Rigged Libor Shows Flaw of Self-Regulation

Manipulation flourished for years, even after bank supervisors were notified.

Every morning, from his desk by the bathroom at the far end of Royal Bank of Scotland Group Plc’s trading floor overlooking London’s Liverpool Street station, Paul White punched a series of numbers into his computer.

White, who joined RBS in 1984, was one of the employees responsible for the firm’s submissions to the London interbank offered rate, or Libor, the global benchmark for more than $300 trillion of contracts, from mortgages and student loans to interest-rate swaps. Behind him sat Neil Danziger, a derivatives trader at the bank since 2002. On the morning of March 27, 2008, Tan Chi Min, Danziger’s boss in Tokyo, told him to make sure the next day’s submission in yen would increase.

‘Financial Fraud’

The conspiracy wasn’t confined to low-level employees. Senior managers at RBS knew banks were systematically rigging Libor as early as August 2007, transcripts of phone conversations obtained by Bloomberg show. Some traders colluded with counterparts at other banks to boost profits from interest-rate futures by aligning their submissions. Members of the close-knit group knew each other from working at the same firms or going on trips organized by interdealer brokers such as ICAP Plc to Chamonix, a French ski resort, or the Monaco Grand Prix.

Light Touch

The scandal demonstrates the failure of London’s two-decade experiment with light-touch supervision, which helped make the British capital the biggest trading hub in the world. In his 10 years as Chancellor of the Exchequer, Gordon Brown championed this approach, hailing a “golden age” for the City of London in a June 2007 speech. Even after the FSA pledged to toughen its rules following the 2008 financial crisis, supervisors failed to act on warnings that the benchmark was being manipulated.


Sheila Bair, a former acting chairman of the U.S. Commodity Futures Trading Commission and chairman of the Federal Deposit Insurance Corp. from 2006 to 2011, said the scope of the scandal points to the flaws of light-touch regulation.

‘Yeah, Yeah’

The 2007 credit crunch increased the opportunity to cheat. With banks hoarding cash and not lending to one other, there was little trading in money markets, making it impossible for rate-setters to assess borrowing costs accurately. Instead, traders said they resorted to seeking input from interdealer brokers, colleagues and acquaintances at other firms, many of whom stood to benefit from where the rate was set. They described it as legitimate information-sharing in the absence of trading.

No Training

“If you have a system like Libor, where highly subjective quotes are built into the process, you have a lot of opportunity for manipulation,” said Andrew Verstein, a lecturer at Yale Law School in New Haven, Connecticut, and co-author of a paper on Libor rigging to be published in the Winter 2013 issue of the Yale Journal on Regulation. “You don’t need a cartel to make Libor manipulation work for you. It certainly wouldn’t hurt, but it didn’t have to happen.”

Instant Messages

Brevan Howard wanted to know why the rate jumped, even after the Fed had announced unprecedented steps to boost liquidity at the end of the week, something that should have lowered the measure, the people said.

Geithner Memo

In June 2008, New York Fed President Timothy F. Geithner sent a memo to Bank of England Governor Mervyn King and his deputy, Paul Tucker, putting forward a list of recommendations for fixing Libor, including increasing the number of contributing banks, basing the rate on an average of randomly selected submissions and cutting maturities in which little or no trading took place.

‘Reliable Benchmark’

Liam Parker, an FSA spokesman, referred to earlier comments FSA Chairman Adair Turner made to British lawmakers in July that the regulator was in contact with the CFTC at a “very early stage” in the U.S. commission’s investigation. It’s in the nature of such probes that one regulator takes the lead and others assist and decide at a later date whether to get “directly and formally involved,” Turner said.

‘So Flawed’

The CFTC sent letters to several banks that fall requesting information, according to a person with knowledge of the investigation. The commission decided it had the authority to act because Libor affects the price of commodities, including futures contracts that trade on the Chicago Mercantile Exchange.

Traders’ Requests

The settlement revealed how widespread the manipulation was. The bank’s derivatives traders made 257 requests for U.S. dollar Libor, yen Libor and Euribor submissions between January 2005 and June 2009, according to the settlement. The requests for U.S. dollar Libor were granted about 70 percent of the time.

Wrongful Dismissal

At RBS, managers condoned and sometimes encouraged rate-rigging by employees, according to Tan, who sued the bank for wrongful dismissal in Singapore in December 2011. Tan says executives including Nygaard and Kevin Liddy, global head of short-term interest-rate trading, were aware of the behavior.

Chamonix Trip

The manipulation of Libor was a common practice in an unregulated market small enough for most participants to know one another personally, investigators found. Traders who worked 12-hour days without a lunch break were entertained by interdealer brokers soliciting business, according to three people familiar with the outings.

‘Completely Failed’

“Governance of Libor has completely failed,” FSA Managing Director Martin Wheatley, who led the review, said as he released the report. “This problem has been exacerbated by a lack of regulation and a comprehensive mechanism to punish those who manipulate the system.”

Alabama Mortgages

In Alabama, mortgage-holders have filed a class action in federal court alleging that 12 banks colluded to push Libor higher on the dates when repayments are set. The plaintiffs include Annie Bell Adams, a pensioner whose home was repossessed, and Dennis Fobes, a 59-year-old salesman of janitorial supplies whose house in Mobile is now worth less than his mortgage. He said he refinanced in 2006 with a $360,000 adjustable-rate mortgage linked to six-month dollar Libor.

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