Tom Hayes, the first banker to be jailed for manipulating Libor, has served his sentence but is now fighting his conviction. He says financial markets should have kept Libor — but kept the submitters behind a Chinese wall.
The London Interbank Offered Rate (Libor), for decades the pre-eminent benchmark for floating rates of interest in a wide range of currencies, was putatively based on lending that took place in the London interbank market. This market had developed as an important tool for lenders to balance daily deposits against outstanding loans.
As well as being widely used as a handy, supposedly risk-free benchmark for everything from floating rate notes to mortgages, Libor came to be a looked upon as a measurement of the health of the international banking system.
But when a scandal erupted in 2012 where banks were found to be fixing the rates in their favour, it dragged Hayes and other alleged Libor manipulators into the spotlight. Many observers were shocked by the rudimentary underpinnings of a benchmark upon which so much of the machinery of the financial markets rested.
To decide where Libor was set each day, representatives from a panel of 16 banks would answer a single question: at what rate could they borrow money in a given tenor? More precisely, if they were to ask for a rate to borrow a sizeable chunk of cash in the interbank market, and they had to accept whatever rate was offered, what would that rate be? The highest and lowest figures were trimmed off by the trade association that managed the submissions, the British Bankers' Association, which has since been merged into UK Finance, and an average was found from the rest. The trimming off of the highest and lowest quotes was supposed to make it impossible for a single institution to influence the calculation by submitting an outlying rate.
But there was no requirement for the rates to be based on actual transactions, and the rates submitted by the individual banks would not be made public, though the other banks could see them after the rate was published.
There are two main ways in which it has been suggested that banks could benefit from posting Libor rates that veered away from the real rates they could borrow at. They could manipulate Libor to suit their commercial interests, such as trading positions, or those of their customers. Or they could convey to the world that they were healthy, creditworthy entities by low-balling the rate.
Though the specifics are disputed, most agree that banks were rigging Libor for both of these reasons at the tail end of the noughties.
A statistical analysis included as evidence in a class action suit in 2012 showed that Libor consistently rose on the first day of the month — the day on which the rate on most floating mortgages are reset.
And during the financial crisis, banks had more reason than ever to portray themselves as having easy access to short term liquidity by submitting low rates. At the same time, banks were actually more cautious about lending to each other and the amount of real activity in the interbank market was low. As a result, Libor became "in many ways the rate at which banks do not lend to each other", as Mervyn King, then governor of the Bank of England, memorably told the House of Commons Treasury Select Committee in 2008.
Though traders argued that low-balling was far more serious, it was they that bore the brunt of the judicial consequences of Libor manipulation. Hayes was the first person to be found guilty by a jury for manipulating Libor and served 5-1/2 years of an 11 year sentence in prison, having had it reduced from 14 in a 2015 appeal.
Hayes, who was diagnosed with Asperger’s syndrome in 2015, does not fit the mould of the swaggering trader. One of his nicknames — besides Rain Man — was Tommy Chocolate, for his fondness of drinking hot chocolate instead of beer.
There were a number of eye-catching aspects to his case. During the time that he was an active trader, for instance, his uncle, Chris Salmon was the private secretary to Bank of England governor King. Salmon was subsequently involved in the process of coming up with alternative benchmarks to replace Libor.
Hayes did stints at Citigroup and Royal Bank of Scotland in the noughties, but his longest trading spell was in the Tokyo office of UBS. Hayes strayed beyond the confines of his own bank for Libor tips, relying on a network of brokers to help spread his message on Libor across the Street.
When the Serious Fraud Office first focused on Hayes, he decided to co-operate. He spent months talking to the SFO, racking up almost 100 hours of interviews. However, months after, he decided to fight the charges, plead not guilty and refuse to testify against his fellow conspirators.
Upon release, Hayes has decided to fight his conviction. His case is being examined by the Criminal Cases Review Commission.
GlobalCapital: A lot of banks speak about conduct and culture in the City these days. Firms insist that good behaviour is very important. Do you think things have changed?
Tom Hayes: I haven’t worked for a long time in the industry but I still know guys in it. I don't think you're ever going to change the culture really, especially when your performance metric is entirely a function of how much money you bring in.
Even if you took away all bonuses, people still want to do the best job they can. Those are the sorts of people you want to work there. I didn't sit there every day and think I'm doing this because of my bonus. I sat there because I wanted to do the best job I could do. A lot of people employed in banks have that type of attitude.
But then the performance metric is to make money. You try and spot things that are going to help you make money that are in the rules and accepted. Why wouldn’t you do something that would give you a slight edge? There are black edges, which are illegal, then grey edges which are just questionable.
That's the way the system was. You can say, ‘I don't like the system and I don't like the way that these guys have done this’, but those things which existed were systemic and widely accepted. They were there long before I worked in a bank and will go on long after I stopped working in a bank. The idea, propagated in my trial, that in some way I'd come in and corrupted my managers was just rubbish.
When things went wrong, it made sense for them to blame traders for submitting Libor commercially rather than actually address senior management and the Bank of England which was the low-balling.
If you read the sentencing remarks in the Southern District of New York, the judge talks about how the Bank of England was involved and the low-balling was of a far greater magnitude. The banks, the Treasury and the Bank of England decided to lie about their borrowing costs.
It was presented in my trial as some kind of noble cause, whereas what we were doing was wrong. Actually, what we were doing — I submit high, another bank might submit low — but once you trimmed down the arithmetic mean, the number that came out was always a true number. It was always a number that a bank could borrow at. People were battling for higher or lower rates, either from their own treasury department or their own derivatives positions. None of those things made the rates untrue.
Do you think traders should be allowed to take edges like that?
The people who designed the rate knew there was a conflict of interest, which is why they had the trim-down hermetic mean. The whole thing worked because of the trim-down. There was an acknowledgement there was a conflict of interest, and they weren't going to be able to contain that conflict of interest without it. It was built into the system and it worked fine for decades. It was only when low-balling happened that everyone started getting upset. No one wants to hear about the conference call that took place on a bank's cash desk between the central bank and the bank's cash desk guys every day.
With your case and the so-called ring of traders, the "Spider Network", is it your view that by and large the banks that employed you knew what you and the other traders were doing?
Well, my bank had IT systems to optimise its commercial setting of Libor. Unfortunately it didn’t exist for yen Libor, which is why I sent those emails [to other people in the market about moving yen Libor]. But for sterling, dollars and euros, they had IT systems that aggregated trading positions and the submissions were made on that basis.
UBS had a document about publishing Libor rates. There was an interview with the woman who wrote that document and administered the system in a middle office capacity which wasn’t disclosed in my trial. I only saw that interview subsequently when the Financial Conduct Authority gave it to somebody in an enforcement hearing. Had I had that, I would have called her as a witness.
But it wasn’t just UBS. At RBS, they rearranged the trading floor so the cash guys sat next to the derivatives guys to pass that information across. At the end of the day everybody was setting their rates commercially save for a couple of banks.
Some banks had external derivatives positions larger than their internal treasury. But whether you’re an equities trader or an exchange trader if you needed to borrow money you either needed to borrow from internal treasury or lend money to internal treasury. So they would either be net borrowers or net lenders. Usually that took place at one rate, and usually that rate was attached to Libor. So if the treasury desk was net borrowing, they would want Libor rates to be lower but if they were net lending, they would want Libor rates to be higher.
Don’t forget that by definition every submitter was a trader, and they had positions that were sensitive to Libor.
You need to juxtapose my sentence to the punishment weighed out by the FCA to the Libor setting manager at UBS, which was complete exoneration. They accepted there was a range, they accepted they could toss a coin to choose a number. They accepted the managers told him to choose numbers commercially. So, right before my trial began, this guy has complete exoneration.
I don't think that's the wrong decision. But then I was given a 14 year prison sentence. There are people on my indictment who weren't charged, and subsequently have just been given private written warnings by the FCA. You explain how they were co-conspirators in this international fraud and were just given private written warnings. It’s an absolute joke.
Do you think you would have been prosecuted without your co-operation with the SFO?
I was going to be prosecuted regardless, there was a political imperative. Clive Efford MP said what I did was akin to treason, Nigel Lawson in the Treasury Select Committee said I was a crook of the first order.
I sent 2,000 emails [about Yen Libor], so I was the head on the stick. I got charged simultaneously in two jurisdictions because I was being offered up everywhere.
What they didn’t anticipate is that I would fight. Logically, why would I? I could have got a much lighter sentence, kept more money and probably would have saved my marriage and maintained my relationship with my son if I hadn’t fought.
Not even terrorists get charged with the same offence simultaneously in two jurisdictions. It was ridiculous. Both sides were fighting over me because they saw it as a dead cert that they could lock up a banker at a time when locking up bankers was a political imperative. I had [ex-Labour Party leader] Ed Miliband at the dispatch box at Prime Minister's Questions banging on at [then Conservative prime minister David] Cameron about why bankers weren’t being prosecuted for this Libor thing.
Contrary to what I was told by my US lawyers, no one really went to jail in the US. No one really went to prison because there was a fraud and no loss. There are no victims in my trial, yet I was told this wasn't relevant. I mean, how can you have a fraud trial where victims were not relevant?
Part of your defence was that out of the thousands of trades that you did, almost all were with other banks.
There were only 39 trades with non-bank counterparties, all of which were hedge funds. I did roughly 28,000 Libor trades at UBS, and 27,960 were with banks, 24,000 of which were [with] Libor panel banks.
I was a market maker for the Street. I traded other products that didn’t fix against Libor anyway, and I wanted my profit and loss to show that. In 2008 I made $90m-plus that year, and $2m was on Libor trades. Of that $2m, how much had anything to do with the daily reset?
When I looked at my reset ladder, 53% of my requests correlated where my reset was on a given day, I think, 8% of the time I had no position at all. The rest of the time, it was actually against my own position, because the position of the desk outweighed my trading position. So I was making requests that were not favourable to me.
The whole, stupid greed thing. I turned down a $2.5m pay rise in '08 and didn't go to Goldman Sachs, which was the stupidest thing I could ever have done because I wouldn’t be sat here right now. Then I get accused of being greedy.
Why was your sentence such an outlier in terms of white collar crime?
The only person who got a similar sentence was Jeffrey Skilling at Enron. He brought down a company, with thousands of employees losing their pensions and shareholders lost their money. I was working in Japan for a Swiss bank dealing in Japanese interest rates and the Japanese regulatory authority didn’t even sanction me. The Japanese continue to use Tibor without many problems.
I was never meant to get that sentence. I was meant to plead guilty, be given a short sentence of two or three years and do 18 months. But the fact I fought and refused to give evidence against my co-defendants meant they went for me.
I’m proud of the fact those guys didn’t go to prison. I'm proud of the fact I refused to do what others did to me. It came with great personal cost to me. Of course it's not completely altruistic, but I feel quite strongly that I made decisions that weren't always in my best interest.
Do you think there should be more prosecutions of financial crime?
No, I think if you want to prosecute you have to understand what you are prosecuting. My case was entirely misunderstood, at times even by own defence team. I didn’t speak to the media and so this narrative was allowed to take seed that just wasn't true.
I don't think I articulated well enough to the jury but when you go and get a credit card or loan or a mortgage, you can go and ask 10 banks and get exactly the same product but you'll get 10 different rates. Yen Libor isn’t even attached to retail products.
I sent what looked like very salacious emails. The tone was not great to look at but you're in the City and that’s the way tone is sometimes. But salacious doesn't make it a criminal offence.
At the time no banker had gone to prison for the financial crisis and though I had nothing to do with that I took the burden on my shoulders for the whole financial crisis. That's why I was sentenced so egregiously.
The brokers you worked with were all acquitted. What did you make of their defence — that they lied to you all the time and didn’t try to lean on other banks to change Libor rates?
I always felt my job was a numbers game. I never had any empirical evidence that they ever did anything. It was a zero sum game for them, or a net-net positive option. If it went their way they could say ‘we helped you out’. If it went against them they could say ‘oh, we tried’.
I had no idea whether speaking to brokers about Libor was or wasn't effective. All I knew is that if it shifts Libor by a thousandth of a percentage point then that's good.
As I said in my trial, I was asking for favours and I had no idea as to what happened after. I was surprised when I saw some of the underlying evidence. I've seen emails from people saying, ‘Oh, we lie to him all the time’.
Do you think they weren't doing anything?
It’s so funny; in a case which entirely revolves around honesty the brokers ran a defence of dishonesty. The paradox of that is remarkable.
The question is, do you believe anything brokers say? I remember early in my career, I was told all brokers are liars. Actually, I think that's pretty fair. They’re the same as estate agents. They always say ‘you really need to be quick on this one because this one will go quickly.’ An estate agent is a broker between a buyer and a seller of a house, and a broker is an estate agent between financial assets.
One of the reasons I used to get so angry and be accused of not being a good person to talk to was I'd catch them out and I would get mad about it. But I'm pleased that they got off because no one should have even faced trial. People keep saying to me about my managers, and I keep saying, well, they shouldn’t have faced trial either. This Salem witch trial that happened to me should never have happened to anyone.
Finance is trying to move away from Libor to rates like Sonia and Sofr. What do you make of them?
There’s a lot of people feeding at the trough on this transition. Suddenly all the law firms and [the big financial services firms] and everybody else will be involved.
They're going to use compounded overnight rates over three months, which don’t have bank credit in there. I don’t think it’s the best rate for banks to use. They're going to have to use that [rate plus a credit spread] or something.
They should have just kept Libor. What they should do is just take Libor submitters away from the banks and stick them behind a Chinese wall. It’s worked for eight years and they’ve had to change it at great cost. Obviously, none of the banks want to submit, because it opens them up to a whole load of other legal stuff. The best way is Libor how it’s calculated and submitted right now.
The problem is, if they carried on with Libor in the current climate, they would effectively have to say it's OK, now commerciality has been withdrawn. That would be an admission that really it was always OK, but it was just set up without the correct safeguards in place.
UBS and RBS declined to comment.