LIBOR rigging part 2: Difference between revisions

Okay, so a picture is emerging. What follows is not authenticated history, but something more like a fable or a [[Just so story|“just so” story]]: a simple device to paint a general picture. Also, a cheeky way of avoiding having to dredge up and validate what actually happened.   

{{Drop|D|uring the 1980s}} an “interest rate” transformed from being simply “the time cost of borrowing money”, thus intractably bound into [[indebtedness]] and necessarily a subordinate priority to ''getting you money back'', to being a tradable instrument in its own right. One could be, and Tom Hayes was, a “rates trader”.   

This is because of the emergence of [[interest rate swap]]s. By offsetting coterminous fixed with floating loans, you were left with a string of interest cashflows and no principal. (There ''was'' principal, as we [[A swap as a loan|argue elsewhere]]; it just didn’t manifest as part of the swap contract.)  

This is a ''profound'' conceptual shift.   

Suddenly, you could extract the “interest rate information” as a distinct financial conception from the [[substrate]] of the principal indebtedness in which, hitherto, it had been buried.   

It is a like the transformation from analogue to digital: in the same way, and at broadly the same time, information technology was developing techniques for abstracting the “information content” of any written material from the physical substrate it was printed on. [[James Burke]] did a great ''Connections'' episode on it.  

The entire distribution infrastructure built around written communication, which had evolved lazily over thousands of years, was ''vaporised'', and the information encoded in written communications was preserved in digital form.</ref> this is not true of interest. An [[interest rate]] is ''not'' logically prior to a loan, but its ''consequence''. An interest rate cashflow ''implies'' a loan.

{{Drop|Y|et the derivatives}} wizards had invented a way of unshackling interest, the ''shadow,'' from principal, the [[occluder]]. This is deep, dangerous magic. Conceptually free of that mortal weight, and enabled by developments in computing — the coincidence of the information and derivative revolutions was, well, ''no coincidence'' — financial analysts could create, hedge, and then sell to small and medium-sized enterprises, all kinds of funky new interest rate products: collars, caps, floors, more exotic things like [[Greenclose v National Westminster Bank plc|extendable collars]] and, well, ''[[Interest rate swap mis-selling scandal|enhanced dual fixed rate protection strategies]]''.

There is another story here — far more outrageous, in JC’s view — but it will have to wait. For the meantime, the point is “what LIBOR might be used for” changed out of all recognition. Sleepy old deposits rates and mortgages were but a small part of a far bigger picture.

Banks across the street began engaging their derivatives trading teams in the LIBOR setting process. Tom Hayes, who traded Yen LIBOR swaps in Tokyo was one. Though in his mid twenties at the time of the allegations, Hayes was ''greatly'' valued by a succession of bank for his “strong connections with Libor setters in London,” information they considered “invaluable for the derivatives books”.  

As public interest focussed in on the LIBOR submission process in the wake of the [[LIBOR lowballing]] incident sentiment — both inside and outside his employers — turned sharply against him.

{{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, a statute that followed a Law Commission survey of the ancient criminal law of fraud and which had also 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. 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>  

But 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 well 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> The ingredients seem to be along the following lines:

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 LIBOR Definition was not a statute at all, let alone a criminal one. It was, the Court of Appeal ruled, part of a ''contract'' between the submitting banks and the BBA. That is was not a criminal offence ''per se'' to fail to comply with the LIBOR Definition did not move the court:

Defendants get the benefit of the same doubt in case of ambiguously-framed crimes.<ref>{{Cite|Sweet|Parsley|1970|AC|132}}</ref>

And, if the LIBOR Definition meant to mandate this “obvious” outcome, it did not do a very good job of it. As a matter of plain English, “could borrow” does not rule out a higher rate but, rather, implies it: the Court of Appeal concedes as much, at para 89:  

There are good reasons to imagine at least thirty-seven LIBOR submitters might not have so reacted had you asked them.

 

It would have been easy enough for the old grandees if Threadneedle Street to put the matter beyond doubt. All it would take would be a single modifying adjective:  

They did not.  

There were other techniques they might have used to prevent banks talking their own book: for example, inviting them to submit the minimum rates they were prepared to ''lend'' to each other, rather than borrow.  

As Tom Hayes’ original pleading made clear, a bank submitting the rate at which it could ''borrow'' has an inherent conflict of interest. There were any number of ways it could craft the data it received in ways no-one could check: by carefully selecting the banks from whom it did, and did not, seek offers. From its timing. From the phrasing of the request. From the person to whom it was addressed.  

If you give merchants the flex to align their behaviour with their commercial interests, it is an odd merchant indeed who will not do it.  

{{drop|A|nd after all}}, ''everyone'' was at it. A fun game, if you have twenty minutes, is to google the names of the {{plainlink|https://en.wikipedia.org/wiki/Libor|LIBOR panel banks}} to see which were ''not'' somehow implicated in “LIBOR rigging”. If you haven’t got twenty minutes, the WSJ’s brilliant interactive {{plainlink|https://graphics.wsj.com/libor-network/|spider network}} will give you the answer in an instant. There were ''thirty-seven'' prosecutions for LIBOR manipulation.

''Is the LIBOR rate designed to protect investors, and if so who''? Depositors? Borrowers? Why? As noted, classic bank customers, who borrow fixed and deposit floating, would benefit from a ''higher'' rate, not a lower one. This is of course, all very complicated, ''because banks are very complicated''. It is not obvious what is or is not in a bank’s interest.

{{drop|T|here is a}} final lawyer nerd-out, but in forming its decision on this review, the Court of Appeal was confronted with some of its own prior rulings and judgments. The common law [[doctrine of precedent]] means an appeal court is generally bound by its own previous decisions in analogous cases. Usually, previous decisions are from unrelated cases. This always provides room for to distinguish inconvenient earlier decisions “on their facts”.  

But not here. Here, the prior authorities were decided in previous appeals of ''the actual case before the Court of Appeal''. This is unusual, due to the convoluted route by which the case came to the Court of Appeal, having been referred to it by the Criminal Cases Review Commission. Hayes and Palombo’s original convictions had already been appealed once to the Court of Appeal.   

On one hand, it should not make a difference that it is the same case. It removes any possibility for “distinguishing on the facts”. On the other, asking the same court to reconsider decisions it feels constitutionally bound to follow makes a mockery of the appeal process. What is the point of reviewing a case you are bound to follow? This should, at least, be an unequivocal grounds for allowing a further appeal to the Supreme Court, which is not bound by lower court decisions or, after a famous practice direction, its own ones.

{{Drop|N|one of this}} is to suggest that the financial services industry is without sin, nor that the LIBOR submitters were some monastic order of chaste knights acting only in the selfless pursuit of a noble, holy quest.

 

 

The LIBOR submission process was normalised, tolerated and even ''exalted'' throughout the industry. Banks vied for Tom Hayes’s services. He was offered, and paid, seven figure salaries. In his twenties. Nor did he make any secret of what he did: he posted his LIBOR desires each day on ''Facebook'', for heaven’s sake. This was hardly the actions of some [[Clavam Hominum Senum Pallidorum|secret society]].  

It is absurd to regard this as some kind of conspiracy amongst a cabal of [[Bad apple|bad apples]] conducted away from the eyes of witless employers.

A global system so badly conceived, configured and operated as to be defenceless  — even inadvertent — in the face of these travesties; that for a period of decades it could neither see nor stop what we are now asked to accept was systemic, widespread, criminal activity  — surely this is the elephant in the room we ignore by obsessing about Tom Hayes. We do ourselves, and not just Tom Hayes and his fellow defendants, a disservice if that is the convenient view we take.  

Whether Tom Hayes’ appeal will be heard by the Supreme Court remains to be seen, but, given the Court of Appeal’s declared inability to gainsay its own previous judgments in Hayes’ case, it is hard to see how a rational judicial system could tolerate anything else. We will have to see.

{{Sa}}