Business cards, Libor-rigging and Self-Interest

libor-rigging-thumbnailGoing through my old business cards the other day, I spotted one for Tom Hayes, a Short Term Interest Rate Derivatives trader.

Immediately it set me thinking whether this was the same Tom Hayes mentioned in the recent Libor-Rigging settlement at UBS. An Internet search did not throw up any categorical evidence that it was, but enough circumstantial evidence (London based, STIRS, JPY) to lead me to believe it was the same person.

Thinking back, I must have met Tom Hayes in late 2004, early 2005 and I recall a young, very smart trader who immediately got the value and liked the desk risk management software we were trying to sell to his firm. The deal went ahead, but I left my job a few months after, so never met him again.

But looking back now, I wonder what made him take the path that he did.

Clearly self-interest, as the email evidence clearly show that he influenced his colleagues at UBS and other firms to change their Libor submissions purely as his own book would benefit. One could argue that his P&L also benefited UBS, so his thought process and self-justification may have been not entirely for his own personal benefit but also his firm.

While many an economist would say that self-interest is an entirely rational and proper act in a capitalist society, in this case the self-regulation of Libor submissions failed miserably. Clearly there was in-sufficient oversight of Libor submissions at many Banks and a lack of mechanisms for the BBA to verify the accuracy of submissions. Which for all the banks, asset managers, pension funds, hedge funds that were not part of the select Libor submission process, is a shocking example of insiders influencing a benchmark for their own benefit.

We know business ethics is now a common course on MBA programs, not surprising given some of the criminal indictments against a few alumni. Jeff Skilling of Enron, Rajat Gupta of McKinsey, the list is a surprising one.

However I think the lesson is that individuals and firms will always push self-interest too far beyond what society or law would regard as fair and legal and without sufficient policing and penalties to punish improper behaviour  we are left with the personal morals and ethics of a single individual, which too often are found wanting.

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