Was Tom Hayes Running the Biggest Financial Conspiracy in History?
bloomberg.com
bloomberg.com
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.
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.
"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
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?
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.
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.
| before deposit || after deposit || after Joe buys |
| Cash | Credit | Debt || Cash | Credit | Debt || Cash | Credit | Debt |
----+------+--------+------||------+--------+------||------+--------+------|
You | $100 | $0 | $0 || $0 | $100 | $0 || $0 | $100 | $0 |
Jack| $0 | $0 | $0 || $0 | $0 | $0 || $0 | $60 | $0 |
Joe | $0 | $0 | $0 || $0 | $0 | $0 || $0 | $0 | $60 |
Bank| $0 | $0 | $0 || $100 | $90 | $100 || $100 | $30 | $160 |
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.
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.