case, conceptually free of that mortal weight of principal, and enabled by the rise of computer modelling — the coincidence of the digital and derivative revolutions was, ah, no coincidence — financial modellers were able to create and then , with their new tools, hedge, all kinds of funky new nterest rate products. Collars, caps, floors, enhanced dual rates , knock ins, knock outs. There is another story here — in JC’s view far more outrageous — about how commercial bankers used these tools to shift interest rate risks onto small businesses, but that will have to wait. | ||
In the meantime, “what the LIBOR rate might be used for” quickly changed. Sleepy old deposits rates and mortgages were but a small part of it. | |||
Banks across the street engaged their derivatives trading teams in the LIBOR setting process. Tom Hayes was one such derivatives trader. He traded Yen LIBOR in Tokyo. Though a young man at the time of the allegations, Hayes was valued by a succession of bank employers — for a time — for his great connections around the LIBOR setting market. | |||
As public interest focussed in on the LIBOR submission process in the wake of the [[LIBOR lowballing]] incident sentiment — both inside and outside his employer ls — turned sharply against him. | |||
====“A conspiracy to defraud”==== | ====“A conspiracy to defraud”==== | ||
{{drop|H|ayes was indicted}} on the ancient [[common law]] offence of “conspiracy to defraud”. Criminal law minutiae, perhaps, but he was not charged under the Fraud Act 2006. That Act followed a Law Commission survey of the ancient criminal law of fraud which recommended ''abolishing'' common law conspiracy to defraud, because | {{drop|H|ayes was indicted}} on the ancient [[common law]] offence of “conspiracy to defraud”. Criminal law minutiae, perhaps, but he was not charged under the Fraud Act 2006. That Act followed a Law Commission survey of the ancient criminal law of fraud which recommended ''abolishing'' common law conspiracy to defraud, because of its “potential to catch ''behaviour that should not be criminal''”.<ref>{{plainlink|https://www.gov.uk/guidance/use-of-the-common-law-offence-of-conspiracy-to-defraud--6|Attorney General guidance to the legal profession on use of conspiracy to defraud}}, November 2012.</ref> | ||
Though the government accepted the general thrust of the Law Commission’s recommendations, it “decided to retain [''common law conspiracy to defraud''] for the meantime, but accepted the case for considering repeal in the longer term.” <ref>Ibid.</ref> | Though the government accepted the general thrust of the Law Commission’s recommendations, it “decided to retain [''common law conspiracy to defraud''] for the meantime, but accepted the case for considering repeal in the longer term.” <ref>Ibid.</ref> | ||
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In any case, common law conspiracy to defraud was not abolished, still hasn’t been, and that is what Tom Hayes was charged with. | In any case, common law conspiracy to defraud was not abolished, still hasn’t been, and that is what Tom Hayes was charged with. | ||
Being a common law offence, its ingredients are not sharply delineated — this in itself is a policy reason to to prefer statutory crimes, but anyway<ref>Shout out to my buddies in Kiwiland, by the way, where all criminal offences were codified and all residual common law crimes abolished in 1961. Good job, Kiwis!</ref> — though | Being a common law offence, its ingredients are not sharply delineated — this in itself is a policy reason to to prefer statutory crimes, but anyway<ref>Shout out to my buddies in Kiwiland, by the way, where all criminal offences were codified and all residual common law crimes abolished in 1961. Good job, Kiwis!</ref> — though they seem to be along the following lines: ''an agreement between persons intending to defraud someone by doing something dishonest with a likelihood of resulting loss, even if no loss eventually arises''.<ref>This is in JC’s non-expert words. Not a criminal lawyer. May be missing something.</ref> | ||
The crux: was Hayes ''dishonest'' when he submitted his LIBOR rates? | The crux: was Hayes ''dishonest'' when he submitted his LIBOR rates? | ||
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The jury answered, “yes” to all three questions. Hayes was sent to prison for 14 years.<ref>Reduced on appeal to 11. He is out now.</ref> | The jury answered, “yes” to all three questions. Hayes was sent to prison for 14 years.<ref>Reduced on appeal to 11. He is out now.</ref> | ||
Tom Hayes was not the only one. In total, ''thirty-seven'' traders were prosecuted in London and New York for interest rate benchmark manipulation. Of these, nineteen were convicted and nine imprisoned. | |||
At the time, there was plenty of righteous dudgeon about LIBOR rigging. None of it favoured Tom Hayes or his fellow inmates, who fitted a popular narrative. | At the time, there was plenty of righteous dudgeon about LIBOR rigging. None of it favoured Tom Hayes or his fellow inmates, who fitted a popular narrative. Even their employers affected a tone of wounded indignance that their reputations can have been so rudely traduced. It is a familiar stance. | ||
But if [[little old ladies make bad law]], then what about young investment bankers? | But if [[little old ladies make bad law]], then what about young investment bankers? | ||
====Meanwhile, in Gotham City==== | ====Meanwhile, in Gotham City==== | ||
{{Drop|T|he travails of}} other LIBOR submitters are interesting because of the scale of the ostensible “criminal enterprise” — we’ll come to that — but also because two of those convicted in the United States appealed in 2022. Their appeal focused on ''what the LIBOR Definition actually meant''. | {{Drop|T|he travails of}} other LIBOR submitters are interesting because of the sheer scale of the ostensible “criminal enterprise” — we’ll come to that — but also because two of those convicted in the United States appealed in 2022. Their appeal focused on ''what the LIBOR Definition actually meant''. | ||
In {{casenote|United States|Connolly and Black}}<ref>{{citer|United States|Connolly and Black|2d Cir. 2022|No. 19-3806|}}</ref> the United States Court of Appeals for the Second Circuit found construing the LIBOR Definition to be a question of ''fact'': filtered through the prisms of grammar, usage, and context, an upon which evidence of industry practice from subject matter experts would have a bearing. | In {{casenote|United States|Connolly and Black}}<ref>{{citer|United States|Connolly and Black|2d Cir. 2022|No. 19-3806|}}</ref> the United States Court of Appeals for the Second Circuit found construing the LIBOR Definition to be a question of ''fact'': filtered through the prisms of grammar, usage, and context, an upon which evidence of industry practice from subject matter experts would have a bearing. | ||
The question of law — were the submitters dishonest?<ref>The charge was wire fraud under {{Plainlink|https://www.law.cornell.edu/uscode/text/18/1343|18 U.S. Code § 1343}}: in the JC’s nutshell, electronically communicating for the purpose of executing any scheme to defraud or obtain by false pretence. (''Double'' disclaimer: JC is neither a US lawyer nor a criminal lawyer, but it looks analogous to common law conspiracy to defraud.)</ref> — depended a great deal on | The question of law — were the submitters dishonest?<ref>The charge was wire fraud under {{Plainlink|https://www.law.cornell.edu/uscode/text/18/1343|18 U.S. Code § 1343}}: in the JC’s nutshell, electronically communicating for the purpose of executing any scheme to defraud or obtain by false pretence. (''Double'' disclaimer: JC is neither a US lawyer nor a criminal lawyer, but it looks analogous to common law conspiracy to defraud.)</ref> — depended a great deal on the LIBOR Definition as to which the US court took a literal reading: | ||
{{quote| | {{quote| | ||
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It was within the rules. Connolly and Black were acquitted. | It was within the rules. Connolly and Black were acquitted. | ||
Buoyed by the outcome in New York, Tom Hayes persuaded the UK Criminal Cases Review Commission to refer his case back to the Court of Appeal — which had aleady heard and rejected | Buoyed by the outcome in New York, Tom Hayes persuaded the UK Criminal Cases Review Commission to refer his case back to the Court of Appeal — which, significantly, had aleady heard and rejected his appeal once — for reconsideration. | ||
The Court of Appeal handed down its decision in March 2024. | The Court of Appeal handed down its decision in March 2024. | ||
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{{drop|T|he Court of}} Appeal considered first that question of legal methodology — whose job was it to determine what the LIBOR Definition meant — and came to a different conclusion. | {{drop|T|he Court of}} Appeal considered first that question of legal methodology — whose job was it to determine what the LIBOR Definition meant — and came to a different conclusion. | ||
Under English law, contractual interpretation is a matter of law, to be resolved by the judge. Evidence of market practice, or the belief of submitters, does not enter into it. | Under English law, contractual interpretation is a matter of law, to be resolved by the judge. Evidence of market practice, or the subjective belief of submitters, does not enter into it. | ||
The Court of Appeal interpreted the LIBOR Definition to | The Court of Appeal interpreted the LIBOR Definition to require a bank to always submit the ''lowest'' of the available rates in the range: | ||
{{Quote|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.}}It is hard to imagine, in the abstract, a bank voluntarily borrowing at above the lowest rate then available. But finance is a complicated business, and borrowing decisions are not made in the abstract. There are plenty of examples where a bank might take a higher rate.<ref>Where, for example, the bank is a creditor of a bank offering the higher rate, but to the one offering the lower rate: here, the more expensive loan materially reduces the bank’s net credit exposure, and therefore the capital it must hold against the lending bank.</ref> | {{Quote|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.}}It is hard to imagine, in the abstract, a bank voluntarily borrowing at above the lowest rate then available. But finance is a complicated business, and borrowing decisions are not made in the abstract. There are plenty of examples where a bank might take a higher rate.<ref>Where, for example, the bank is a creditor of a bank offering the higher rate, but to the one offering the lower rate: here, the more expensive loan materially reduces the bank’s net credit exposure, and therefore the capital it must hold against the lending bank.</ref> | ||
====Crimes and contracts==== | ====Crimes and contracts==== | ||
{{Drop|B|ear in mind}} that the “legal question” to be answered here is one of criminal law, not contract: whether the nebulous ingredients of common law | {{Drop|B|ear in mind}} that the “legal question” to be answered here is one of criminal law, not contract: whether the nebulous ingredients of common law ”conspiracy to defraud” were satisfied. | ||
The LIBOR Definition was not a statute at all, let alone a criminal one. | The LIBOR Definition was not a statute at all, let alone a criminal one. It formed part of a ''contract'' between the submitting banks and the BBA. | ||
Unlike crimes and torts, contracts do not admit of mental states or culpability. There is no ''mens rea''. You either comply with a contract, on the facts, or you don’t. One’s intention, recklessness or negligence does not come into it.<ref>Any number of tedious JC tracts refer such as[[contractual negligence|this one]]</ref> | Unlike crimes and torts, contracts do not admit of mental states or culpability. There is no ''mens rea''. You either comply with a contract, on the facts, or you don’t. One’s intention, recklessness or negligence does not come into it.<ref>Any number of tedious JC tracts refer such as[[contractual negligence|this one]]</ref> | ||