Tuesday, July 31, 2012

LIBOR Circus of Three Rings (Economic Principles)

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July 29, 2012
David Warsh, Proprietor

The Libor scandal last week assumed for the first time the faint outline of a dispiriting caper movie. The Wall Street Journalreported on new details that have emerged about a suspected ring of thieves (subscription required) – “more than a dozen traders from at least nine banks, often allegedly working together in small groups to target different interest rates on separate continents … a wide conspiracy that continued for several years and cascaded around the world.”

Thomas Hayes, a trader who worked for the Swiss bank UBS from 2006 until 2009, surfaced as a central figure in various probes. Citigroup hired Hayes away in 2009 and fired him the following year, according to the WSJ.

So far no criminal charges have been filed – against Hayes, other traders whom he is alleged to have enlisted, or their supervisors.   Not yet.

But as the WSJ previously reported, Hayes was the central figure in a civil action against UBS and Citigroup brought by Japanese investigators last year. And new information, adduced from court filings by reporters Jean Eaglesham and David Enrich, shows that traders have told Canadian regulators, too, that Hayes “worked closely at several banks to push yen Libor submissions up and down” and “also tried to rig rates through employees at brokerage firms that supplied information to banks on the yen Libor panel.”
The broad investigation, which involves US, UK, and European authorities as well, is continuing.  Evidence in emails, instant messages, trading records and direct testimony is piling up.

And since the Hayes story (and whatever others like it may emerge) is very different from two other aspects of the rate-rigging story – the intramural misreporting scandal among the banks that made headlines earlier this month when Barclays bank agreed to pay a $450 million fine; and the question of what regulators did and failed to do about various shady practices – it is important to distinguish, early and often, among the three distinct rings of the Libor circus.

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