The Spider Network
The Libor rigging scandal told through the traders who ran it
Summary
Enrich, a Wall Street Journal reporter, tells the story of the LIBOR manipulation scandal through Tom Hayes, the UBS and Citigroup derivatives trader who was convicted in Britain and given a fourteen-year sentence, later reduced to eleven.
The mechanics are the substance. LIBOR was set daily by a panel of banks submitting estimates of what they would pay to borrow, and the submissions were not based on actual transactions. Traders with positions whose value depended on the rate asked their own banks' submitters, and brokers who dealt with several banks, to move the submissions by small amounts. Enrich documents that this was widespread, longstanding, discussed openly in recorded communications, and understood by supervisors, and that the practice of submitting rates below true borrowing costs during the crisis to conceal funding stress was a separate and arguably more serious offence involving senior management and, on some accounts, central bank knowledge.
His argument about Hayes is that he was a genuinely obsessive and socially unusual trader who did what the market's structure invited, who documented everything he did because he did not think it was wrong, and who was prosecuted while the institutions and senior figures who built and permitted the system were not.
Enrich had Hayes' cooperation and the book is sympathetic to him, which readers should weigh. The account of the benchmark's structural flaw, that a price of enormous systemic importance was set by unverified estimates from parties with positions in it, is the durable point.
Key takeaways 7
- LIBOR was set from unverified estimates submitted by banks with positions whose value depended on the result, which is a structural conflict rather than an abuse of a sound system.
- Manipulation was widespread, longstanding and discussed openly in recorded communications, which indicates participants did not believe they were doing anything prohibited.
- Interdealer brokers coordinated submissions across multiple banks, which is what turned individual requests into an effective cartel.
- Submitting rates below true borrowing costs during the crisis to conceal funding stress was a separate offence involving senior management rather than individual traders.
- Prosecution concentrated on individual traders while the institutions and supervisors who built and permitted the structure faced fines but not personal liability.
- A benchmark referenced by hundreds of trillions in contracts was set by a process with no transaction data behind it and no verification.
- Compliance functions at the banks involved reviewed the communications and did not identify the behaviour as a problem for years.
Who should read it
Investors and risk professionals interested in how benchmark design creates manipulation incentives and how individual liability was allocated afterward.
Where it sits in the reference 3
Who recommended it 1 · 1 direct
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