Bloomberg’s Matt Levine has been thinking this week about the decision by a New York court to drop charges against Tom Hayes, a former UBS and Citigroup trader, who had served more than five years in prison in the UK for Libor manipulation.
According to Levine, the defence was a pretty weird one. It rested on the notion that Hayes, while openly admitting to lying in his rate-submitting role, was not necessarily defrauding anyone if the rate was right or wasn’t influenced by his submissions – something that is hard to prove retrospectively.
As he noted:
“They need to prove that your Libor submission was false, rather than you proving that it was true. That will generally be hard, and in any case US prosecutors never even tried. They looked at all those chats, all those confessions of guilt, and figured that they were good enough to prove that the traders were lying. But they never quite proved that they weren’t also telling the truth.”
But Tom Hayes, isn’t very happy with that assessment. He implies it dismisses the defence as somewhat arbitrary or off-the-cuff – when really, according to Hayes, there were some major issues in play. Chief among them whether just thinking about doing a crime or thinking you’re doing a crime is fraudulent if, in the end, no one can prove any actual harm was done to anyone.
Can you, essentially, be guilty of a thought crime?
He’s dropped us a note just now offering the following response and we’ve highlighted some key points:
It is unfortunate that Matt Levine has seen fit to pen an article opining on amongst other things the case in law required to prove guilt in the Libor cases, the rate-setting process and the role of the submitter and the content of the interviews of Tom Hayes (TH).
Taking each of these in turn Levine states that for a fraud offence you must say something false but in the Libor cases that was never the case. In fact in the UK it was legally ruled that the rate need not even change. That is to say if a commercial request was made that did not even change the rate it was still considered to be a fraudulent misrepresentation. Notwithstanding that there could be no economic prejudice whatsoever were the same rate submitted, when Levine states it was necessary for the prosecution to “prove your Libor submission was false” that is demonstrably untrue. In fact this was the subject of the post conviction appeal in Dec 2015 of Tom Hayes (see here).
The judges’ direction to the Jury in the case (upheld by the court of appeal) make this clear, they were explicitly not required to find any false rate was submitted in any way merely the presence of a commercial consideration.“Fifth if a submitter considered that there was a range of possible figures which could be submitted, each one of which could be justified as a subjective judgement on the information he had, and then submitted a figure within that range which took account of such commercial interests of the bank or any other bank or person, if the submitted figure did not differ from the figure which would have been submitted without taking such commercial interests into account, the submitter would not have made a genuine assessment of the bank’s borrowing rate in accordance with the LIBOR definition.”
Had Levine had experience on the cash desk or knowledge of the submitters own role he would know that this, in reality, was a specious argument, one mutually exclusive with reality. In short every submitter traded or had exposure to the final published Libor rate. The notion of a submission absent of commercial interest is a non sequitur.
In the Libor cases on both sides of the Atlantic all that the case in law required was the presence of a commercial conversation or thought, no more. Sensibly the 2nd Circuit, although recognizing the inherent unfairness of a system riddled with conflicts of interest, found that this did not a false submission make “irrespective of its motivation”. The 2nd Circuit was in essence preventing the creation of a thought crime. Had they allowed the case in law to stand then falsity would become an issue of motivation not truthfulness or numeric accuracy.
Their judgement also noted that the BBA instructions did not prohibit LIBOR submitters “from receiving or considering input from that bank’s . . . derivatives traders[,]” and nor did the BBA’s LIBOR Code of Conduct for Contributing Banks, adopted in 2013. Levine seems to believe these cases were about “lying” and the requirement to prove that, the judgment in Conolly and Black shows they were actually about motivation and that was the only thing the jury were asked to consider in that regard.
On the second point Levine seems to believe incorrectly in a notional hierarchy of rates within the range available to the submitter. He believes one rate to be more “truthful” than another. Levine to our knowledge has never worked on a cash desk, much less as a Libor submitter. He states requests were aimed at deviating submissions from the “truth” to a “lie” which also happened to be true.
His statement is simply not correct. It is in direct contrast to how the CME (the largest exchange for USD Libor derivatives) defined a valid submission, which was in the following terms;
“A contributor panelist who can borrow ‘in reasonable market size’ at any one of a wide range of offered rates commits no falsehood if she bases her response to the daily Libor survey upon the lowest of these (or the highest, or any other arbitrary selection from among them”
In fact the UK’s FCA conceded you could toss a coin to choose the submission from the range. It is surprising that Levine does not realise that axiomatically different lenders have different appetite to lend to a panel bank depending in their own cash position and risk appetite.
Much like with mortgages and credit cards in the retail sectors there are several valid offered rates from multiple lenders. What defines one as more true or false in Levine’s warped view is not clear. He merely decides that any request must be for the rate to be moved from a more “truthful” submission to one that is less so.
Of course this is not true and the second circuit recognized this. Requests were predominantly made for precisely that described as legitimate by the CME, high or low within the range. Moreover as promulgated above the submitter was already subject to their own motivations by virtue of their conflicted role as a trader with commercial interests in the submission. We suspect that Levine did not seek the advice of a contemporaneous Libor submitter when writing what he did.
Of course in describing the brazen behavior caught on the chats Levine undermines his own argument in the first sentence about the state of mind of those caught up in the Libor cases . Further in relation to the “bribes” of which he speaks things such as coffee, sushi, mars bars, lunch and the like again undermine the notion of a state of mind of those who believed what they were doing was wrong. That people would engage in international fraud and risk prison for such a paucity of reward beggars belief.
As the FCA stated in their final notice of 2012 the behavior at UBS was considered normal business practice. UBS managers themselves negotiated the fixed monthly fees payable to ICAP for Libor services and the same managers knew of and approved wash trades made with Prebon and RP Martin. The fact that all defendants employed by these companies were acquitted unanimously in a few hours is telling, the jury accepted that they did not believe they were doing anything wrong.
Lastly Levine chooses to selectively quote from 82 hours of interviews given by Tom Hayes. He conveniently fails to mention that Tom Hayes’ stated purpose of such interviews was to make the false confessions that would prevent his extradition to the USA by being charged in the UK. In such circumstances Tom Hayes had no choice but to incriminate himself. Had he read the whole 82 hours he might have formed a more balanced view of their content such as the comments made by Tom Hayes in respect of the rules governing Libor at the time and the notion the submissions were false and misleading.
Two such quotes are found below;
Scoping interview, 31 January 2013, Transcript Disk 2
“I mean no one ever spoke to us about LIBOR. Like I said, there were no rules internally or externally. I mean, there was no compliance training. There was no Chinese walls, there was nothing. I mean, just yeah, there was nothing, there was just nothing there.”Citigroup interview, 5 June 2013, p19
“When the internal investigation at Citi started some clear rules were laid down, he thinks in June, and no contact was allowed with the Cash desk unless it went through Compliance. Until then there had been no internal rules at any bank that he had worked for, in respect of traders and Cash desks speaking to each other.”UBS interview, 22 May-6 June 2013, p93-94
“Again this sort of comes down to whether I feel that, you know, any of the rates that were ever published or submitted were actually false and in the case of what us derivatives traders did I don’t actually believe that they were false…They were undoubtedly affected. I’m not saying they weren’t affected. Otherwise I wouldn’t have bothered doing it. But I don’t think that necessarily the outcome was that you had a rate that was false, except in the case of the solvency stuff [Lowballing] where it was obviously just bullshit.“I don’t know about misleading. I mean, how many people look at three-monthly LIBOR and go ‘Oh, I was misled because it was an eighth of a basis point different than it would have otherwise been’? You know…I mean, I’m guessing that one. I still probably wouldn’t have thought that applied to me, though, because I would have looked at the securities part of it and thought ‘Well I’m dealing with an interest rate, which is subjective’. You know, you, we’re allowed to choose whatever our submission is. So I’m not sure that would’ve changed what I did.”
As a group of traders we have collectively over the years been the subject of a lot of reporting. Much of it based on a false narrative driven by prosecution hyperbole and gross misunderstanding by the authors. The press allowed the public zeitgeist, politicisation and desire to find those at fault for the financial crisis to cloud their judgement.
Unfortunately this groupthink created a hostile and prejudicial climate for the defendants in the run up to their trials. Few, if any, of the authors took the time to do the reading and research such a complex matter required. That we as a group are still, 10 years later, subject to such lazy journalism from an author supposedly from a legal background is a shame.
Hayes certainly has a point about journalistic groupthink. He also has a point about the unfortunate trial by media he de facto had to endure. But we also think that Levine’s takes shouldn’t be taken too seriously or literally. Based on the breadth of topics someone like Levine covers, there’s no way he can be an expert in everything. He has a daily email to put out (and more recently an entire crypto project) and likely hasn’t the bandwidth to do extensive research on every topic. What’s more, he’s usually very transparent about the fact that he is opining on a somewhat reactionary and kneejerk basis, drawing on his base knowledge (which is extensive and extremely insightful, but clearly not entirely foolproof on every occasion).
When you read Levine, it should be taken for granted you’re doing so to get the take of a highly informed finance guy, but not necessarily someone who is a specialist in the specific field being addressed.
Hayes understandably feels sensitive about the nuances. And we are very sympathetic to his plight. But in a world consumed by immediate reactionary commentary, nuance is always end up collateral damage. It’s the nature of the entire sucky system. Levine isn’t perfect, but he is far from the worst offender. Also, we don’t think Levine was necessarily implying that the New York ruling wasn’t just.
Btw – for those who haven’t listened to the BBC’s Andrew Verity’s podcast on the whole sorry saga, do check it out here.
