The benchmark rate for more than $300 trillion of contracts was based on honesty. New evidence in banking’s biggest scandal shows traders took it as a license to cheat. Graphic: Bloomberg Markets
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 had joined RBS in 1984, was one of the employees responsible for the firm’s submissions for 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 who had worked 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, Bloomberg Markets magazine will report in its March issue. “We need to bump it way up high, highest among all if possible,” Tan, who was known by colleagues as Jimmy, wrote in an instant message to Danziger, according to a transcript made public by a Singapore court and reported on by Bloomberg before being sealed by a judge at RBS’s request.
Danziger typically would have swiveled in his chair, tapped White on the shoulder and relayed the request to him, people who worked on the trading floor say. Instead, as White was away that day, Danziger input the rate himself. There were no rules at RBS and other banks prohibiting derivatives traders, who stood to benefit from where Libor was set, from submitting the rate — a flaw exploited by some traders to boost their bonuses.
The next morning, RBS said it would have to pay 0.97 percent to borrow in yen for three months, up from 0.94 percent the previous day. The Edinburgh-based bank was the only one of 16 surveyed to raise its submission that day, inflating that day’s rate by one-fifth of a basis point, or 0.002 percent. On a $50 billion portfolio of interest-rate swaps, RBS could have gained as much as $250,000.
Events like those that took place on RBS’s trading floor, across the road from Bishopsgate police station and Dirty Dicks, a 267-year-old pub, are at the heart of what is emerging as the biggest and longest-running scandal in banking history. Even in an era of financial deception — of firms peddling bad mortgages, hedge-fund managers trading on inside information and banks laundering money for drug cartels and terrorists — the manipulation of Libor stands out for its breadth and audacity.
Details are only now revealing just how far-reaching the scam was.
“Pretty much anything you could do to increase the revenue of your organization appeared legitimate,” says Martin Taylor, chief executive officer of London-based Barclays Plc from 1994 to 1998. “Here was the market doing something blatantly dishonest. I never imagined that people in the financial markets were saints, but you expect some moral standards.”
Where Libor is set each day affects what families pay on their mortgages, the interest on savings accounts and returns on corporate bonds. Now, banks are facing a reckoning, as prosecutors make arrests, regulators impose fines and lawyers around the world file lawsuits claiming the manipulation pushed homeowners into poverty and deprived brokerage firms of profits.
For years, traders at Deutsche Bank AG, UBS AG, Barclays, RBS and other banks colluded with colleagues responsible for setting the benchmark and their counterparts at other firms to rig the price of money, according to documents obtained by Bloomberg and interviews with two dozen current and former traders, lawyers and regulators. UBS traders went as far as offering bribes to brokers to persuade others to make favorable submissions on their behalf, regulatory filings show.
Members of the close-knit group of traders knew each other from working at the same firms or going on trips organized by interdealer brokers, which line up buyers and sellers of securities, to French ski resort Chamonix and the Monaco Grand Prix. The manipulation flourished for years, even after bank supervisors were made aware of the system’s flaws.
“We will never know the amounts of money involved, but it has to be the biggest financial fraud of all time,” says Adrian Blundell-Wignall, a special adviser to the secretary-general of the Organization for Economic Cooperation and Development in Paris. “Libor is the basis for calculating practically every derivative known to man.”
More than five years after alarms first sounded, regulators and prosecutors are closing in. UBS was fined a record $1.5 billion by U.S., U.K. and Swiss regulators in December for rigging global interest rates. Tom Hayes, 33, a former yen trader at the Zurich-based bank, was charged by the U.S. Justice Department on Dec. 20 with wire fraud and price fixing for colluding with brokers, contacts at other firms and his colleagues to manipulate Libor. Hayes hadn’t entered a plea as of mid-January, and his lawyers at Fulcrum Chambers in London declined to comment.
Barclays paid a 290 million pound ($464 million) fine in June to settle with regulators, and three top executives, including CEO Robert Diamond, departed. Other banks, including RBS, were negotiating settlements in early 2013, according to people with knowledge of the talks. RBS may pay as much as £500 million to settle allegations that traders tried to rig interest rates, two people with knowledge of the matter say. UBS and Barclays admitted wrongdoing as part of their settlement agreements. Spokesmen for the two banks, and for RBS, declined to comment.
The industry faces regulatory penalties of at least $8.7 billion, according to Morgan Stanley analysts. The European Union is leading a probe that could see banks fined as much as 10 percent of their annual revenue. Meanwhile, Libor is being overhauled after the U.K. government ordered a review in September into the way the benchmark is set.
The scandal demonstrates the failure of London’s two-decade experiment with light-touch supervision, which helped make the British capital the biggest securities-trading hub in the world. In his 10 years as chancellor of the Exchequer, from 1997 to 2007, Gordon Brown championed this approach, hailing a “golden age” for the City of London in a June 2007 speech. Brown, who later served as prime minister for three years, declined to comment.
Regulators have known since at least August 2007 that some banks were using artificially low Libor submissions to appear healthier than they were. That month, a Barclays employee in London e-mailed the Federal Reserve Bank of New York, questioning the numbers that other banks were inputting, according to transcripts published by the New York Fed. Nine months later, Tim Bond, then head of asset allocation at Barclays’s investment bank, publicly described Libor as “divorced from reality,” saying in a Bloomberg Television interview that firms were routinely misstating their borrowing costs to avoid the perception they were facing stress.
The New York Fed and the Bank of England say they didn’t act because they had no responsibility for oversight of Libor. That fell to the British Bankers’ Association, the industry lobbying group that created the rate in 1986 and largely ignored recommendations from central bankers after 2008 to change the way it was computed. Regulators also were preoccupied with the biggest financial crisis since the Great Depression, and forcing banks to be honest about their Libor submissions might have revealed they were paying penalty rates to borrow, which in turn would have further damaged public confidence.
Libor is calculated daily through a survey of banks asking how much it costs them to borrow in 10 currencies for periods ranging from overnight to one year. The top and bottom quartiles of quotes are excluded, and those left are averaged and made public before noon in London.
Because it’s based on estimates rather than actual trade data, the process relies on the honesty of participants. Instead of being truthful, derivatives traders sought to influence their own and other firms’ Libor submissions, with their managers sometimes condoning the practice, according to documents and transcripts of instant messages obtained by Bloomberg.
Occasionally, that meant offering financial inducements. “I need you to keep it as low as possible,” a UBS banker identified as Trader A wrote to an interdealer broker on Sept. 18, 2008, referring to six-month yen Libor, according to transcripts released on Dec. 19 by the U.K.’s Financial Services Authority.
“If you do that … I’ll pay you, you know, $50,000, $100,000 … whatever you want … I’m a man of my word.”
Some former regulators say they were surprised to learn about the scale of the cheating. “Through all of my experience, what I never contemplated was that there were bankers who would purposely misrepresent facts to banking authorities,” says Alan Greenspan, chairman of the U.S. Federal Reserve from 1987 to 2006. “You were honorbound to report accurately, and it never entered my mind that, aside from a fringe element, it would be otherwise. I was wrong.”
Sheila Bair, who served as acting chairman of the U.S. Commodity Futures Trading Commission in the 1990s and as chairman of the Federal Deposit Insurance Corp. from 2006 to 2011, says the scope of the scandal points to the flaws of light-touch regulation on both sides of the Atlantic. “When a bank can benefit financially from doing the wrong thing, it generally will,” Bair says. “The extent of the Libor manipulation was eye-popping.”
Libor debuted the same year that British Prime Minister Margaret Thatcher’s so-called Big Bang program of financial deregulation fueled a boom in London’s bond and syndicated-loan markets. The rate was designed as a simple benchmark that banks and borrowers could use to price loans.
In 1997, the Chicago Mercantile Exchange adopted the rate for pricing Eurodollar futures contracts, solidifying Libor’s position in the swaps market, which by June 2012 had a notional value of $639 trillion, according to the Bank for International Settlements. Swaps are contracts that allow borrowers to exchange a variable interest cost for a fixed one, protecting them against fluctuations in interest rates.
The CME decision created a temptation for swaps traders to game Libor, particularly in the days before international money market dates, when three-month Eurodollar futures settle. The value of positions was affected by where dollar Libor was set on the third Wednesdays of March, June, September and December. The manipulation of Libor was discussed openly at banks.
“We have an unbelievably large set on Monday,” one Barclays swaps trader in New York e-mailed the firm’s rate setter in London on March 10, 2006. “We need a really low three-month fix. It could potentially cost a fortune.” The rate setter complied with the request, according to the FSA, which published the e-mail following its investigation of the bank’s role in manipulating Libor.
The 2007 credit crunch increased the opportunity to cheat. With banks hoarding cash and not lending to one another, there was little trading in money markets, making it difficult for rate setters to assess borrowing costs accurately. Instead, traders say they resorted to seeking input from brokers, colleagues and acquaintances at other firms, many of whom stood to benefit from helping to push the rate in a particular direction.
On Aug. 20, 2007 — days after BNP Paribas SA halted withdrawals from three of its funds, which marked the start of the credit crisis — Paul Walker, RBS’s London-based head of money-markets trading, telephoned Scott Nygaard in Tokyo, where he was head of short-term markets for Asia. Walker, the person responsible for U.S.-dollar Libor submissions, wanted to talk about how banks were using the benchmark to benefit their trading positions.
“People are setting to where it suits their book,” Walker said, according to a transcript of the call obtained by Bloomberg. “Libor is what you say it is.”
“Yeah, yeah,” replied Nygaard, an American who had joined RBS in 2006 after six years at Deutsche Bank in Japan.
Walker and Nygaard, who’s now global head of treasury markets based in London and a member of the Bank of England’s money-markets liaison group, both declined to comment. It didn’t take a conspiracy involving large numbers of traders at different firms to move the rate. By nudging their submissions up or down, traders at a single bank could influence where Libor was fixed. Even inputting a rate too high to be included could push up the final figure by sending a previously excluded entry back into the pack.
“If you have a system like Libor, where highly subjective quotes are built into the process, you have a lot of opportunity for manipulation,” says Andrew Verstein, a lecturer at Yale Law School in New Haven, Connecticut, and co-author of a paper on Libor rigging 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.”
Rate setters at JPMorgan Chase & Co., Rabobank Groep, Barclays, Deutsche Bank, RBS and UBS were given no training or guidelines for making submissions, according to former employees who asked not to be identified because investigations are continuing. At RBS and Frankfurt-based Deutsche Bank, derivatives traders on occasion made their firm’s submissions, they say. Spokesmen for all of the banks declined to comment. Anshu Jain, co-CEO of Deutsche Bank and head of its investment bank at the time, told investors at a panel discussion in Germany on Jan. 21 that rigging Libor “sickens me the most of all the scandals.”
As the credit crisis intensified in the fourth quarter of 2007, Libor was a closely scrutinized gauge of the health of financial firms. After years of relative stability, the benchmark became more volatile. The average spread between the highest and lowest submissions to the three-month dollar rate widened to about 8 basis points in the three months ended on Oct. 30, 2007, from about 1 basis point in the previous three months, data compiled by Bloomberg show.
The volatility drew the attention of some bankers. On Aug. 28, 2007, Fabiola Ravazzolo, an economist on the financial-stability team at the New York Fed, received an e-mail from a member of Barclays’s money-markets desk in London accusing the firm’s competitors of making artificially low Libor submissions, according to transcripts published by the regulator that didn’t identify the sender. Barclays that day had submitted the highest rate to three-month dollar Libor, while the lowest was posted by London-based Lloyds TSB Group Plc, suggesting Barclays was having more difficulty obtaining funding than Lloyds, a bank later bailed out by the U.K. government and now known as Lloyds Banking Group Plc.
“Today’s U.S.-dollar Libors have come out, and they look too low to me,” the e-mail from the Barclays employee said. “Draw your own conclusions about why people are going for unrealistically low Libors.”
Lloyds, in an e-mailed statement, declined to comment on what it called “speculation by traders at other banks.” It wasn’t until the following year, prompted by a March 2008 report by the Bank for International Settlements and an April article in the Wall Street Journal suggesting banks were low-balling their submissions, that the New York Fed and the Bank of England asked the BBA to review the rate-setting process.
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 improving Libor, including increasing the number of banks that submit rates, basing the rate on an average of randomly selected submissions and cutting maturities in which little or no trading took place.
Aside from creating a committee to review questionable submissions and promising to increase the number of contributors to dollar Libor, the BBA didn’t implement Geithner’s suggestions. Angela Knight, then the group’s CEO, said in a December 2008 statement that Libor could be trusted as “a reliable benchmark.”
Privately, regulators were skeptical. As the BBA was drafting its proposals, King wrote to colleagues including Tucker on May 31, 2008, describing the group’s response as “wholly inadequate,” according to documents released by the Bank of England in July. Rather than press the BBA to change the way Libor was set, the Bank of England, the FSA and the New York Fed demanded that any references to their institutions be removed from the BBA review, the e-mails show.
A spokesman for the Bank of England says Britain’s central bank “had no supervisory responsibilities” for Libor at the time. The New York Fed also “lacked direct authority over Libor” and didn’t want to be seen endorsing a private association’s plan, according to Jack Gutt, a spokesman. The New York Fed continued to press for reform through 2008, he says.
Liam Parker, an FSA spokesman, referred to earlier comments Adair Turner, chairman of that agency, made to British lawmakers in July that the regulator was in contact with the CFTC in Washington at a “very early stage” in an investigation the U.S. agency began in 2008. The BBA said in an e-mail that it’s working with regulators “to ensure the provision of a reliable benchmark which has the confidence and support of all users.”
By failing to act, regulators allowed rate rigging to continue over the next two years. At RBS, the abuse was most pronounced from 2008 until late 2010, according to people close to the bank’s internal probe. At Barclays, manipulation continued until the second half of 2009. Japan’s Financial Services Agency banned Citigroup Inc. from trading derivatives linked to Libor and Tibor, the Tokyo interbank offered rate, for two weeks in January as punishment for wrongdoing that started in December 2009.
Former Barclays Chief Operating Officer Jerry Del Missier went further, saying that the Bank of England encouraged the lender to suppress Libor submissions. In October 2008, days before RBS and Lloyds sought bailouts, the central bank asked Barclays to lower its quotes because they were stoking concern about the bank’s stability, Del Missier told a panel of British lawmakers on July 16. Tucker, the Bank of England deputy director, told the panel he never gave such instructions.
“It’s not adequate for the authorities to say, ‘We didn’t have responsibility,’” says Paul Myners, a Labour Party member in Parliament’s House of Lords and a U.K. Treasury minister from 2008 to 2010. “It was a huge oversight by the regulators not to realize that Libor and other benchmarks were of such critical importance that they should fall within the regulatory ambit.”
In the end, it was a U.S. regulator without any banking oversight that took action. Vincent McGonagle, a top enforcement official at the CFTC in Washington, initiated a probe into Libor after reading the April 2008 Wall Street Journal story. The agency sent letters to several banks that year 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 futures contracts that trade on the CME.
Banks opened their own investigations after the CFTC inquiries. Barclays appointed Rich Ricci, then co-head of its investment bank, to oversee an inquiry. As his team sifted through thousands of pages of e-mails and transcripts of instant messages and phone conversations, it uncovered evidence that traders were manipulating the rate both up and down for profit, according to two people with knowledge of the probe.
The CFTC came to the same conclusion in late 2009 or early 2010, according to the person with knowledge of the commission’s inquiry. It happened when Gary Gensler, chairman for less than a year, stood in the foyer of his ninth-floor Washington office as Stephen Obie, acting head of enforcement at the time, played a Barclays tape of a conversation between traders and rate setters, the person said. “We had to vigorously pursue this,” Gensler says. “Sometimes practice in a market gets confused and over the line, but nonetheless it may still be illegal.”
The investigations revealed how widespread the manipulation was. At UBS, traders made about 2,000 written requests for movements in rates from late 2006 to late 2009. The majority were sent by Hayes, the Tokyo-based trader who led a “massive effort” to rig yen Libor, the CFTC said in a settlement with the bank in December. Hayes also bribed brokers to disseminate his requests to other panel banks and, on occasion, persuaded them to lie about where Libor should fix that day, the Department of Justice said. Hayes, who traded “enormous volumes” in yen swaps, made about $260 million in revenue for UBS during the three years he worked there, the CFTC said.
At Barclays, derivatives traders made 257 requests for U.S.-dollar Libor, yen Libor and euro interbank offered rate, or Euribor, submissions from January 2005 to June 2009, according to the settlement between the bank and regulators. The requests for U.S.-dollar Libor were granted about 70 percent of the time.
Manipulating Libor was a common practice in an unregulated market big enough to span the world though 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 brokers soliciting business, according to three people familiar with the outings.
In March 2007, five months before the onset of the credit crisis, a dozen traders from Lehman Brothers Holdings Inc., Deutsche Bank, JPMorgan and other firms traveled to Chamonix, according to people with knowledge of the outing. The group, traders of yen-based derivatives, spent a day skiing before gathering over mulled wine at a restaurant. They flew back late on Sunday, in time for a 6 a.m. start the next day.
The trip was organized by London-based ICAP Plc, the world’s biggest interdealer broker. Brokers such as ICAP and RP Martin Holdings Ltd., also in London, were sounding boards for those trying to set rates, especially after money markets dried up, traders interviewed by Bloomberg say.
ICAP said in May that it had received requests from government agencies probing banks’ Libor submissions and is cooperating fully. The firm said it had suspended one employee and placed three others on paid leave pending the outcome of the investigation. Two RP Martin brokers were arrested in London on Dec. 11 as part of an inquiry into Libor rigging. Brigitte Trafford, an ICAP spokeswoman, declined to comment, as did RP Martin spokesman Jeremy Carey.
RBS in 2011 dismissed Tan, Danziger and White, the rate setter, following the bank’s probe into yen Libor known as Project Zen. Tan sued the bank for wrongful dismissal in Singapore in 2011, and the case is still before the court. Andy Hamilton, who traded derivatives tied to the Swiss franc, also was fired for trying to influence Libor. The bank has suspended at least three others, including Jezri Mohideen, head of rates trading for Europe and the Asia-Pacific region, according to a person with knowledge of the probe. White, Tan, Danziger and Hamilton declined to comment. Mohideen said in a statement issued by his lawyer that he never sought “to exert pressure on anyone to submit inaccurate rates.”
Deutsche Bank has dismissed two individuals, including Christian Bittar, head of money-markets derivatives trading, three people familiar with the bank’s internal investigation said. Barclays has disciplined 13 employees and dismissed five, Ricci, now head of corporate and investment banking, told British lawmakers on Nov. 28. At least 45 employees, including managers, knew of the “pervasive” practices at UBS, the FSA said. More than 25 left the Swiss bank following an internal probe, a person with knowledge of the investigation said in November.
The Barclays settlement prompted the U.K. government to order an inquiry into Libor. The report, published in September, recommended stripping the BBA of its oversight role, handing it to the Bank of England and introducing criminal sanctions for traders seeking to rig the rate. “Governance of Libor has completely failed,” FSA Managing Director Martin Wheatley, who led the review, said when 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.”
The ubiquity of contracts pegged to Libor leaves banks vulnerable to lawsuits. Barclays was ordered by a British judge in November to release the names of individuals involved in rigging rates after Guardian Care Homes Ltd., a Wolverhampton, England–based owner of about 30 homes for the elderly, sued for £38 million over interest-rate swaps that lost it money.
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 says he refinanced in 2006 with a $360,000 adjustable-rate mortgage linked to six-month dollar Libor. “It’s just another example of how the banks have manipulated everything in their power,” Fobes says. “I will fight them to the day I die to save my home.”
The city of Baltimore and Charles Schwab Corp., the largest independent brokerage by client assets, have filed suits claiming banks colluded to keep Libor artificially low, depriving them of fair returns. At least 30 such cases are pending in federal court in New York.
In London, lawyers at Collyer Bristow LLP, a 252-year-old firm, are working on a plan that would force banks to reimburse customers for any payments made under contracts pegged to Libor. Stephen Rosen, who runs the firm, says clients who entered into interest-rate swaps with banks may be entitled to cancel those contracts because manipulation was so entrenched — at a cost of hundreds of billions of dollars.
“It’s possible on legal grounds to set aside the swap contract entirely, which could mean you can recover all the payments you’ve made under the swap,” says Rosen, who wears thick-rimmed glasses and speaks in clipped, precise tones, sitting in his office in a Georgian townhouse in the legal district of Gray’s Inn. “The bank, when they entered into the swap, made an implied representation that Libor would not be unfairly manipulated.”
Rosen says his clients include a publicly traded real estate company, three nursing homes and at least 12 more firms that bought Libor-linked interest-rate swaps from banks. He declines to identify them by name, citing confidentiality rules. “The client will argue, ‘Had you told me the truth — that you were fraudulently manipulating this rate — I would never have entered the contract with you,’” he says. “We are calling this the nuclear option.”
With assistance from Silla Brush in Washington, Andrea Tan in Singapore and Francine Lacqua, Lindsay Fortado and Jesse Westbrook in London.
To contract the editor responsible for this story: Robert Friedman at email@example.com.
Diamond Testifies in Libor Probe
Former Barclays CEO Robert Diamond gave evidence to the Treasury Select Committee in London on July 10, 2012. Diamond stepped down from his position after regulators fined the bank 290 million pounds for attempting to rig the benchmark interest rate.
Former Barclays CEO Robert Diamond gave evidence to the Treasury Select Committee in London on July 10, 2012. Diamond stepped down from his position after regulators fined the bank 290 million pounds for attempting to rig the benchmark interest rate. Photographer: Paul Thomas/Bloomberg
How Libor Was Rigged
Gensler Began CFTC Investigation of Libor Manipulation
Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission, started an investigation after listening to a tape of a conversation between traders and rate setters at Barclays.
Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission, started an investigation after listening to a tape of a conversation between traders and rate setters at Barclays. Photographer: Peter Foley/Bloomberg
London Lawyer Takes on Libor Banks
Harry Borden/ Bloomberg Markets
Stephen Rosen, an attorney at Collyer Bristow in London, represents a real estate company, three nursing homes and more than a dozen other firms that bought Libor-linked interest-rate swaps from banks.
Stephen Rosen, an attorney at Collyer Bristow in London, represents a real estate company, three nursing homes and more than a dozen other firms that bought Libor-linked interest-rate swaps from banks. Photographer: Harry Borden/ Bloomberg Markets
Libor Score Card