Ian Fraser: Stephen Hester, the Great Escape Artist

By Ian Fraser, a financial journalist who blogs at his web site and at qfinance. His Twitter is @ian_fraser.  [An edited version of this article was published on pages 34-35 of the Sunday Herald on February 10th, 2013].

It has been described as the biggest banking felony in history … yet no-one has been prosecuted for the Libor fixing scandal. Ian Fraser looks at the RBS sacrificial lambs.

During Royal Bank of Scotland’s IT meltdown last summer, chief executive Stephen Hester referred to the risk “that you turn over rocks and find new things [that you have to clean up].” Last Wednesday, nearly five years on from the £45.5 billion taxpayer funded rescue of the Edinburgh based lender, a vast rock was hoisted aloft by three regulators. What lurked underneath was not a pleasant sight.

In a deferred prosecution deal with the United States Department of Justice, Commodities Futures Trading Commission and the London-based Financial Services Authority, the bank admitted that between 2006 and 2010 staff based in London, Singapore, Tokyo and the US conspired to manipulate the global financial benchmark, the London Interbank Offered Rate (Libor) calculated in both Swiss Francs and Japanese Yen. They did this in order to make money for themselves and the bank at the expense of others. Libor is a global benchmark used to price some $300 trillion of contracts, ranging from mortgages to student loans to interest-rate swaps, calculated by averaging out submissions from up to 40 global banks

“This is the biggest scandal, the biggest anti-trust felony, in the history of the world, and it continued for years,” said Bill Black, associate professor of economics and law at the University of Missouri-Kansas City, and a world leading expert on financial crime. “Even after the investigation became public knowledge, the felony continued, and it continued with greater efforts being made to cover it up, with people being instructed to no longer to use instant messages and such like in order to make it harder for the regulators.

“What is most stunning is that these traders and submitters were willing to say these things, knowing that there was a verbatim record being kept. What does that tell you not just about the institution itself, but also about the FSA and the Serious Fraud Office? That is the one of the most important and revealing fact that comes out of this. The perception inside the bank was ‘we don’t need to worry about those clowns’.”

By pleading guilty to one count of wire fraud in its Japanese arm, RBS managed to avoid having its US operations shut down by the US Department of Justice. Over and above the plea, and a two-year deferred prosecution in the United States conditional on good behaviour in that jurisdiction, RBS is paying a fine of $612m (£390m) to three regulators. “We are holding RBS accountable for a stunning abuse of trust,” said assistant US attorney general Lanny Breuer. “Our message is clear: no financial institution is above the law.”

The penalties, handed out alongside revelations of hundreds of lurid, sexist and semi-literate ‘IMs’ or instant messages in which RBS traders and managers laughed as they displayed a casual disregard for the law, were unveiled at 1pm on Wednesday. They included one from Neil Danziger, a yen foreign exchange trader, who the bank dismissed in 2011, dated 15 September 2009. Danziger celebrated one successful falsification of the Libor rate by comparing his actions to those of a hooker pulling up and down her underwear. “im [sic] like a whores drawers,” he messaged.

Two other global banks have reached settlements along similar lines over Libor crimes. UBS was fined $1.5 billion (£950m) in December, and Barclays was fined $451m (£287m) in June 2012. A further 20 or so global banks are have yet to reach settlements. In the UK they are thought to include Lloyds Banking Group and HSBC.

RBS received a heftier fine that Barclays because the bank effectively bribed interdealer brokers, including RP Martin, to persuade other banks to also misrepresent their Libor borrowing costs. The Edinburgh-based bank did this via so-called ‘wash’ trades – matching buy and sell trades placed with the same counterparty for the same amount on the same day, which earn the broker a commission, but cancel each other out.

The regulatory documents reveal how Tom Hayes, a derivatives trader at UBS who has been characterised as the “Jesse James” of the global Libor rigging scandal, and RBS’s Danziger (who worked together at RBS in 2002-03) expedited corrupt payments to brokers “to increase [their] influence over the broker firms,” the FSA said. Together Hayes and Danziger gave £211,000 in bribes to brokers, one of which was RP Martin, as part of their push to manipulate global interest rates so their own rate-related bets would come up trumps, regulators said.

“Can you do me a favor,” one broker asked Danziger on September 19, 2008, just days after the Lehman Brothers collapse. “You’re not going to get paid any bro for this and we’ll send you lunch around for the whole desk.” As the broker outlined the trade, he said “Take it from UBS, give it back to UBS. He wants to pay some bro,” referring to fees. “Yeah, yeah,” Danziger replied. Later that day, the broker asked Danziger if he could “do another 100 yards” or 100 billion, increasing the size of the transaction. “Flat switch,” the broker said. “I know I’m pushing my luck.”

Another reason RBS’s fine was marginally bigger than Barclays’s was because it allowed the Libor rigging to continue for longer, and because it failed to stamp out the wrongdoing even after FSA launched its investigation. However on the plus side, unlike Barclays and UBS, RBS’s top management was not found to have low-balled the bank’s Libor numbers in order to deceive investors about their institution’s financial health in the build up to the global financial crisis.

Since being found out by regulators, RBS’s strategy has been to blame junior and middle-ranking people for the scandal, claiming that no one at the top of the bank knew it was going on. This is surprising, given that in September 2007, the Financial Times’s Gillian Tett highlighted concerns that Libor was “a bit of a fiction” [FT 25 September 2007], and that in April 2008 the British Bankers’ Association sent a memo to ‘panel’ banks including RBS asking them to check their Libor submission processes and ensure they were “submitting honest rates” after the Wall Street Journal’s Carrick Mollenkamp highlighted “growing suspicions about Libor’s veracity” [WSJ 16 April 2008]. And the financial rewards of rigging rates were, and are, immense. For example RBS’s rates, currencies and commodities group — the one where Libor rigging and other forms of market manipulation are believed to be commonplace — saw its income rise by 87% in the half year to June 2008, at a time when the overall income RBS Global Banking and Markets fell 10%, according to the bank’s former finance director Guy Whittaker.

Some RBS traders who have been dismissed for Libor rigging argue that they are being used as scapegoats, claiming that their superiors in in GBM in London ‘condoned collusion’. In court papers filed with the Singapore High Court last year, Tan Chi Min, RBS’s ex-head of Japanese Yen interest-rate trading , declared that Libor rigging was a well-known and common practice at the bank in 2006-11. He is suing RBS for wrongful dismissal, claiming the bank condoned the practice saying: “The defendant’s [RBS] consequent internal investigations were intended to create the impression that such conduct was the conduct not of the defendant itself, but the conduct of specific employees. Tan, also known as ‘Jimmy’ Tan, worked for RBS from August 2006 to November 2011 and is claiming £1 million in bonuses and 3.3 million RBS shares.

Hayes, a former RBS trader also known as ‘Rain Man’ as a result of his reported lack of social skills, “dwarfed them all” where Libor rigging was concerned, as he “spearheaded a massive effort” to manipulate benchmark rates, according to the CTFC. On leaving RBS, Hayes, who also made massive trading profits for each subsequent employer, jumped ship to Royal Bank of Canada, then to UBS, then to Citigroup. Hayes, 33, was seen as a valuable commodity in investment banking circles due to the strength of his strong network of contacts who could help him nudge the Libor rate up and down. His pay package more than doubled from $2m to $5m  when he moved from UBS to Citi.

However, Hayes was fired by Citi in September 2010 and in December 2012 he was arrested by the Serious Fraud Office and bailed without charge. Separately, he was charged with wire fraud, price-fixing and conspiracy by the US Department of Justice. According to an article in the Wall Street Journal, Hayes is now ‘singing like a canary’, and seeking to prove to the authorities that Libor rigging was condoned at the highest levels at his former employers. Jennifer Arcuri, a close friend of Hayes, said he is helping police with their inquiries. “He believes he’s innocent,” Arcuri told the WSJ. She added that trying to rig Libor “was common industry practice. It was like spanking children in the 1970s – it wasn’t bad.”

On Thursday RBS said it had thrown a couple of senior people overboard, confirming that global head of treasury markets, Scott Nygaard, and global head of short-term interest-rate trading, Kevin Liddy, had gone. Nygaard was a member of the Bank of England’s money markets liaison group, set up to advise the central bank on City developments. On Wednesday the bank said that Jezri Mohideen, its head of rates trading for Europe and Asia-Pacific, and Paul Walker, head of money-markets trading, had also been dismissed. It has not clarified how much of their bonuses will be clawed back, but the UK government is determined that the RBS’s fines will come out of the bonus pot, even of workers who had nothing to do with Libor rigging. So far, RBS said that eight of the 23 individuals who appear to have been implicated in the price-fixing scam have been dismissed. Eight left before the main disciplinary process started, and six have either been disciplined or going through a disciplinary process.

Black, author of ‘The Best Way to Rob a Bank is to Own One’ and a former senior US regulator with the Federal Home Loan Bank Board and the Office of Thrift Supervision, believes this is wholly inadequate. “They’re talking about keeping six of the people who were part of the largest anti-trust violation in history and they’re talking about internal discipline?! This is becoming more and more like a Eugène Ionesco play. It does look as though no-one – or at least no-one senior – Is going to be prosecuted for this. It’s all being presented as if there were just a few rogues who operated for between six and ten years of rogue-dom.”

Seemingly determined to protect Hester, chancellor George  Osborne was instrumental in persuading the bank to oust its head of investment banking, John Hourican, at the same time relieving him of Hourican of some £4m in unvested bonuses. In a memo to staff, Hourican, who oversaw the division in which Libor rigging occurred from October 2008, said he bore “some responsibility for the continuing actions of all our employees” but had no knowledge or involvement in Libor rigging.

Some are questioning how long Hester can remain in post. One problem for Hester is the bank’s seeming nonchalance about Libor rigging, even three years after Hester replaced Fred Goodwin as chief executive. The FSA said that, in March 2011, RBS misled the regulator, indicating that it had put proper systems and controls in place when it had not. FSA enforcement head Tracey McDermott said: “The FSA takes it very seriously when firms tell us that they have appropriate systems but do not.” On Wednesday, Hester said the RBS board had turned down his offer to resign. “The people who sit in judgement of us can dismiss us at any time if they feel that the bad bits get to be bigger than the good bits.”

The FSA and the Serious Fraud Office are still reported to be considering prosecutions. And a spokesman for Crown Office in Edinburgh told the Sunday Herald “COPFS continues to consider all information published or received as part of its investigation into the Scottish banking sector announced last year.”

Last Wednesday’s settlement is far from being the end of RBS’s Libor woes. The bank had its London offices raided European Union in October 2011 as part of an EU inquiry into the rigging of Libor, Euribor and other alleged market abuse. The results of the Brussels-led anti-trust probe are not due until 2014. In Canada, the competition bureau is investigating RBS for alleged collusion with other banks to manipulate a number of interest rates and has subpoenaed the bank for information, but RBS is refusing to cooperate, citing data privacy laws in the UK. In Switzerland, the competition commission is investigating whether traders at 12 financial institutions including RBS rigged Libor and Tibor to manipulate “market conditions regarding derivative products based on these reference rates”. There is also a potential £15 billion damages bill arising from civil actions from investors and others who lost out as a result of the Libor manipulation, some of which were buoyed by Wednesday’s settlement. Cenkos analyst Sandy Chen said that, assuming there was just 0.05% mispricing in interbank rates over four years – much less than the 0.4% that some class action lawsuits allege – RBS could face damages of £80bn. That would mean bankruptcy.

In one of the biggest cases, the City of Baltimore has filed a class action on behalf of entities and individuals who purchased financial instruments indexed to Libor in the United States between August 2007 and May 2010. The most valuable parts of the RBS deferred prosecution agreement for these plaintiffs are the underlying documents, including details of the instant messages, according to legal experts. But to gain access to those documents, the plaintiffs may have to survive a motion to dismiss by the defendants. In the Baltimore case, a hearing on RBS’s motion to dismiss will be heard on March 5 by US District Judge Naomi Reice Buchwald in Manhattan. William Carmody, a lawyer for the city of Baltimore, said last week he had not carefully studied RBS’s deferred prosecution agreement, but added that the statement of facts contained in it was remarkably detailed. “It’s incredibly helpful for our case,” he said.

There are further stones to turn over at RBS. One is an ongoing US Department of Justice and Federal Reserve inquiry into money laundering for rogue states by its US arm Citizens Financial, which some informed sources predict will lead to a bigger fine than Libor rigging. RBS said: “The Group is co-operating fully with these investigations. It is not possible to reliably measure what effect these investigations, any regulatory findings and any related developments may have on the Group, including the timing and amount of fines or settlements.”

Another scandal on the horizon for RBS involves the alleged manipulation of exchange rates between the Vietnamese Dong, Indonesian Rupiah and Malaysian Ringgit on the non-deliverable currency forwards (NDFs) market. These are derivatives that allow speculation in or hedging of emerging market currencies that cannot be traded directly or freely due to exchange controls. The effect of manipulation  on the performance of NDFs can be spectatular, with one trader likening it to the “financial equivalent of a cyclist on steroids.” The probe has already seen Ken Choy, a Singapore based director in RBS emerging markets foreign exchange trading unit, who was an active player in Singapore’s NDF market, put on leave, according to Bloomberg News.

Many people believe the UK government and UK authorities, together with those in the US, are being too soft on financial crimes, seeing mollycoddling miscreant financial institutions that it majority owns as more important than seeking justice. The fact that RBS’s share price rose on the day of its settlement suggests investors believe it got off lightly. Referring to the RBS deferred prosecution, Neil Barofsky, former special inspector-general of the Troubled Asset Relief Programme and author of Bailout, said: ‘It seems some banks are still too big to jail.”

In a an op-ed in the Financial Times last week, Barofsky added: “This forbearance will have potentially devastating long-term effects, as each settlement on favourable terms reinforces the perception that, for a select group of executives and institutions, crime pays. It is only rational. They know that they will get to keep all of the ill-gotten profits if they go undetected, and on the small chance that they’re caught, most probably only the shareholders will pay – and only a relatively minor fine at that. The lack of meaningful consequences for those committing these frauds encourages future fraudulent conduct. Ultimately, the financial crisis was a game of incentives gone wild, and the lack of accountability in the aftermath of the crisis has only reinforced those bad incentives.

“Breaking those incentives requires ditching the ‘Geithner doctrine’, which has led to the banks becoming even larger and more systemically significant than they were before the crisis … To reclaim our system of justice, the global threat posed by the failure of any of our largest financial institutions must be neutralised once and for all. They must be reduced in size, their safety nets must be dramatically constricted and their capital requirements enhanced far beyond the current standards. Then, and only then, can the same set of rules apply to all.”

Black said: ‘Why does RBS exist? The bank is too big to prosecute, it’s too big to run honestly, it creates enormous distortions, it’s created catastrophic harm to the British people. It should be shrunk and divided up into vastly more efficient entities. But none of that seems to be on the table. Instead we get inadequate solutions like the ‘electric ring-fence’ to separate retail and investment banking. In essence, RBS holds the British economy and the British people hostage.’

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  1. Norman

    I have one question to ask, aside from bringing these frauds to the publocs attention, just what is accomplished? The fines are a joke, nobody goes to jail that should be there, and the worst part of it, the beat goes on.

  2. Susan the other

    A while back there was a blurb about how it wouldn’t devastate the bottom line of any one banking institution if all the banks just got together and cancelled out each other’s debt. That this paper accounting would also solve much of the complexity involved in being too big. At which point there would be a lot of unemployed banksters because the necessity for their services would be written off, blah blah. That would be a good place to start. And then shut them all down and start over. Until we do, nobody in their right mind is going to want to deal with them for anything; not for saving, not for borrowing. Not for nothin’.

    1. jake chase

      I would be more upset about this LIBOR rigging if I understood what real markets are affected by LIBOR and how. If bank A is screwing bank B on a CDS they deserve one another.

      Does anyone understand why this chicanery matters?

      1. OpenThePodBayDoorHAL

        Just affects your mortgage payment, your credit card interest payments, your bank account interest rates, the rates all the companies you do business with pay, and rates all of the state and Federal governments and municipalities pay. Just them.

  3. damian


    “Barofsky added: “This forbearance will have potentially devastating long-term effects, as each settlement on favourable terms reinforces the perception that, for a select group of executives and institutions, crime pays.”

    Yves – you should sponsor a Naked Capital Symposium at Skirball – Neal is a Law Professor there as you know

    subject: how the light touch (no touch) DoJ under Holder/Breuer is creating Fragility in the financial system

    for the proposition: Neal Barofsky and Nassim Nicholas Taleb

    against the proposition: Nicholas Gregory Mankiw & Robert Glenn Hubbard Hubbard

    both Mankiw & Hubbard believe stealing and fraud should be the capitalist standard and good for the system – so the debate will smoke out the issue once and for all – should crime pay?

    Taleb’s book as applied to NO criminal sanctions for Fraud provides the theory and critical path for the creation of ever more danger to the system

    Both Taleb and a former prosecutor like Barofsky would be an amazing pairing

    possible addition of Matt Taibbi for chapter and verse on particular incidents and color for the matrix of crime – and obviously you as well!

    the tickets would immediately sell out – just make sure i get two!

    1. Mark P.

      Tiresome as its repetition may become, this can’t be said enough. Because this is really where we’re at, and everybody’s squawkings and ventings of outrage assume a social order now long-gone.

  4. ebear

    I don’t see what all the fuss is about. Governments worldwide, through their central banks, have been manipulating the rate at which they borrow for decades. The banks were simply following their example.

    Fact is, when governments “set” rates at the headwaters, then (manipulation aside) anything happening downstream that poses as price discovery is itself a fraud.

  5. Schofield

    Institutionalizing Career Criminality amounts to the same thing as injecting your country with a Black Death pathogen.

    It is exceedingly hard for dogma constipated Neo-Liberals to find the imagination to understand this since in their minds the market automatically self-regulates and self-polices itself. This is of course utopian childishness based on a failure to understand that nature has chosen to make us ambivalent creatures for survival purposes. For some purposes individualism suffices but the ever-increasing complexity of the Division of Labour requires collectivism and to continue to pretend that individualism still suffices allows free-riding to insinuate itself.

  6. Synopticist

    “In essence, RBS holds the British economy and the British people hostage.”

    This is it. We sunk so much money into it, theres a percieved national interest in keeping it going. Plus the Tory party is basically owned by the City (as opposed to the last govt, which was only half-owned by them), so theres no chance of them lifting a finger.

    I’ve repeated this on many occasions, but the big thing is, we’re suffering from Outrage Fatigue when it comes to the banks. Most people already hate them so much, and are so cynical about their activities, that newer scandals just act like water off a duck’s back.
    By contrast, for their dwindling band of supporters on the right the bankers are always go-getting entrepeneurial heroes who must be valued and protected.

    So don’t expect any change from the UK, at least not until this govt goes.

    1. TC

      A 1% financial transaction sales tax appears an idea whose time has come in the U.K., no? How can the City dare balk?

  7. Mary Kaplan

    How does this stuff continue to go on in the banking and financial industry? Are all those people morally bankrupt? To laugh as they are committing fraud is unbelievable to me. While less governmental involvement seems to be a goal of many of us, this highlights that governmental regulations are necessary and even when in place can be ignored.

    1. Lambert Strether

      Worse, these very wealthy people are going to pass all their values on to their kids, who will go to all the right schools, and vomit together at all the right fraternties.

      Rinse, repeat.

    2. Carla

      “Are all those people morally bankrupt?”

      Uhm, yes. But even more shockingly, they apparently have never heard of the French Revolution or the guillotine.

      Someone, sometime, somewhere, will have to teach them.

  8. Doug Terpstra

    According to Barofsky “Breaking those incentives [gone wild] requires ditching the ‘Geithner doctrine’”

    But it’s working so well. Timothy Geithner: “The only real mistake I can think of is that there were times when we were unnecessarily unsure of ourselves. We should have just realized at the time how right each of our decisions was.”

    My only mistake was thinking I might’ve made one. And humility is my only flaw.

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