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.
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.
This chapter traces the history of financial regulation in the UK. It challenges the widely held belief that the period from the 1980s witnessed a systematic process of deregulation. In fact, from the 1970s there was a period of increasing regulation up until the mid-2000s, when the government began to encourage a ‘light touch’ approach. The combination of all these factors meant that banks were ill-prepared to meet the financial crisis. In its aftermath, as the banks embarked on the slow path to recovery, making profits was essential. The traders seized any opportunity they could, and it may well be the case that banks were simply relieved that some areas of their business were profitable.
This chapter provides a brief history of LIBOR, the London Interbank Offered Rate, tracing both market developments and the macro-economic and regulatory environment in which it was created. Beginning as an informal measure used in the London Eurodollar market of the 1960s, LIBOR made the transition to a formal benchmark in the mid-1980s, eventually becoming the most widely used benchmark in the world by the late 1990s.
This chapter charts the loss of faith in LIBOR that began to set in during the financial crisis, particularly following two articles in the Wall Street Journal. Investigation by the regulators subsequently revealed that a number of early warnings had been overlooked, and that certain banks had been distorting rates since at least 2005. Drawing on reports by the UK’s Financial Services Authority, the chapter demonstrates the day-to-day manipulation practised by traders at Barclays, the Royal Bank of Scotland and UBS.
This chapter sets out the ways in which other banks manipulated LIBOR, using the same techniques and for the same reasons. As the Financial Services Authority’s ‘final notice’ to UBS makes clear, the methods used were due in large part to one trader moving from one bank to another, so that networks of contacts were established.
In this chapter the focus is on the comments and claims made about LIBOR prior to the beginning of the formal investigations by the Financial Services Authority and the US Commodity Futures Trading Commission. As usual, after any scandal is revealed, the question immediately arose as to why the regulators had not discovered the wrongdoing earlier and taken action against those involved. This chapter sets out who knew what, considering the reasons both for the failure to detect what was going on with LIBOR and for the alleged failure to take prompt action.
This chapter shows how much the foreign exchange market has changed and developed over the years. It also reveals what goes on behind the scenes when buying foreign exchange at a bureau de change, paying bills to a company in another country or booking a hotel using a credit card on the internet or by telephone. The days of noisy trading floors where dealers shouted at each other have long gone, replaced by computers and people tapping at keyboards or talking quietly to each other. When did the foreign exchange market start to change and why does it matter?
This chapter uses evidence collected by regulators to demonstrate how dealers’ practice of acting as principals rather than agents put their clients at risk. Containing extensive excerpts from traders’ communications, it demonstrates how they managed their manipulations and in what environment it all took place.
This chapter begins with short histories of the London bullion market, including the development of the Gold and Silver Fixes. After the breaking of the LIBOR and foreign exchange scandals, suspicions soon emerged that the gold and silver markets were also being rigged. Initial investigations by the Commodity Futures Trading Commission found no evidence of this, but orders would later be issued against a number of figures, notably trader David Liew, and steps would be taken to protect the system from manipulation.