This book provides a compelling account of the rigging of benchmarks during and after the financial crisis of 2007–8. Written in clear language accessible to the non-specialist, it provides the historical context necessary for understanding the benchmarks – LIBOR, in the foreign exchange market and the Gold and Silver Fixes – and shows how and why they have to be reformed in the face of rapid technological changes in markets. Though banks have been fined and a few traders have been jailed, justice will not be done until senior bankers are made responsible for their actions. Provocative and rigorously argued, this book makes concrete recommendations for improving the security of the financial services industry and holding bankers to account.
crisis because it had such far-reaching
consequences for our understanding of risk and the way it is managed
in the financial system, as well as consequences for the regulators
of the system. In examining the global crisis of 2007–8 we
attempt to understand whether it was different from previous crises.
We also explain the immediate response to the crisis from regulators
interact, and can lead to adverse
outcomes for clients. The evidence collected by the regulators shows
that this is what happened.
Manipulating the foreign exchange market 165
Final notice to Barclays issued by the FCA, 20 May 2015
Barclays was the first to admit wrongdoing but was nevertheless fined
by the FCA. In its final notice, issued on 20 May 2015, the FCA stated
that over the five years between 1 January 2009 and 15 October 2013,
Barclays failed to control its London voice trading operations in the G10
spot FX market.1 Barclays put its interests ahead of the
Who knew what when?
In this chapter, I shall focus on the comments and claims made about
LIBOR prior to the beginning of the formal investigations by the FSA
and the CFTC. As usual, after any scandal, the question immediately
arises as to why the regulators had not discovered the wrongdoing
earlier and taken action against those involved. Market rumours had
swirled around LIBOR at the very beginning of the financial crisis
(and, some would claim, before that), but had apparently been ignored.
Regulators should never overlook the possible significance
for the FRBNY announce that since the Barclays deal had failed, Lehman had to file for bankruptcy by midnight. Miller argued: ‘You don't realize what you're saying. It's going to have a disabling effect on the markets and destroy confidence in the credit markets. If Lehman goes down, it will be Armageddon.’ 5 He was right. Later in the course of the bankruptcy proceedings, he stated that he believed that the regulators could have stepped in, not necessarily to save Lehman, but to head off the meltdown that followed: ‘They totally missed it.’ He added: ‘When
been thoroughly reviewed and enabled a reconstruction of what the borrowing rate should have been, based on the default-insurance figures,
which showed that the LIBOR was lower for Citigroup by 0.87%, 0.7%
for WestLB, 0.57% for HBOS and 0.42% for UBS between late January
and 16 April, the date of the first report of doubts.
When the regulators finally released the results of their investigations,
it became clear that early warnings from a variety of sources had been
overlooked. Evidence given at the trial of Tom Hayes (a trader standing
prices of securities are continuously adjusted to reflect all publicly available information. Many argued that the dominance of the theory created the context in which the financial crisis occurred.
The theory influenced market participants, central bankers and regulators alike. Central bankers believed that market prices could be trusted and that bubbles either did not exist or could not be identified before they occurred, or even that they were beneficial for growth. Regulators seemed to accept the need for ‘light touch’ regulation, in which the
banks didn't want bank-type supervision from the Federal Reserve. They wanted to be regulated by the SEC, which had been their functional regulator for 70 years. 20
This does put the position as stated by Erik Sirri, Director of Market Regulation, Securities and Exchange Commission, in a somewhat different light, but does not undermine the basic point that proper regulation of the investment banks did not exist. In his testimony, Sirri pointed out that no regulator in the Federal
This book explains the fundamental causes of the bank's failure, including
the inadequacy of the regulatory and supervisory framework. For some, it was the
repeal of the Glass-Steagall Act that was the overriding cause, not just of the
collapse of Lehman Brothers, but of the financial crisis as a whole. The book
argues that the cause is partly to be found both in weak and ineffective
regulation and also in a programme of regulation and supervision that was simply
not fit for the purpose. Lehman Brothers' long history began with three
brothers, immigrants from Germany, who sold selling groceries and dry goods to
local cotton farmers. Dick Fuld, the chairman and CEO, and his senior
management, ignored the increased risks, choosing to rely on over-valuations of
the firm's assets. The book examines the regulation of the Big Five
investment banks in the context of the changes which took place in the structure
of banking after the repeal of the Glass-Steagall Act. It describes the
introduction of the European Union's Consolidated Supervision Directive in
2004. The book examines the whole issue of valuing Lehman's assets and
details the regulations covering appraisals and valuations of real estate,
applicable at the time and to consider Lehman's approach in the light of
these regulations. It argues that that the valuation of Lehman's real
estate assets was problematic to say the least, as the regulators did not
require the investment banks to adopt a recognized methodology of valuation, and
that Lehman's own methods were flawed.
The well-being of Europe’s citizens depends less on individual consumption and more on their social consumption of essential goods and services – from water and retail banking to schools and care homes – in what we call the foundational economy. Individual consumption depends on market income, while foundational consumption depends on social infrastructure and delivery systems of networks and branches, which are neither created nor renewed automatically, even as incomes increase. This historically created foundational economy has been wrecked in the last generation by privatisation, outsourcing, franchising and the widespread penetration of opportunistic and predatory business models. The distinctive, primary role of public policy should therefore be to secure the supply of basic services for all citizens (not a quantum of economic growth and jobs). Reconstructing the foundational has to start with a vision of citizenship that identifies foundational entitlements as the conditions for dignified human development, and likewise has to depend on treating the business enterprises central to the foundational economy as juridical persons with claims to entitlements but also with responsibilities and duties. If the aim is citizen well-being and flourishing for the many not the few, then European politics at regional, national and EU level needs to be refocused on foundational consumption and securing universal minimum access and quality. If/when government is unresponsive, the impetus for change has to come from engaging citizens locally and regionally in actions which break with the top down politics of ‘vote for us and we will do this for you’.