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It’s getting to be a struggle to be amused by Libor manipulation chats. RBS took its lumps today, and the CFTC and FSA orders are full of quotes, and you can read them in various round-ups, but, meh. Even Bart Chilton is bored; today’s imagery (“sends a signal to those who would monkey around with benchmark rates … much more than a slap on the wrist …”) is a letdown after his UBS masterpiece (“Financial sector violations are hurtling toward us like a spaceship moving through the stars”) just a few weeks ago. I get it! Everyone manipulated Libor! In writing! And then they were like “heh, fukin awexome man, u manipluated libor, gud work, i sexx u now, w champain.” Fabulous.1
Part of why RBS provides less delight than its predecessor Libor-settlers is that RBS made use of the oldest and most reliable way to avoid typos: not typing. From the CFTC order:
In October 2006, RBS senior management decided to facilitate more communication between derivatives traders and money market traders, some of whom were also LIBOR submitters, by locating them on the same RBS currency trading desks. This co-location plan was known as the Short-Term Markets Desk (“STM”). One of the express purposes of STM was to encourage derivatives and money market traders to communicate about the relevant market conditions that could impact trading and funding decisions. … RBS’s Yen and Swiss Franc derivatives traders quickly took advantage of this new arrangement. Sitting with the Primary Submitter, the traders not only shared their views of market conditions, or “market color,” but they also told him what their trading positions were and encouraged him to make submissions that would make their positions more profitable. …
STM was in place formally until mid-2008 and continued informally for Yen and Swiss Franc traders into 2009. In the spring of 2009, the trading floor was reorganized, and the derivatives traders and submitters were separated onto different desks. The seating change did nothing to slow the scheme. When they were no longer in close proximity to the submitters, the traders increased their use of Bloomberg chats and instant messages to continue making requests for beneficial submissions, which were frequently accommodated.
To be fair to the regulators they’ve apparently interviewed RBSers as well as just, like, Ctrl-F’ing Bloomberg chat records for approximate spellings of words like “cartel,” “manipulate,” and “champagne.” And they describe some examples of oral requests for Libor manipulation, suggesting that those interviews paid off. Still the bulk of all of these documents is taken up with inflammatory IM conversations, because “Trader X recalls that at some point on or around August 25, 2007, he turned to Submitter Y and asked him to do him a solid or words to that effect” doesn’t have the same effect as reprinting the equivalent IM. Show, don’t tell.
A constant awkwardness in the Libor manipulation scandal is that everyone mostly knew it was happening: banks repeatedly and explicitly told clients and regulators that Libor was being manipulated in 2007-2008, and the CFTC was warned in 1996 that the Libor setting mechanism would be vulnerable to abuse by derivatives traders. The fact that nothing was done to stop it is not only embarrassing for regulators, it also raises questions about the culpability of the manipulators: if their behavior was permitted by regulators, how bad could it have been?
Of course regulators can’t be everywhere, and no doubt they were shocked by the sheer amount of the manipulating. But they can be somewhere. Like on trading floors, for instance. It turns out that one pretty simple regulatory thing you can do is show up on a trading floor and be all “hmm, so, your M&A bankers are sitting right next to your risk arb traders? That seems bad.” And so that seating arrangement never occurs. People talk about “Chinese walls” between the public and private side of banks, but one of the simplest ways to enforce those notional walls is with actual walls. Also elevators. You sit the bankers and the traders on different floors and, like magic, they leak less information to each other.
This is low-hanging fruit for regulators, who frequently do physically traipse around banks saying things like “that wall should be taller” or whatever. Not only would sitting the Libor submitters away from the swaps traders cut down on Libor manipulation, it would also produce a better record for catching manipulation when it happened. Not 100% – the plucky RBS manipulators kept right on manipulating, over the phone, even while being investigated2 – but it helps.
The irony, of course, is that when the regulators don’t do that, but only come back years later to look at IM records, the banks with the most inflammatory IMs are the ones who get in trouble. The banks that just sat submitters next to swaps traders, avoiding shady IMs through the simple expedient of shady in-person conversations, are the ones who look relatively clean.3
The CFTC complains:
RBS’s traders were able to carry out their many attempts to manipulate Yen and Swiss Franc LIBOR for years because RBS lacked internal controls, procedures and policies concerning its LIBOR submission processes, and failed to adequately supervise its trading desks and traders. RBS did not institute any meaningful controls, procedures or policies concerning LIBOR submissions until in or about June 2011.
But the awkward fact is that neither did the CFTC, the FSA, the BBA, or anyone else. Libor submitters getting “market color” from derivative traders was long an accepted practice, and despite the obvious possibility for manipulation that that presented, regulators never thought to do anything about it either.
And so … everyone manipulated Libor. Maybe? As at Barclays and UBS, the RBS conversations make it clear that they thought everyone else was manipulating Libor too, and to some extent they justified their manipulation by the fact that they were just submitting fake low quotes to offset other banks’ fake high quotes.4 That might be true; there’s definitely some evidence of it in, e.g., the fact that RBS apparently did a wash trade with an interdealer broker to compensate him for helping manipulate Libor, or the fact that one UBS trader seems to have made a career out of doing that.
Or maybe they’re exaggerating, out of a guilty conscience: it’s easier to do naughty things when you assume everyone else is doing them too. It’s hard to know. Unless, of course, everyone else who manipulated Libor was also dumb enough to do it all in writing.
CFTC Orders The Royal Bank of Scotland plc and RBS Securities Japan Limited to Pay $325 Million Penalty to Settle Charges of Manipulation, Attempted Manipulation, and False Reporting of Yen and Swiss Franc LIBOR [CFTC, and order]
RBS fined £87.5 million for significant failings in relation to LIBOR [FSA]
RBS Securities Japan Limited Agrees to Plead Guilty in Connection with Long-Running Manipulation of Libor Benchmark Interest Rates [DOJ]
1. Though I can’t resist this, which was for some reason my favorite of the RBS conversations:
The beep means you’re being recorded!
3. Something similar may be going on in the S&P lawsuit: S&P has lots of inflammatory emails saying basically “we are throwing away analytical rigor just to match Moody’s!” But what was Moody’s doing then? Not emailing, one presumes. [Update: Or cc’ing a lawyer and calling the emails privileged.]