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Libor Scandal: How Executives Must Have Known

Posted by Larry Doyle on December 20, 2012 9:03 AM |

The intrigue surrounding the greatest financial fraud “of all time” could fill many a book and many a movie theatre. While the intrigue may make for riveting reading and viewing, the simple fact is this fraud comes with an exceptionally high cost for investors, consumers, and society as a whole.

How did the web of this manipulation grow so large? Where were the regulators and internal compliance people to snuff it out and bring some semblance of order to what can only be defined as “organized racketeering?”

While little focus has yet been shone on the regulators or those in compliance at the banks involved, we now begin to see some cracks in the Libor rigging foundation in terms of addressing the fact that senior executives were aware and involved in this manipulation.

Having spent many years on sales and trading desks on Wall Street, why am I so confident in stating that senior executives at these institutions were aware of this racket? Here are a list of reasons:

1. On every trading desk, the desk manager will “ALWAYS” inquire of each and every trader, “how are you making your money?” “With whom are you doing business?” “What do you need to grow your business?” The trading managers job is to “manage the traders.” Duh…

2. The trading managers ALWAYS have a seat on the trading desk and typically an office very closely nearby for off the desk meetings. As such the managers might be situated anywhere from 5 to 50 feet from those involved in the rigging. From there, the desk manager will report into the division head (Derivatives Head), if not the head of Fixed Income, both of whom would have offices on the trading floor. These individuals also will direct their focus and attention on those individuals and desks driving large revenue flows. They too will inquire the same questions as posed above. In very short order, the individual trader who generates hundreds of millions of dollars of revenue will be known by the most senior executives in the bank. These executives will not only know the individual but they will know the particulars of his business.

3. How else would the desk manager be aware of this manipulation? Their supervisory responsibilities mandate that they review the following: daily trade reports and periodic flagged electronic communication along the lines of e-mails and other forms (Bloomberg messages). To think that traders might simply utilize private cell phones or texting borders on the ridiculous. What would the managers see in the midst of reviewing trade reports? Trades that drive large profits which could then be questioned as to the nature of the transaction. What about the communications? Wall Street supervisory systems are set up to flag messages that have certain buzzwords — along the lines of those we have read in this scandal — that would set off bells and whistles that would make any firehouse proud.

Why didn’t any of these systems prevent the manipulation that clearly went on for years? Very simply, the senior executives charged with these responsibilities were overrun by the magic elixir of the VERY LARGE revenue streams connected to this multi-trillion market.  These flows will incapacitate any sense of moral fiber that may otherwise be present in many of the executives involved. In very short order a sense of rationalization overwhelms any semblance of moral rectitude.

Now what?

Will the regulators and prosecutors have the collective balls to connect these very simple dots and see that those arrested and prosecuted for these crimes go far beyond the traders on the desk and their pals at the inter-dealer brokers who were aiding and abetting the fraud?

Society and history will judge the regulators and prosecutors very harshly if they do not doggedly pursue the trail of manipulation and failed oversight to the very end of the line. Who knows? Perhaps in the process the prosecutors may learn that the trail might actually go through some revolving doors between Wall Street and Washington (and similar global outposts)  and implicate some of the regulators themselves and the regulatory system at large.

I compel all those pursuing this trail to  . . .  navigate accordingly.

Sense on Cents/Libor Scandal

Larry Doyle

Isn’t it time or overtime to subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook.

I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Peter Scannell
  • Donnie Brasco

    Everything you need to know about how to run a trading desk, courtesy of Al Pacino (3:30).

    Nobody can touch you, because I represent you. Keep your nose clean. Follow the rules, be a good earner and maybe one day when they open the books you become a wiseguy.

    Just remember the golden rule: “He who has the gold, makes the rules.”

  • fred

    LD, Interesting read.

    To the long, dismal list of fatally broken institutions — GDP, governments, schools, corporations — we can add the mysterious Libor, and its conveniently comfortable calculation. It’s difficult to overstate what a pillar of the global economy Libor is — it’s used in setting interest rates that affect the daily lives of pretty much every citizen of every advanced economy across the globe. And it’s difficult to overstate how troubling it is that this, too, is an institution rigged by the few, for the few; that this institution too, is, corrupted.

    This scandal isn’t about price-fixing. It’s not about a bank. It’s not even about power and privilege, corruption and compromise. It’s about life, tragedy, and human potential. It’s about the capacity to create a worthwhile future. It is, in short, about you and I, and the places we seek for ourselves in the world.

    Let me couch this for you in the pedestrian terms of financial hydraulics — the tawdry terms which seem to substitute for thinking in what’s become of our thin, shallow economic and political discourse. The most basic function of a financial system is to price money. If a financial system can’t undertake that simple task effectively — if the price of money is fixed like a roulette wheel stuck on red — all else must necessarily fail: investment must become malinvestment, speculation must precede creation, “profit” must become divorced from benefit, and wealth is effectively transferred from poor to rich, in a form of quiet but lethally effective institutionalized theft.

    Now, let me couch this for you in the human terms of political economy — the terms in which you and I should rightly conceive of an “economy” as the sum of the enduring human good; not merely as a set of pipes for the grease of finance to be injected into.

    Who authors the destiny of nations? Which compact governs the relations between the powerless and the privileged? Whose rights are sacrosanct? How are fortunes earned — and spent? What does “wealth” mean? If money is in a basic sense a currency in which the fruits of enterprise past are safely kept, to seed the soil of prosperity tomorrow — and if the value of that money itself is corrupted — can one be said to be a participant in “an economy”? Or is one more a pawn in a rigged game of self-destruction; a mark in a Ponzi scheme; a dull-eyed pack animal to which the engines of extraction are yoked? Does “freedom” — in the most primitive sense, autonomy from the circumscription of one’s own inalienable rights, those basic liberties which don’t just accrue to us, but inhere in us — still allow one freedom? Who’s who — master and servant, mechanism and operator, principal and agent, sovereign and serf?

    These are the terms of the debate we’re not having. These are the words that are left unsaid. These are the concepts and ideas on which prosperity itself was built. These are the unspoken phrases that flit like ghosts through what’s left stammeringly unspoken by the finely-suited pundits and so-called “leaders” too cowering and afraid, too tempted and silenced, too timid and too petrified to challenge the primacy of a system that’s leaving millions to choke on the fumes of the collapse of their own futures.

    When, exactly, did it become acceptable to sell out? To become a sociopath for a few million bucks? “Ah,” you darkly mutter. “We all sell out.” Yet on such a norm of easy shoulder-shrugging compromise nothing great can be built. Unless you believe that Abraham Lincoln, too, for a few extra bucks, might have joined Barclays as a Senior Advisor for “Human Resources.”

    Our institutions are corrupted — but it’s not just money that corrupted them. It’s the norms that you and I endorse, every second of every day, with every tiny decision we make, that value money over meaning; privilege over purpose; expedience over development; convenience over sophistication; McPleasure over eudaimonia; system over existence. Tempted by a devil’s bargain, deep down, in our defeated hearts, you and I have already surrendered. Faintly, in the distance, we protest, we shout, we object. You and I consent to the system. And the system consents to us.

    “The banker rigged the rates, and stole from you and me.” Who stole what from whom? Was it the banker who stole a dollar a day from us — or we who stole a life worth living from the banker? Who consents to a deal with the devil — you? Or you and the devil? When the deal is struck, has the devil stolen your soul? Or have you stolen, for a few searing moments, the devil’s due? If the basis of the contracts that govern men is consent, have you and I, with our furious pursuit of more-bigger-faster-cheaper-now-at-any-cost already consented to the compact of our own undoing; already tempted the banker with the devil’s glittering deal — and damned the banker to tempt us right back?

    Let me tell you a secret.

    There is no system. You and I aren’t the system. The bankers aren’t the system. The politicans aren’t the system. Whom and what we elevate to exalted office isn’t the system.

    There are a multiplicity of systems. For example, I’ve proposed redesigning the economy around the idea of a national balance sheet, which redefines profit and wealth to matter in human terms. Simon Johnson and numerous others have proposed banks be broken, split, limited. Roger Martin has proposed that the overweening pursuit of shareholder value be upgraded to the pursuit of human value. Michael Porter has suggested that shared value be the linchpin the economy is held together by. Gary Hamel has suggested we redesign the corporation as more a vehicle for human accomplishment than a military machine. Richard Florida has suggested that we optimize for creative capital — not just financial capital. And that’s just a tiny list.

    One remains trapped in a life one doesn’t fully live until one sees the multiplicity of one’s potentials; the possibilities one can arc towards. So it is with societies. We will, I’d venture, remain trapped in these lives, in these places, by these institutions, until we see that there is no system, but a multiplicity of systems. A multiplicity of systems — arrayed in ranks, shepherded into first, second, third, and last place by the norms we share; by the values we’re capable of mustering. A range of design choices that, like life choices, bend one’s trajectory towards the heights — or into the depths.

    Like lives, economies and societies must be chosen. Not merely decided upon, by tired, fearful old men in ornate rooms — but actively chosen, and rechosen, constructed and reconstructed, by the norms we choose to enact, and the values you and I choose to live, every second of every day.

    You and I — we are more than pawns, marks, algorithms, “consumers,” margins. At our highest and fullest, you and I are here in the human world. And the systems we consent in every moment to be governed by, through the ideals and values we share, can damn us not just to deal with the devil, but to become the devils — to evoke from one another the smallest and worst in our natures.

    And yet you and I must fight fatalism. There are billions of stars in this galaxy. We’re moored to a rock perched on the edge of a single one. There is no system. There is only the journey past the edge of impossibility. Who’s who, mechanism and operator, sovereign — and serf?

    More blog posts by Umair Haque
    More on: Economy, Ethics, Finance

  • LD


    I think this commentary provides us all with a lot to think about. It goes from the essence of crony capitalism that corrupts us and then far beyond that to the ultimate question.

    That is?

    How then shall we live?

    Thanks for your holding the bar very high around here. It is a distinct pleasure to read and share your thoughts.

  • Jayson Kim

    Since getting burned by the stock market collapse in 2008 – 2009, senior executives and investors have dumped trillions into cash and fixed income investments in a desperate attempt to avoid capital losses in their portfolios.

  • LD, Thought you might like this video from the Keiser Report (Russian Times) where they’re talking about, among other things, the Libor scandal (run time: 29:36 mins).

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