Libor Manipulating RBS Traders Were Apparently Cool With Libor Manipulation

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It's hard to see what is news about the latest Libor news but it exists so let's paste it here:

Royal Bank of Scotland Group Plc managers condoned and participated in the manipulation of global interest rates, indicating that wrongdoing extended beyond the four traders the bank has fired.

In an instant-message conversation in late 2007, Jezri Mohideen, then the bank’s head of yen products in Singapore, instructed colleagues in the U.K. to lower RBS’s submission to the London interbank offered rate that day, according to two people with knowledge of the discussion. No reason was given in the message as to why he wanted a lower bid. The rate-setter agreed, submitting the number Mohideen sought, the people said.

One way to conceptualize Libor is that it's the interest rate at which banks lend to each other on an unsecured basis. This is fine as far as it goes but late 2007 was farther than it went; by that point banks were skittish about unsecured lending and Mervyn King was already conceptualizing Libor as the interest rate at which banks don't lend to each other. But of course there are lots of rates at which banks don't lend to each other; 714.03% per annum is, for example, a perfectly good interest rate at which I will assert banks don't lend to each other. So King's formulation insufficiently specifies.

But that means you need a new concept! It just does; you can't avoid it by saying "well just try harder to say what rate you borrow at when you don't borrow." How do you get the new concept? Beats me; the CFTC has listed factors that were kosher to consider and they include prior Libor submissions, actual and expected central bank decisions, and "research documents," which are all, like, things you can look at, but which are none of them information about rates you can borrow at.1

Faced with that, a tempting way to conceptualize Libor is that it is the variable that interest rate derivatives solve for. There are eighty gazillion dollars worth of Libor-referencing derivatives in the world, and half of them are long and the other half are short, and if you submit a really high Libor all the short people2 will yell at you, and if you submit a really low Libor all the long people will yell at you, and if you get it just right you will have peace in your time until the next morning. And so you do. This is a stupid and wrong way to conceptualize Libor and we can stipulate that it constitutes massive fraud but what else are you gonna do? Here's a guy:

“This kind of activity was widespread in the industry,” said David Greene, a senior partner at law firm Edwin Coe LLP in London. “A lot of the traders didn’t consider this behavior to be wrong. They took it as the practice of the trade. This is how things operated, and it seemed harmless.”

The more I think about this the less I understand it, but here is a critical lacuna in my understanding: I can't for the life of me figure out whether the manipulating banks were mostly long or mostly short the rates they manipulated. I once speculated on pure a priori no-arbitrage grounds speculated that banks mostly profited by higher rates but I have no confidence in that; it seems at least in certain times and places and banks to not have been true.

So here's a question: did the Libor submitters know? Perhaps - actually it seems likely - this Jezri Mohideen character knew all of RBS's yen-Libor DV01 and so the submitter could be pretty sure that by lowering his yen Libor submission he was making RBS money. (Or making his clients money?3) It's less obvious that this would be knowable in, for instance, USD, given that RBS had a fair amount of USD-denominated, Libor-referencing loans that were not managed by the derivatives desk that was hassling and sitting next to the Libor submitters.

In any case, the RBS Libor submitter surely didn't know whether the other banks were net long or short; he could well have imagined that they were all managing offsetting books. In other words, that there was supply and demand for higher and lower Libors, and that they were doing their self-dealing part in an overall socially beneficial system of balancing that supply and demand, just as they would be if they were trading an actual thing instead of their imaginary guesstimate of an imaginary interest rate. If they conceived of their submissions as trades, rather than as scout's-honor promises about where they were borrowing, it's perhaps understandable that they weren't too bothered about leaning the way that made them money.

Or not, I dunno. But, again, what else were they gonna do?

RBS Managers Said to Condone Manipulation of Libor Rates [Bloomberg]

1.Really! If a guy on RBS's economics research desk called the Libor submitter and said "I think the Bank of Japan will raise rates, so you should submit a higher Libor," that would apparently be okay. And yes that's less obviously fraudy than saying "I will make more money if you submit a higher Libor, so submit a higher Libor," but it's no less unrelated to your actual costs of unsecured borrowing today, which are supposedly measured by Libor. If your shoeshine guy said "I think the Jets' secondary will really step it up with Darrelle Revis out, so you should submit a higher Libor," would it be okay to do it? Are "internal ... research documents" closer to that, or to fraudy self-interest, or to your actual borrowing costs? Blargh.

2.Who have your phone number. Or don't need it; here's Bloomberg again:

The bank’s seating arrangements helped facilitate these interactions. Money-market traders who made the firm’s daily Libor submissions sat on the same desk as derivatives traders whose profits rose and fell depending on where Libor was set, three people said.

3.Right? He too had to balance a market. Presumably if he's short rates and submits, like, "negative 20%," RBS clients who are long swaps against him will call him up and yell at him, which when you're in the business of selling swaps to those people is a bad thing. And if he's flat rates and has a big client who is short, he'll submit a low rate, no?

Related

RBS Trader Whose Instant Messages Clearly Show Him (Allegedly) Engaging In Libor Manipulation Not Going Down Without A Fight

One thing that most people probably agree on is that having their instant messages, e-mails, and phone calls end up court would be cause for at least a little embarrassment. Everyone's thrown in an emoticon they aren't proud of, some of us have used company time to chat with significant others about undergarments, and the vast majority of workers have spent a not insignificant amount of the workday talking shit about their superiors. Of course, the humiliation gets ratcheted up a notch in the case of people who 'haha' (and in extreme circumstances "hahahah') their own jokes* which, just for example, involve habitual Libor manipulation. Tan Chi Min knows what we're talking about: “Nice Libor,” Tan said in an April 2, 2008, instant message with traders including Neil Danziger, who also was fired by RBS, and David Pieri. “Our six-month fixing moved the entire fixing, hahahah.” And while having such an exchange become public would be tremendously awkward for most, you know what's really 'hahaha' about this whole thing is that 1) Tan was the one who wanted people to read the above, which was submitted as part of a 231-page affidavit earlier this month and 2) He's trying to use it as evidence that he didn't deserve to be fired. The conversations among traders at RBS and firms including Deutsche Bank AG illustrate how the risk of abuse was embedded in the process for setting Libor, the benchmark for more than $300 trillion of securities worldwide......Tan, the bank’s former Singapore-based head of delta trading for Asia, [is] suing Britain’s third-biggest lender by assets for wrongful dismissal after being fired last year for allegedly trying to manipulate the London interbank offered rate, or Libor. Tan, who 'allegedly' tried to manipulate the London interbank offered rate, also included this conversations as part of his defense: “What’s the call on Libor,” Jezri Mohideen, then the bank’s head of yen products in Singapore, asked Danziger in an Aug. 21, 2007, chat. “Where would you like it, Libor that is,” Danziger asked, according to a transcript included in Tan’s filings. “Mixed feelings, but mostly I’d like it all lower so the world starts to make a little sense,” another trader responded. “The whole HF world will be kissing you instead of calling me if Libor move lower,” Tan said, referring to hedge funds. “OK, I will move the curve down 1 basis point, maybe more if I can,” Danziger replied. And this: In another conversation on March 27, 2008, Tan called for RBS to raise its Libor submission, saying an earlier lower figure the bank submitted may have cost his team 200,000 pounds. “We need to bump it way up high, highest among all if possible,” Tan said. Tan also asked for a high submission in an Aug. 20, 2007, instant message to Scott Nygaard, global head of RBS’s treasury markets in London. “We want high fix in 3s,” Tan said in the message. “Neil is the one setting the yen Libor in London now and for this week and next.” Also this: “It’s just amazing how Libor fixing can make you that much money or lose if opposite,” Tan said on an Aug. 19, 2007, conversation with traders at other banks, including Deutsche Bank’s Mark Wong. “It’s a cartel now in London.” And this philosophical one, for good measure: “This whole process would make banks pull out of Libor fixing,” Tan said in a May 16, 2011, chat with money markets trader Andrew Smoler. “Question is what is illegal? If making money if bank fix it to suits its own books are illegal... then no point fixing it right? Cuz there will be days when we will def make money fixing it.” The defense rests. RBS Instant Messages Show Libor Rates Skewed for Traders [Bloomberg] *Although actually people who do this probably don't even have the good sense to be ashamed of themselves.

RBS Traders Have Yet To Find Anything They Don't Like To Manipulate

Just because their manipulation of Libor has gotten the most notice doesn't mean it's the only thing like to mess with. Don't box them into that corner, like your one-trick ponies at Barclays. Royal Bank of Scotland suspended a trader for trying to rig the Singapore dollar swap offer rate, indicating employees may have sought to manipulate more than just Libor, two people briefed on the matter said. Senior trader Chong Wen Kuang was put on leave earlier this year for trying to rig the interest rate to benefit his trading position, said the people who asked not to be identified because the bank is probing his actions. He is the first RBS employee to be suspended or fired for attempting to rig a benchmark other than the London interbank offered rate, one of the people said. RBS Said To Suspend Trader Of Interest Rate Rigging [RBS] Earlier: RBS Trader Whose Instant Messages Clearly Show Him (Allegedly) Engaging In Libor Manipulation Not Going Down Without A Fight