How the Libor scandal spat in the world’s face

Libor is just a number, a small number. Then you notice the blood spatters and realize that little Libor is actually a crime scene. You and I were the victims but we will never know how badly we were hurt. The scandal unfolds.

The basics: Banks borrow money from each other at a lending rate based, not on collateral but on creditworthiness, on self-perceived health. In 1984, British bankers decide to report the rate — essentially a summary of hundreds of banks’ credit ratings — that banks would pay each other. They’d remove the highest and lowest rates and come up with a nice useful average — the London Interbank Offered Rate, called Libor (pronounced “Liebore”) — that soon became the most crucial number in finance.

When the financial world became globalized, manic and huge, with a crush of things being turned into financial vehicles that were bet on from every angle of possibility, Libor was the linchpin. By 2013, $360 trillion (U.S.) in deals were based on it. Wee Libor was it.

The process: Each bank had a “submitter,” a man — it’s an all-male scandal — in a back room idly phoning in his approximation of the bank’s rate that day.

After deregulation, financial institutions overexpanded, turning into prestige casinos and hiring broker-gamblers who were great at math, creating new ways of packaging debt for resale, shaving tiny profits off each dollar of billion-dollar deals, placing blood-curdling bets, and winning massive sums for their employers.

In 2006, some bankers — a fancy name for untrained hustlers with a talent for deal making — realized they could game the system by fiddling with Libor, varying it by a basis point or two to favour their own deals. All they had to do was make nice with the bored, lonely submitters, give them a nudge and pay them off.

Libor manipulation wasn’t illegal. It was so clearly morally wrong that it was not thought necessary to specify that.

The British broker who became the public face of the Libor scandal was Tom Hayes, a grubby man who dressed in tattered pants and sweaters with holes, and had terrible dandruff.

Socially clueless, he was good at one thing: creating massively complicated computer models for derivatives, which are financial products derived from something else, e.g., gold bar futures rather than gold bars themselves.

David Enrich is the ironically named author of the latest book on the Libor scandal, The Spider Network: The Wild Story of a Math Genius, a Gang of Backstabbing Bankers, and One of the Greatest Scams in Financial History. (The subtitle is styled for simpletons.)

The Spider Network, about Hayes and his gang of thieves, is great stuff, although written in tight co-operation with Hayes himself, now serving an 11-year jail sentence. The only scammer jailed after Libor, he feels he is a scapegoat. He is not. He is guilty; it is irrelevant that other juries were too mystified by high finance to convict.

Hayes worked at various institutions — all these men move around a lot — including Royal Bank of Canada early on (he appalled them), the Swiss bank UBS, and Citigroup. He did his nastiest work at UBS in Tokyo, persuading co-workers to skew Libor, and then doing the same with traders at competing banks, which was very Carlos Danger, shall we say.

As a result, the Libor rate was falsified and international finance was poisoned. Pension plans overpaid, university endowments lost value, people lost homes, all because Libor birthed small corruptions for the personal profit of a few heartless brokers.

The reader becomes Nick Carraway in The Great Gatsby, meeting Meyer Wolfsheim, the man behind the fixing of the 1919 World Series.

“It never occurred to me that one man could start to play with the faith of fifty million people — with the single-mindedness of a burglar blowing a safe.” But that’s what Hayes did nearly a century later, so he could have grand houses and five cars.

Hayes, eternally crying out “No fair! It wasn’t just me,” is now crowdfunding an appeal because he says his Asperger’s syndrome made him incapable of understanding right and wrong. There are interesting aspects to Hayes’ autism. It’s true that Hayes was working with nasty people and easily led. But it’s also true that the math talent that autism gave him was his poisoned chalice.

Very few people are jailed for white-collar financial crime. Perhaps this is why there is so much of it. In the Trump years, it will explode.