You can question some of the life choices that Tom Hayes, a/k/a Trader A, UBS’s Libor-manipulating-est Libor manipulator, has made, but this seems to me inarguable:
Citigroup executives wooed him in June 2009 at a swanky bar in Tokyo. As they showered him with praise, say people who were there, Mr. Hayes rarely spoke, instead letting his girlfriend, a lawyer, answer questions.
Shady traders: date lawyers! And let them do all the talking for you.
That detail is from this amazing Wall Street Journal article about Hayes. When we last discussed Hayes and his totally open and casual requests to people he’d just met to manipulate Libor for him, I asked “is this: (1) all of these people did not fully realize that they weren’t supposed to be doing what they were doing, (2) UBS’s culture was one of complete lawlessness and fuck-around-ery, or (3) both of those things are true and reinforce each other?,” and per the Journal the answer is fascinatingly (3).
I’ve occasionally said that Hayes made a career of Libor manipulating but that’s not entirely right. He started at RBS and, per the Journal‘s account,1 spent his time there mainly being smart and dressing “like a college student — with washed out jeans, a polo shirt and sometimes a threadbare sweater” rather than IMing people to ask them to fix Libor. (That, at RBS, seems to have come later.) Then he moved to UBS:
There, according to regulators, traders were already engaging in behavior authorities later described as inappropriate: They routinely submitted requests to colleagues in London and Zurich to move the bank’s Libor submissions up or down to suit the traders’ positions. …
“Who was I to question what they were doing? I thought it was weird, but that’s how they did it,” [his friend Jennifer] Arcuri says he told her. Within a few months, based on practices at the bank and feedback from his bosses, Mr. Hayes considered it part of his job, said a person familiar with his thinking.
He got good enough at that job that everyone tried to poach him, leading to his heavily lawyered chat with Citi. When Citi offered him a job, some at UBS tried to keep him. And some did not:
After Citigroup offered Mr. Hayes more than double the nearly $2 million he was earning at UBS, his UBS boss, Michael Pieri, lobbied a senior UBS executive to counter with a big bonus, according to people familiar with the offer. Emails released by the Justice Department show Mr. Hayes’s boss cited the trader’s “strong connections with Libor setters in London. This information is invaluable for the derivatives books.”2 …
But when the senior UBS executive asked for input about Mr. Hayes, a trading-desk manager emailed: “I find it embarrassing when he calls up his mates to ask for favours.” The manager added, “It makes UBS appear to manipulate others to suit our position.”
So he went to Citi, kept on doing what he was doing, and … that didn’t last:
In July 2010, Mr. Cecere got a call from Citigroup’s legal department. An employee in London had raised concerns that Mr. Hayes was making inappropriate requests about the bank’s Libor submissions. Citigroup hired a law firm to sift through Mr. Hayes’s emails and phone calls. It sent compliance officials to Tokyo to investigate.
Mr. Hayes told colleagues he was “flabbergasted” and said he “had no idea it was wrong,” a former colleague says.
We talked a while back about Jesse Litvak, the Jefferies trader who conducted long imaginary negotiations to inflate the prices of securities he was crossing between clients, and the fact that his imaginary negotiations might be uncomfortably close to the kvetching and obfuscation that salespeople regularly use to conceal their price basis in securities that they’re selling. Afterwards a reader2a mentioned to me a logical puzzle involving common knowledge. In this puzzle, some people on an island has blue eyes, the island has a rule that anyone who knows he has blue eyes has to leave, and nobody talks about eye color. The result is that nobody leaves. One day a stranger comes to the island and says “some of you have blue eyes.” Even though everyone knew that fact already, the fact that the stranger says it is enough to change everything, and the blue-eyed people quickly leave the island.3
As our reader put it:
Even though everyone knows the game, nothing happens until someone outside their little island confronts them with the fact. It’s not the outsider’s superior skill or knowledge that matters, just their outsiderness. And in a way, that’s hopeful.
That’s an appealing way to think about Libor. Within the closed world of Libor traders, at least at some banks, manipulation seems to have been pretty universally accepted, to the point that Hayes could understandably have no idea that he was doing anything wrong. When someone outside that world – here, that Citi employee in London – paid it sustained attention, and said “hey this seems pretty shady,” the problem was actually addressed, the offenders fired, and the whole thing brought to regulators.
This makes sense: if you grow up in that world, and see all your bosses and role models thinking of Libor as the subject of negotiations, then, like Hayes did, you grow to assume that your job is to negotiate Libor with submitters, and that there’s nothing wrong with that. (This is helped by the absence of specific policies, at your bank or elsewhere, prohibiting those negotiations.) Doing it in too obvious a way might be “embarrassing,” but nothing worse.
But when the outside world finds out about Libor manipulation, the tone is more or less one of shock. There appears to be some sort of simple information problem: if everyone in the Libor-manipulating circles had known what the outside world would think, they might have hesitated in their manipulation.4
And, of course, if everyone in the outside world had known about what the Libor manipulators were up to, someone might have tried to put a stop to it sooner.
But this theory is incomplete. Everyone did know about Libor manipulation, or could if they cared to: it was widely and publicly discussed for years, including with regulators. And including on Facebook:
The strategy wasn’t a secret. Each morning at a meeting of UBS’s interest-rate-derivatives desk in Tokyo, Mr. Hayes told colleagues which way he planned to push Libor that day, according to the Justice Department. Mr. Hayes was so open about his strategy that he would change his status on his Facebook page to reflect his daily desires for Libor to move up or down, said a person familiar with the matter.5
The problem is that no one was outsider enough: anyone who cared enough to find out that Libor was being manipulated by banks pretty much got that information from bankers. Bankers who they thought were good guys, and who presented that manipulation as a ho-hum matter of course rather than a scandal. And so the regulators took it the same way: embarrassing, perhaps, but not worth raising a stink about. This is sort of natural; as Megan McArdle put it in a related context:
If you want information about how things work, you have to get it from the people in the industry. But those people will naturally carry with them the belief that their industry is incredibly important,
and, in this case, that things that happen all the time in their industry are things that have to happen. (Or, at least, are things that aren’t illegal.)
That seems to be the story of the Libor scandal. Libor was born manipulable, and grew up being manipulated, and anyone who spent much time paying attention to Libor seems to have taken that as a natural fact. And so it was. The problem with Libor is that everyone knew its flaws, but nobody was shocked by them. Until they shocked everyone all at once.
Rate-Rig Spotlight Falls on ‘Rain Man’ [WSJ]
1. Which, obvs, seems based mainly on talking to Hayes’s friends, so grain of salt. It seems plausible to me, though I’m always willing to cut shady traders some slack.
2. Btw I’m fascinated by the use of the word “information”: not “opportunity to manipulate,” but “information.” What if instead of manipulating Libor you insider-traded it? That is, you could adjust your trading positions to reflect what you knew about what Libor submitters would do (receiving more fixed when you knew Libor would be low etc.). That seems less efficient than manipulating: you only have a few hours or so in which to find out what people are going to submit and make big swings in your positions. Much easier to just wheedle them into submitting a higher number. That’s a structural result of levering a few fake numbers into zillions of dollars of derivatives trades.
Note, too: would the insider trading be illegal? It’s not in a security, right?
2a. (Infinite Guest)
3. Well the newcomer changes everything, plus the unusual-in-nature combination of (1) everyone on the island being perfectly logical and (2) the island having really dumb rules. It’s a puzzle, whatever.
4. Right? Bernie Madoff had a pretty good idea that people would be mad if they found out what he was up to, but from this Hayes story you get the pretty strong impression that at least some of the Libor manipulators really thought that they were innocently doing their job by calling their buddies and asking them to adjust their submissions, and that they’d have changed their behavior if they knew that others would not perceive it that way.
Others, not. Those RBS guys who said over the phone what they wouldn’t put in IM: bad fact.
5. Doesn’t that seem … sort of dangerous? Not in a Libor-manipulating way – it’s not clear it really has anything to do with manipulation, honestly – just in a getting-picked-off way.