It is kind of amazing that for more than 40 years, up until the Libor scandal of 2012 and the reforms that followed, the world’s most important number was put together through an honor system. The manipulation of the Libor rate — which banks around the world use as their benchmark interest rate in lending to one another, so that their clients’ interest rates never fall too far below their own costs of borrowing — was a shock to the nonfinancial world when the mainstream media picked up the story. But within the industry pretty much everyone knew that bankers and traders often used whatever number made them the most money when setting the interbank rate that determines adjustable-rate mortgages, student debt, municipal deals and more, affecting ordinary lives everyday.
Journalist Erin Arvedlund explores the stories behind the long-running fix in Open Secret: The Global Banking Conspiracy That Swindled Investors Out of Billions. Through a combination of news reports and original interviews, Arvedlund serves up one tension-laden scene after another, in a multi-character drama that is clearly going to end badly. She traces the story from the first media break in 2008 by two London-based Wall Street Journal reporters to the present day, with former UBS rate superstar Tom Hayes awaiting his punitive fate. Other key players include former Commodity Futures Trading Commission chairman Gary Gensler, who fought to control wildfire, and Bob Diamond, the American-born ex-head of Barclays, the first bank to admit to the manipulation — a man portrayed as greedy beyond English tolerability. The question of whether Barclays could have bought Lehman Brothers without manipulating the Libor rate still hangs over the case.
That such an important number could be so easily changed by junior employees might be astonishing, but in fact it evolved informally from Evan Galbraith dreaming up the floating-rate note for cash loans — in his bathtub — in 1969. Especially striking, however, is the pomposity that of young number-fixers in the interbank messaging systems that Arvedlund quotes, such as a trader outright asking who will cheat for him if his normal submitter is away for the morning:
Trader: “Noonish? Who’s going to put my low fixings in? hehehe.”
Submitter: “[X or Y] will be here if you have any requests for the fixings.”
That the bankers could arrogate these important rates — which underscored the value of some $350 trillion in derivatives — so easily raises the question of just how high up the corporate ladder the scandal really went; surely, senior executives could not be that unaware of such impropriety.
