Criminal prosecutions for rigging LIBOR - will bankers finally see jail-time?

The wriggling and wiggling of UK political and regulatory authorities trying to avoid taking criminal action against individual bankers for LIBOR rate fixing was just more of the same. The latest excuses and obfuscations by those who should be protecting us but would rather protect the bankers included:

• The Financial Services Authority (FSA) does not have the power to make a criminal prosecution in this case, and changing the law is currently being considered. The FSA can prosecute once we change the law.      [True. Successive governments have avoided giving the FSA this power] 

• The Serious Fraud Office (SFO) does have the power, but is too useless. [We shall see]

The FSA has an uniquely abysmal record on regulation and enforcement. FSA fines are a miniscule tiny fraction of bank profits, making them nothing more than a cost to the banks of doing business as usual – like paying their electricity bills. In any case the fines imposed by the FSA are used to subsidise the fees paid by the banks to the FSA – the fines are effectively recycled back to the perpetrators. 

Angst at being held in contempt even in comparison to the FSA eventually brought out the lion in the SFO. Having said on the 2^nd July 2012 they were

“considering whether it is both appropriate and possible to bring criminal prosecutions.. we hope to come to a conclusion within a month.”

they managed to come to their conclusion much quicker, in just four days, issuing a single sentence press release on 6^th July 2012:

“The SFO Director David Green QC has today decided formally to accept the LIBOR matter for investigation.”

The humiliation of not pursuing this would have been too much for the SFO in circumstances where:

a)      Barclays had admitted its fault, paid its fine, ejected its CEO & COO, and has its Chairman’s resignation.

b)      The US Department of Justice had collected the evidence on Barclays and a slew of other leading banks

c)      The Fraud Act 2006 left little doubt that the law to prosecute was in the statute books and waiting to be thrown.

In fact, so precisely relevant is Chapter 35 Sections 1 to 6 of the Fraud Act that it could be the basis of a job description for a bank trader – see the addendum to this post for details.

The battle is not yet over. Politicians and regulators do not really want to have to travel to one of the bleak open prisons to visit their Best Forever Friends. They have a record of doing what is necessary behind the scenes to avoid this inconvenience. And the SFO’s tentative little roar may yet turn into the usual mewling and puking one expects when it comes to regulators versus the Financial Services Industry.

To understand whether this case deserves criminal prosecution, some insight is provided in Bob Diamond’s letter to Barclays staff just before he decided to resign in July 2012:

“It is important to bear in mind that this behaviour stopped nearly three years ago. The documents released last week represent part of an industry-wide investigation and are the result of investigations which we carried out in cooperation with three different regulatory Authorities over three years.”

a)      Diamond himself was in charge of the “behaviour” three years ago, and many years prior to that.
b)      He states that the investigation with “three different regulatory Authorities” started three years ago, when the “behaviour” stopped.
c)      You may call senior bankers many things, but ‘stupid’ is not one of them. Even a stupid burglar would work out that if the cops are investigating him on suspicion of burglary it would be a good idea to cease the burglarising.

“on the majority of days, no requests were made at all. Even when made, the requests were not always accepted by the submitter"

a)      It is reasonable to assume that Diamond, with the greatest veracity he is able to muster, would want to minimise the number of days the scam took place. “Majority” means greater than 50%. With approximately 260 business days a year, presumably this “behaviour” was happening on 129 of them.

b)      If your spouse promised they were faithful on the 'majority of days', and even when they were out carousing their chat-up lines were "not always accepted", does that make it all ok?)

“the attempted adjustments were, on average, small - typically less than one basis point."

a)       “On average” means that roughly half (depending on which ‘average’ the slippery fellow meant – Mean/Median/Mode) were more than one basis point. Actually, if he meant Modal average – which maybe implied by Diamond’s use of the word “typically” - the truth could be far worse. For example, if Barclays submitted a half base point adjustment three times, then so long as no other adjustment was used three times or more than this half base point would be the 'modal average'. Even if every other adjustment was much more.

b)      “one basis point” is 0.01 of a percent. Doesn’t sound like much? Well, in the US Department of Justice’s Statement of Facts a Barclays trader states, for every quarter of a basis point he stood to lose US$154,687.

“for every 0.25 bps tomorrows [sic] fix is below 4.0525 we lose 154,687.50 usd [United States Dollars]...if tomorrows [sic] fix comes in at 4.0325 we lose 618,750 usd”

One basis point is worth hundreds of thousands of dollars to this one derivatives trader in one day. The evidence suggests there are many of these traders from many banks doing the same thing. These dollars are being fraudulently ripped from the counter-party, who holds the other side of the derivatives contract. The Department of Justice’s submission goes on to say:

  

“In the instances when the published rates were manipulated in Barclays’s favor due to Barclays’s manipulation of its submissions, that manipulation benefitted Barclays swaps traders, or minimized their losses, to the detriment of counterparties, …Certain Barclays swaps traders and rate submitters who engaged in efforts to manipulate LIBOR and EURIBOR submissions were well aware of the basic features of the derivatives products tied to these benchmark interest rates; accordingly, they understood that to the extent they increased their profits or decreased their losses in certain transactions from their efforts to manipulate rates, their counterparties would suffer corresponding adverse financial”

“Those United States counterparties included, among others, asset management corporations, retirement funds, mortgage and loan corporations, and insurance companies.”

The defrauded counter parties held our savings, our pensions, our loans. In short, we the public were the defrauded ripped-off counter parties.

Those of us, including me, who throw stones at the banks due to the corrupt practices of some of their staff should ask ourselves – if we were tempted with a bonus earned in one year big enough to retire on would we not dive into the dirt? Do we not manage to maintain our sanctimonious positions precisely because we are never tempted?

Of course this is a very good reason to continue throwing stones and maintaining our sanctimonious position. Not because nobody every bothers to tempt us, but because those temptations of millions paid in pay and bonuses to bankers are swiped from us in the form of rotten returns on our savings and investments, high charges on our banking services, higher taxes to fill the hole left by their expert tax dodging, scams like Interest Rate Swaps, and unadulterated fraud like LIBOR manipulation.

ADDENDUM:

Job Description: Bank Trader

Should have the substantial skills and character flaws to contravene the following sections of The Fraud Act 2006:

CHAPTER 35

1 Fraud

(1)A person is guilty of fraud if he is in breach of any of the sections listed in subsection (2) (which provide for different ways of committing the offence).

(2)The sections are—

(a)section 2 (fraud by false representation),

(b)section 3 (fraud by failing to disclose information), and

(c)section 4 (fraud by abuse of position).

(3)A person who is guilty of fraud is liable—

(a)on summary conviction, to imprisonment for a term not exceeding 12 months or to a fine not exceeding the statutory maximum (or to both);

(b)on conviction on indictment, to imprisonment for a term not exceeding 10 years or to a fine (or to both).

(4)Subsection (3)(a) applies in relation to Northern Ireland as if the reference to 12 months were a reference to 6 months.

2 Fraud by false representation

(1)A person is in breach of this section if he—

(a)dishonestly makes a false representation, and

(b)intends, by making the representation—

(i)to make a gain for himself or another, or

(ii)to cause loss to another or to expose another to a risk of loss.

…

(4)A representation may be express or implied.

(5)For the purposes of this section a representation may be regarded as made if it (or anything implying it) is submitted in any form to any system or device designed to receive, convey or respond to communications (with or without human intervention).

3 Fraud by failing to disclose information

A person is in breach of this section if he—

(a)dishonestly fails to disclose to another person information which he is under a legal duty to disclose, and

(b)intends, by failing to disclose the information—

(i)to make a gain for himself or another, or

(ii)to cause loss to another or to expose another to a risk of loss.

4 Fraud by abuse of position

(1)A person is in breach of this section if he—

(a)occupies a position in which he is expected to safeguard, or not to act against, the financial interests of another person,

(b)dishonestly abuses that position, and

(c)intends, by means of the abuse of that position—

(i)to make a gain for himself or another, or

(ii)to cause loss to another or to expose another to a risk of loss.

(2)A person may be regarded as having abused his position even though his conduct consisted of an omission rather than an act.