Former UBS and Citigroup trader Tom Hayes has been convicted of eight counts of conspiring with other traders and brokers to manipulate Libor. As news of the sentencing emerged, much of the coverage has focused on the quirks of the man in question – the story of an autisic mathematician who was able to manipulate one of the world’s most important financial benchmarks for the price of a Mars bar.
There have been descriptions of a man who slept under the same superhero duvet between the age of eight and 24. And we found out that when a student he worked in a restaurant deboning chicken and cleaning a deep-fat frier. But all this tells us little about the collective psychology of the City of London. And until there is a collective culture change in the financial industry, we can expect to see the past repeating itself.
Questions over the integrity of the Libor rate were first raised in 2008. And that former member of the Bank of England’s Monetary Policy Committee described it as “the rate at which banks don’t lend to each other”. But it was not until 2012 that US authorities revealed widespread collusion to manipulate the rate.
Barclays was the first among many banks to be fined hundreds of millions of dollars for its role in manipulating this key financial indice. These huge fines effectively lifted the lid on widespread unethical behaviour in various sectors of the global financial market, including the gold and foreign exchange markets. What these investigations showed is that these apparently free markets were actually controlled by a small number of traders working in global banks who were able to manipulate global indicies for their own benefits.
Holding individuals to account
Dozens of financial institutions have been routinely put on trial and been forced to pay out vast sums for their role in the Libor scandal. But until now, no individuals had been held to account. For many, this was an indication that the City seemed to be quite happy with landing huge penalties on shareholders, but they wanted to avoid individuals being punished at all costs. Banks, like any other corporate structure, appeared to be a mechanism for avoiding individual culpability while harvesting the benefits of it.
The conviction of Tom Hayes is the start of what is likely to be a long process of individuals being held to account for their role in wrongdoing. The UK’s Serious Fraud Office already has other cases in the works and this victory will likely embolden them to file charges against more of his conspirators.
Certainly showing a willingness to punish individuals for misdeeds is likely to be an important deterrent. But questions will remain about whether just coming down hard on a few individuals in a handful of high-profile cases will actually change much about the collective dynamics within the city which produced these problems in the first place.
Hayes’ trial has given us a fascinating insight into the culture which made financial markets into such a hot-house of unethical behaviour. It shows traders were primarily hired for their technical skills and their results orientation. This often meant they were bereft of the ability to make ethical judgements. It also shows that traders were certainly aware they were doing wrong. Hayes himself pointed out that he did not think he was “going to get a medal from the regulator” for his actions, but he also did not think he was a Bernie Madoff.
The trial also raised problems of collective responsibility. Hayes seemed to think that because everyone else was doing it, it was OK. The trial showed that traders were evaluated on crude metrics based on short-term profits. This prompted traders to focus solely on short-term performance with disregard for the longer-term risks.
Another fact the trial highlighted was the role of the flawed design of the market in encouraging manipulation. The same people who set the Libor rate were also the ones who traded on it. This created both the opportunity as well as incentives for traders to set the rate in a way that would advantage their trading activity. Hayes pointed out that even Mother Theresa would manipulate Libor if she was setting it and trading it.
Finally, the trial showed that a widespread denial within the industry of collective misbehaviour meant that those in power were not willing to admit there was a problem, much less were they willing to put it right. For instance, during an investigation one manager at Deutsche Bank dismissed the idea that traders manipulated the Libor rate as a “conspiracy theory”. It seems this was one of those conspiracy theories which proved to be true.
In the wake of revelations about Libor, there have been some significant changes aimed to eliminating the culture which produced such widespread misbehaviour. Traders no longer set the Libor rates. Remuneration is no longer just based on short-term performance, but also considers cultural factors and risk as well. Banks have tried to boost the moral intelligence of their staff by sending them on training courses. Risk management systems have been tightened in order to pick up bad behaviour. The authorities have also started to hold individuals to account for misdeeds.
What remains to be seen is whether these measures are enough to change the collective dynamics in the banking sector which produced widespread manipulation of not just Libor, but most other global financial indices. If they do not, we can expect that just as one trader is sentenced in a court in one part of London, another trader a few hundred meters away is working out a way to get up to no good and make a fortune in the process.