AT’S A TOUGH SENTENCE FOR A FLAWED FACILITY

I hope I never come up in front of Judge Cook for smacking my 3-year old grandson on his leg, when he behaves badly. If I was unlucky to do so, I suspect I would end up in Parkhurst for 2 years. I suppose Tom Hayes’s sentence of 14 years, which gave me cardiac arrest, was not that bad considering the penal servitude he would have been given by the U.S. Justice Department, if Hayes had been extradited to the U.S. He would probably have been sentenced like Bernie Ebbers of Worldcom to 25-years without parole. Be grateful for small mercies? I don’t think so! By any standards that was a brutal sentence. There have been lesser sentences for murder.

There will be little sympathy for Tom Hayes receiving a custodial sentence, though the severity of it shook me to the core. After all he broke the law by manipulating interest rates over a 4-year period for his personal benefit by way of gargantuan annual bonuses. He would appear to have been the leader of the pack. In the months to come others will be incarcerated for similar misdemeanours. Who knows what they might receive in terms of a prison sentence? Allegations have been made against dealers and managers from Barclays and ICAP.


There are several issues that irk me about this Libor scandal. Firstly Hayes looks as though he will be the scapegoat who will initially carry the can for bankers. He is the test case! It looks as though very senior people in banks will have got away scot free. I don’t include Fred Goodwin and their cronies. There is a very distinct difference between wilful negligence and incompetence and criminal activity. Goodwin and his colleagues stood to make a fortune with their incentive schemes without resorting to criminal behaviour. Secondly and this is the irony! By manipulating rates to lower levels, many banks will have benefitted hugely from the settlement of Libor at lower levels.


However the greatest bugbear of all was the fact that LIBOR was totally anachronistic and had been for a decade prior the financial crisis of 2008. How could a trade association have been given the responsibility of measuring the cost of funds for banks totalling $50 trillion by arbitrarily asking 5-14 random banks the cost of raising 3 months money to them for the sake of argument and then divide by the number of banks asked to get an average rate. For a start from October 2008, the interbank market was moribund. Apart from short dates there was no business. So these LIBOR rates were not only non-existent it was totally facile to ask banks to quote them. Whatever Hayes and his partners in crime dreamed up, it was total guesswork. The rates were dreamt up!


All the Central bank’s knew LIBOR was a figment of most banks’ imagination. What is indisputable is the fact that Hayes broke the law and must be punished for it. A prison sentence of say 5 years should have been mandatory! But a 14 year conviction for a crime and a violation of trust from a flawed facility, which still hasn’t been changed is monstrous. I wait with bated breath to see what happens to other alleged perpetrators of rate manipulation.


I would feel a little easier if I knew LIBOR would have already been replaced by a combination of the cost of overnight-index-swaps, the cost of 3 month treasury bills and a bit of LIBOR for good measure.

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