In February 2007 a British hedge fund called The Children’s Investment Fund Management (TCI) wrote to the board of the Dutch bank ABN Amro, in which it was an investor. TCI was known as an activist shareholder, unafraid to use its power to influence companies in which it had taken a stake. TCI demanded ABN Amro’s board “actively pursue the potential break-up, spin-off, sale or merger” of its company in order to realise the true value of its shares. The bank became the focus of a bidding war that was eventually won with a $93.8bn offer by a consortium led by the Royal Bank of Scotland (RBS). It was the last great splurge of the pre-crash era, the deal that ushered in the crisis: the following year, as the financial sector’s exuberance sputtered, the now dangerously overextended RBS wrote off £5.9bn in bad investments. A few months later it had to be rescued by the government at a cost to the taxpayer of £27bn.
Still, it wasn’t a bad deal for everyone. TCI made more than half a billion pounds in profit in the 2007-08 financial year, and during its ABN Amro campaign the hedge fund’s 19 partners shared more than £90m in remuneration. One of them, a promising young financier by the name of Rishi Sunak, left for California the following year.
The 2008 crash took a while to percolate through the UK economy: it was felt first as a wave of unemployment and rising debt, then through the longer and more vicious structural decay of austerity. An increasingly angry and cash-strapped public wanted to know who was to blame. Fred Goodwin and James Crosby, the CEOs of RBS and HBOS respectively, lost their knighthoods – a process known as degradation – but no banker was imprisoned in the UK for having caused the crisis. The then governor of the Bank of England, Mervyn King, who failed to uphold the Bank’s financial stability duties in the years before the crash or to do anything about the asset price bubble that made it so damaging, was rewarded with a seat in the Lords.
In 2022 Gordon Brown expressed regret at not having jailed any bankers at the time, but in the years that followed, some did go to prison – not for causing the crash, but for interfering with the Bank’s most jealously guarded power: the power to decide the price of money.
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Every morning for four decades, someone working at the “cash desk” of each of the biggest investment banks in London would send a message to a central authority – the British Bankers’ Association (BBA), at the time of the 2008 crisis – detailing how much they expected it would cost them to borrow money that day. From these 16 estimates, the BBA would then take the average of the middle eight, and that would be the day’s market rate for borrowing money – the London Interbank Offered Rate (Libor).
Libor was used to price hundreds of trillions of pounds’ worth of financial instruments, including mortgages and company loans; for this reason it was referred to as “the world’s most important number”. Variations of a hundredth of 1 per cent could cost a bank tens of millions. The system had been designed to prevent market manipulation – a very high or low quote would be removed from the figure – but it didn’t work.
For many years, it was common for traders to ask if the rate could be nudged in one direction or another. In 1991 the former Morgan Stanley trader Douglas Keenan reported that banks were increasing their profits by misreporting the amount it would cost them to borrow. At the trial in 2015 of one trader found guilty of rigging interest rates, the court was shown internal messages in which he told a colleague that if they wanted to adjust the key borrowing rate, they could “just give the cash desk a Mars bar and they’ll set wherever you want”.
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Yet, as the BBC economics correspondent Andy Verity writes in Rigged – a forensic account of the Libor scandal based on new recordings, data never shared with juries and years of his own diligent reporting on the issue – this changed during the financial crisis. The rate-rigging that had gone unrecognised (or at least unpunished) for many years became a desperate measure for survival, as banks fudged the numbers in order to make it seem as if they could still fund themselves cheaply from the market. Verity claims that when the Treasury and the Bank of England found out this was happening, they didn’t try to stop the fraud – they made it compulsory.
To do so had become necessary because the Bank of England, along with the Federal Reserve in the US and the European Central Bank, was itself manipulating the numbers in the grandest possible way. Interest rates were slashed to almost zero, and when this didn’t have the desired effect, the banks manipulated the market for national debt, buying up hundreds of billions of dollars’ worth of bonds issued by their own governments. This huge artificial demand pushed up the prices of those bonds, lowering the return (known as “yield”) on all that debt and making money even cheaper to borrow (a process known as quantitative easing).
The point of all this was to end the “credit crunch” which had imperilled the global financial system, but the financial sector remained too frightened to lend. In the US, Bear Stearns and Lehman Brothers had gone under; in the UK, Northern Rock and RBS had to be rescued by the state. Banks continued to worry, reasonably enough, that if they loaned hundreds of millions to another institution, it might not survive to repay the debt. So, even as the government worked to make money cheaper than ever, they continued to charge much higher rates for any money they actually did lend.
Peter Johnson – “PJ”, to his colleagues – the Libor submitter at Barclays, could see from his Bloomberg terminal that the actual prices banks were charging each other to borrow in the market were a great deal higher than the Libor rates that Barclays was posting each morning. By “lowballing” the rate, the bank was making its financial position appear a lot stronger than it really was.
When PJ posted more realistic rates, however, it appeared as if Barclays was in trouble, so his bosses, reportedly under pressure from the Treasury and the Bank of England, insisted he post numbers that were “within the pack”. He repeatedly told his managers he was “not going to lie” if questioned about the unrealistic Libor rates he was being ordered to post; they sympathised but insisted he proceed. From their offices 29 floors above PJ’s desk in Canary Wharf, executives assured the Bank and the Treasury they would lowball with the rest of the industry.
As Verity reports in detail, PJ became one of a number of people in the UK and US – mostly lower-level employees, the people who submitted the false rates, but never the managers who told them to do so – who were used as scapegoats for the Libor scandal, and the crash itself. In 2016, along with three Barclays traders, PJ was convicted and sentenced to four years in prison.
Well, you might say, if my boss asked me to manipulate an international financial benchmark, I’d refuse. But the lesson from Rigged is that it’s not that easy. Work confines us morally as well as physically, we seek compromises and attempt to change things from within, not realising that the people above us have made no such trade-off – and when the illusions are exposed, we are left with the bill.
Rigged
Andy Verity
The History Press, 348pp, £25
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[See also: How the super-rich live]
This article appears in the 14 Jun 2023 issue of the New Statesman, Over and Out