Law, Crime and History
Volume 11, issue 1 (2023): 82-109
© The Author(s) 2023
LIBOR RATE SCANDALS AND CASINO CAPITALISM: CRIMINAL FRAUD IN WORLDWIDE FINANCIAL MARKETS
New Jersey City University
Matthew G. Yeager
Kings University College at Western University
This paper examines Libor rate scandals as examples of global financial deviance resulting in worldwide economic victimization. The mechanics of the scandals are detailed, with theories presented highlighting the political-economic influences underlying their perpetration. An examination of a number of criminal and civil Libor cases are also provided showing that Libor bid-rigging was more than simple organizational or occupational deviance, but rather were deviant practices provided by structural opportunities. In reviewing the inadequate responses to these practices, the paper concludes by introducing arguments for a measure of public control and more aggressive state-regulation of global finance.
Keywords: Libor fraud, casino capitalism, global financial deviance, state regulation
First published daily in 1986, Libor (London Interbank Office Rate) was a global set of benchmark anticipatory interest rates for an array of financial products, including many adjustable rate home mortgages, business loans, and financial instruments, traded on global financial markets developed to help support the financialization of capitalism. Established daily to be the average rate it cost a group of the world’s largest panel banks to borrow from each other, the rate 'reflected' borrowing costs based on estimates established through the banks’ trade body, the British Bankers' Association (BBA).1 Although this made the process somewhat transparent and allowed for limited BBA governance, it was largely self-policed. As a result of deregulation of financial markets and outstanding notational values of at least $300 trillion, Libor became the most important global transactions reference rate.2 Dating back to at least 2007, financial agents and their institutions manipulated these rates to perpetrate fraud, harming millions of ordinary people.3
Over the past few decades, central banks emerged as dominant institutions of financialization and facilitating agents of capitalist accumulation.4 During the 2008 financial crisis as the Libor rate markedly increased, however, banks found it increasingly difficult to find credit.5 This resulted in increased structural opportunities to manipulate Libor through false submissions since rates were submitted as estimates, not actual transactions. By engaging in a series of fraudulent actions, numerous traders conspired to influence daily Libor rates, agreeing among themselves to submit rates that were either higher or lower than actual estimates.6 This dishonest and impervious method of rate fixing was based upon 'gentlemen’s agreements', open to widespread abuse and perpetrated with the effective collusion of financial institutions. Although not every trader, bank, or financial institution was involved, the scandal was widespread. Those involved, however, contributed to economic plunder resulting in massive victimization by artificially increasing mortgage and loan rates, and increasing unemployment, poverty, and social inequality worldwide. This paper, from a historical materialism perspective, explores the Libor bid-rigging deviance of traders and their organizations who took advantage of opportunities provided by political-economic structures of neoliberalism.
Capitalism is an economic system that contributes to, and at times, underlies the social production of fraud, with deviant markets replete with an evolutionary history of lying, cheating, and stealing.7 Different stages of capitalism manifest differing forms of deviance, requiring an understanding of the defining characteristics of each respective stage. In recent decades, with the financialization of capitalism, the financial sector has become prominent, altering surplus value and accumulation of capital dynamics8 and featuring a multitude of innovative forms of exploitative behaviours. Inquiry into one such behaviour, Libor fraud, is of critical importance because it is an example of contemporary, predatory, global deviance within the context of historical materialism.
This paper approaches this inquiry by detailing Libor fraud, exploring the theoretical perspectives that assist our understanding of it, and identifies incentives to commit the fraud. This paper then presents examples of structurally opportunistic Libor fraud from selected legal cases and details State responses. Finally, the paper discusses the fraud and concludes by offering solutions to reduce future potential recurrences. This approach is consistent with an earlier study, where neo-Marxist theory was utilized to understand how financial crimes, like those of Citibank, were facilitated by structural contradictions in capital markets, and protected by those who hold power and control the means of production.9 This article adds to this analytic approach by examining Libor fraud where global financialization is characterized by unregulated capital movement, speculation, and where finance has been separated from the 'real economy'. This creates a structural contradiction where finance capital has grown out of proportion to production, thus bringing pressures on and creating deviant opportunities for lenders, borrowers, and regulators to engage in fraudulent activity.
Deviance is an inevitable response of an economic system that fosters greed, egotistic, or individual tendencies, and competitiveness.10 The 'rational' act of Libor fraud was first established when a Thomson Reuters employee collected daily estimates on how much it cost British, European and American banks to borrow daily from other banks. The employee compiled them and calculated the average of remaining estimates of Libor eliminating the highest and lowest bid estimates and then reported it to the BBA, which was lax about policing estimate authenticity.11 For estimate derivation, the employee frequently relied on brokers’ who provided their own daily Libor movement estimates. Therefore, derivatives traders already had close broker relations who executed their trades, and influenced those brokers to convince bank employees to move Libor in a trader beneficial manner.
Where Libor would be established the next day was unknowable, so uncertainty was fixed by building a future sense based on incomplete and evolving information. Traders had banks’ balance sheets to wager and if they were making money no inquiries were made. Banks previously realized lending risk would be minimized if loans such as mortgages were not offered at a fixed rate, but at a rate that floated with global interest rates. As a result, Libor became that global rate standard, resulting in tens of trillions of dollars of Libor-calibrated mortgages and loans.12
Additionally, in theory, Libor rates were aggressively available and embedded into contracts with other parties who accepted them as pricing mechanisms in derivative contracts with panel banks in spite of interest conflicts. This broadening of the Libor market amplified manipulators’ expected profits with less effort than traditional manipulation. A derivative contract tied to Libor netted millions in profit for the manipulator but did not limit the manipulator who may have had several such contracts with different counterparts.
Libor, like all indices, had three main purposes: blueprinting, contracting, and price information. As a blueprint, indices are utilized to create more informed investment strategies, allowing diversification of an investor’s portfolio and lower governance and monitoring costs. This allows for more efficient coordination and construction of sophisticated investing instruments such as derivative contracts.13 However, although large, unregulated derivative deals are not fully an incentive to commit fraud, it may appear to some that they are attractive vehicles through which to commit fraud. The unregulated derivatives market, however, contributed to allowing banks to maximize profits or diminish profits of long-term contracts that were index tied.14 In fact, by the late-1980s, 'the rate-submission banks had also started to borrow heavily using Libor referenced contracts, creating an incentive to underreport funding costs.15
At the core of Libor fraud lied the self-regulating establishment of daily rates. Daily, a panel of contributing banks evaluated rates at which money was available in the interbank market. Banks were required to provide a submission based on that particular bank’s cost of borrowing unsecured cash for specific currencies and maturities by responding to the following question: 'At what rate would you borrow funds, were you to do so by asking for and then accepting interbank offers in a reasonable market size just prior to 11am?'16 The process involved BBA trimming submitted rates by removing the top and bottom twenty-five percent and then averaging the remainder to create the final published Libor rates, making them globally available around midday London time. This hypothetical and subjective mechanism was open to abuse and manipulation.17
At times, banks underestimated their refinancing costs and their liquidity situation in order not to reveal their fragility and lose their market reputation.18 Libor could be manipulated upwards, but when banks manipulated the rate downward, they would inform calculators they could borrow money at relatively inexpensive rates to make banks appear less risky and insulate themselves. Artificially low submissions came with an unprecedented period of disruption and provided banks with a degree of stability in an unstable time. Coöperatieve Centrale Raiffeisen-Boerenleen Bank B.A. (Rabobank) and Barclays, for example, also manipulated rates downward to confirm the image they were less affected by the credit crisis.
Price information available through indices also motivated Libor fraud. Prior to the introduction of indices, priced research was a costly and strenuous task in which individuals or institutions would each specifically partake in, many of which would use 'ex ante' rationale.19 Price information was based on how much they believed it would cost to borrow funds in the London Market. Financially stable institutions were offered preferred rates, as the likelihood of return was greater. If the institution was not stable, offered rates would rise in a fashion proportionate to perceived risk. Using Libor rates for determining pricing information for contributor banks acted as incentive for institutions to manipulate their submission to appear more financially stable than they truly were.20
Libor fraud was part of the continuing pattern of capitalist deviance made possible by structural incentivized arrangements. It was not the result of individual 'bad apples', but rather resulted from a systemic, macro-structural core of the financial sector, whose internal incentive system shaped individual bankers’ overly aggressive attitudes to risk-taking and risk avoidance.21 Although not everyone participated, the incentives for manipulation existed. The socioeconomic process of global financialization created structural opportunities for deceit and malfeasance to occur because ultimately, when there is something to gain, some people will engage in deviance to gain it.
Rogue traders initially engaged in high stakes gambling and those who did engage in Libor fraud had three main incentives for manipulation. First, banks had reputational incentives since bank submissions can be understood as information on financial health. If a bank reported increased submissions, it would suggest that it would expect to pay more to borrow money and thus was less financially stable. During the financial crisis this was of concern, considering the Lehman Brothers filing for bankruptcy (the largest filing in history) in 2008, which served as the unofficial marker of a deep global economic crisis and was a strong image protection incentive for other institutions.22 The second incentive for Libor manipulation was an institution’s derivatives positions and the increase of profit and/or minimization of loss from the bank’s relative trading positions.23 To understand this, attention must be given to indices for contracts (e.g., an interest rate swap). An interest rate swap is a contractual agreement between parties to exchange cash flows. The two types of swaps are a fixed ratepayer or a floating ratepayer. In either case, the floating ratepayer exchanges their cash flow at an interest rate referenced to a benchmark such as Libor. Thus, if an institutional derivatives trader had a contract in which the floating payer’s interest rate was referenced to Libor, come terminating date of said contract, the trader may have wished to influence Libor rate to either gain a larger profit or minimize their losses.24
The third incentive to manipulate Libor was demonstrated by the ‘rogue trader’ who for their own personal gain initiated this.25 Earlier acts had utilized manipulation to assist the financial institution as an entity. Traders took advantage of weak institutional internal controls and looked to increase profits for their own personal positions, as many of these traders were compensated based on the success of their trading books.26 These traders mostly acted collusively with other traders at similar institutions or interdealer brokers to tamper with Libor submissions of other panel banks indirectly.27 Contributor panel banks often deliberately intervened, which allowed for financial earnings increases at the counterparty or index user expense.28 The extent to which these individuals represented ‘rogue traders', acting only for personal benefit may be open to question, but is irrelevant since the same activities resulted in both individual and organizational benefit.
Libor fraud does not avail itself to seamless theoretical explanation. However, Marxist, neoliberalism and casino capitalism, and critical criminological theories provide underpinning assistance. These perspectives offer insights leading to a critical criminological analysis of processes that assist in understanding how structural opportunities lead to a Libor rate-rigging outcome. Consistent with a historical materialist view, this paper draws upon a variety of theories emphasizing the fundamental inability of the world in which realities, including stages of capitalist development, are constantly constructed and deconstructed.29 Viewed in this manner, Libor fraud was not something that was caused, but rather an outcome involving stages of capitalist interactions. This does not imply that perpetrators of the fraud were passive actors, paralyzed by the structures of capitalism. Deviance is co-constructed by human agents who are provided opportunities through political-economy developmental processes.
Despite the fact that Marxist theory does not account for the criminal behaviour of financial agents and/or their institutions, it does view deviance as a product of class- based society with working class exploitation patterns committed in the name of capitalism. Marx’s observations about 'primitive accumulation' in the form of colonialism, dispossession of small producers from historic commons property, slavery, and mass violence maintain relevancy.30 This is partly due to ’siphoning of public finance by debt service, leading to a major deduction from both wage and non-wage income deduction to the profit of financial capital’31 and is also consistent with accumulation by dispossession.32 Hence, from an historical materialistic view, industrial to neoliberal, financial capitalism conversion is the natural development of private market competition exacerbating capital accumulation.
Capitalism depends on private ownership of property and ‘the ability of owners of capital to consistently accumulate increasing levels of “surplus value.”’33 Therefore, the capitalist State, as an economic instrument, ultimately operates to serve the interests of the controlling classes. Consistent with this, structural contradictions theory identifies capitalist relations evident in the materialist interpretation of historical stages with their distinctive modes of production and dialectic antagonistic forces generated by class struggles of various periods.34 Exploitation and inequality result from the relationship between forces of production and relations of production so capitalist deviance starts with structural contradictions impeding on 'fundamental aspects of existing social relations’.35
Contradictions may create fertile ground leading to systemic fraud where complex financial instruments, including interest-rate swaps, forward rate agreements, basis swaps, overnight index swaps have one thing in common – their 'value' rise and fall with benchmark interest rate reference. Marx delineates how money-dealing capital emerged from merchant capital and developed into the capitalist credit machinery. Banks initially appeared as intermediary disposals of capital, but ultimately, became benefactors between the supplier and borrowers of funds. Profit assists in the appropriation of other people’s labour, and the capital with which the labour of others is set in motion and exploited consists of other people’s property. This is the money capitalists put at the disposal of the 'industrial capitalist and for which in turn, exploits him.’36 Funds accumulated by the financial sector deployed as its own capital are 'loanable capital'37 and may increase more rapidly than production. This credit expansion enables scale of production expansion resulting in the extraction of surplus value with banks as benefactors of expanded profit.
The concentration of incomes and the rise of inequality promote the growth of banking system funds. As the credit system develops, the number of bankers, moneylenders, financiers, grows along an expansion in the volume of interest-bearing paper.38 With this development, 'the 'public’s money' is placed at the disposal of this gang of dealers on a massive scale and so the brood of gamblers multiplies'.39 Chicanery and speculation produced by the credit and interest rate systems 'develop the motive for capitalist production, enrichment by the exploitation of others’ labour, into the purest and most colossal system of gambling and swindling'.40
The credit system and its structural system of gambling support fraudulent interest rate manipulation, extending Marxist notions of 'fictitious capital' where money is thrown into circulation without any equivalent in values – without genuine productive activity. '(A) considerable portion of banking capital is in the form of tradable claims, and this turns to the form of fictitious capital'.41 The notion of fictitious capital supports the ultimate capitalists’ objective to make money out of money, without bother of human labour, investment in machinery, or production itself, with multiple levels of fraud potentially contributing to its creation.
Libor fraud is consistent with this Marxist conceptualization. Interest rates, and their common risk to businesses, underpin a wide variety of economic instruments, vital to fictitious capital creation. Rates affect money supply and investment processes because they influence resource allocation and the rate of interest is ‘the reward for parting with liquidity for a special period of time’.42 Interest rates, although one of the foundational pillars of capitalism do not rest on firm foundations but are subject to the continual crises of capitalism — as evidenced by one such twentieth century crisis.
Neoliberalism and Casino Capitalism
Because Libor fraud was perpetrated in the neoliberalism era, it is important to define this economic theory, delineating it historically and sociologically from classical liberalism and reform liberalism. In essence, this economic theory can be traced to early 18th century classical liberalism, which was against government interventionism, opposing any regulation on the economy and promoted individual freedom as property ownership. Classical liberalism gained relevancy in England and the United States (US), but unforeseen consequences of the industrial revolution highlighted its weaknesses by the end of the 19th century.43 Wealth became concentrated in industrialists and financiers who used their influence to control government and obstruct social reform.
Political and economic changes then led to reform liberalism, which promoted government involvement in public education, health care and social welfare.44 Reform liberalism also resulted in national financial regulation systems, an international framework fixing exchange rates and tightly controlling capital movements.45 Governments adopted stringent financial regulation policies establishing a range of publicly-owned financial institutions in response to private market failures.
Reform liberalism remained predominant in the West following World War II, resulting in three decades of prosperity but by the late 1970s economic stagnation, mounting public debt and government spending designed to stimulate economic growth and full employment (Keynesian principles) lost their effectiveness. Following decades of loosening regulatory capitalist control and financial deregulation, neoliberalism developed with 'casino capitalism' analogizing the current unregulated international financial system to high-stakes gambling. Neoliberalism holds that the business cycle is determined mainly by the supply of money and by interest rates rather than government fiscal policy.46
Susan Strange identifies increased risk and uncertainty in economic markets between about 1965 and 1985 during substantial social and political disruptions in the global system, providing for an understanding of the why and how of contemporary capitalist economic structural transformation.47 Disruptions included financial markets operations innovations, increased market scope and shifts from commercial to investment banking, Asian investment markets and removal of government regulation. These disruptive trends resulted in further economic structural contradictions, providing deviant opportunities to avoid uncertainties and expand capital accumulation. The resulting structural uncertainties of the neoliberal global economy created free markets that promoted speculation and gambling, distracting business from fundamental productive purposes.48 States abdicated international economic management responsibility, favouring gambling at the expense of responsible regulatory management through a series of government decisions that nurtured and encouraged global monetary and finance economic disorder.49 The United States in 1972, for example, allowed the financial futures market to engage in futures or options trading on any currency’s exchange rates, government securities, interest rates, or stock exchange indexes.
Trading in stocks and shares of new financial innovations, such as interest rate swaps and options and future rate agreements were promoted and world economic instability was exacerbated by interest rate volatility, largely unregulated international banks, and less-developed (LDC) debt problems.50 Uncertainty substantially increased and new instruments developed in the markets exaggerated and perpetuated instability. Strange holds that the US did not act forcefully at the time and that ‘the roots of the world’s economic disorder are monetary and finance; the disorder has come not by accident but has in fact been nurtured and encouraged by a series of government decisions’.51 Although there may be strong counterarguments to casino capitalism, it provides an understanding of the transformative nature of capitalism in creating structural opportunities for deviant financial acts.
The economic policies of neoliberalism were embraced by major conservative political parties in the US and in Britain and helped create a new global economic order, rationalized through classic liberalism logic. This pairing organizes political and economic activity around the minimalist welfare-state, taxation, and business regulation programs; flexible labor markets and decentralized capital–labor relations unencumbered by strong unions and the absence of barriers to international capital mobility. The ‘market’ is sacred and is a ‘necessary condition for freedom in other aspects of life’ and is extended through a set of market-centric political orientations that structures the political contest, including limited regulatory and enforcement parameters guiding individual behaviour in global financial activities.52 Neoliberalism emphasizes individualism based on a supply and demand competitiveness which minimizes collectivism and the role of the state in society and the economy. It continues capitalist structure logic in economic, legal, and political institutions, money and capital flow, and other newly created financial instruments. In the process, it ferments new forms of individual and organizational predatory opportunity deviance. It enhances the growing power of financial institutions and banks, while simultaneously weakening State regulatory power. It facilitates and enhances private property maintenance and private capital accumulation with the State, as the protector of private property, supporting the notion that “freedom” based on private property is freedom for an elite class to continue its accumulation processes.53
The paucity of legal system fraud enforcement, and 'slap-on-the wrist' court dispositions contribute to the impunity of white-collar crime and have been well documented by critical criminologists.54 The capitalist State and its legal systems have never prioritized white-collar investigation and enforcement in general, and frauds in particular.55 Drawing on Marx's theory of capitalism, critical criminologists often specify macro-level theoretical approaches to explain crime etiology and punishment in accordance with surplus value theory.56 Much of this literature, although influenced by Marxist thought during the 1970’s, is however limited to explaining governmental and corporate crimes in terms of willful abuses of power and the criminalization process.57 More recent critical criminological perspectives have not focused on deviance causation. Specification of theoretical perspectives linking surplus value rates to crime or punishment, particularly white-collar crime and fraud is difficult.58
Application of a critical criminological approach, though, reconnects deviance by exploring deviant causation in a class-based society, not by simply elaborating on distinctions maintaining it as a separate reality, but viewing how it is developed through the historical materialism of predictable capitalist occurrence.59 The alienating and inauthentic dimensions of contemporary capitalism promote complex patterns of collaborative deviance between elite organizations and government, implicating neoliberal economic and State actors who actively coproduce deviance of the ruling class, corporations, and financial institutions.60Moreover, humans are subjects-in-process, continually recreating themselves, while simultaneously continually re-creating social economic and political contexts, including their deviant acts consistent with their images and roles within a deviant capitalist world order. This human re-creating, taken together with the intransigency of capitalist economic forces and political enabling institutions, provide recurring sequences of new market arrangements fermenting innovative deviant methods of cheating through exploitative transaction methods.61
The contemporary character of such deviance acts on the part of powerful actors occurs where commodification is the transformation into commodities of everything.62 In this manner, capitalism is a system of illusions, including the ultimate illusion of money and interest rates. Widespread benchmark interest rate rigging provides an example of such large-scale deviance locus from critical criminological analysis and is 'a site where the political economy of signs ceaselessly circulates across an imaginary computerized space where nothing is real.’63 Any deviant act, including Libor fraud, is simply the exercise of power to harm others. From this critical criminological lens, crime is harm resulting from investing energy in relations of power that involves pain, conflict, and injury.
Complex capitalist deviance is harmful behaviour and it has been examined in a variety of ways, but a selected case study approach utilized here provides contextual knowledge of Libor fraud, allowing for a broad analysis.64 Data was derived from a variety of criminal and civil court documentations, including motion papers, court 'statements of facts', administrative decision orders, U. S. Department of Justice non- prosecution decisions, and settlement orders (See Appendix). Secondary sources additionally provide rich sources of supplemental information as well. Included in the data analysis are collusive acts of named and un-named traders and their organizations perpetrated at the expense of counterparties who were dependent upon Libor rate integrity. The motives behind these misrepresentations varied over time, from benefitting derivatives trading positions, to avoiding the stigma of appearing weak relative to other banks during the financial crisis.65 In the complexity of noted fraudulent behavior, data also shows that those who engaged in Libor bid-rigging actors learned and developed practices structured by cultural discourses, making them seem natural and inevitable, as it shaped their agency.
The case study approach utilized a multi-step method,66 which first identified cases providing for an understanding of Libor fraud legal issues arising from case facts. A purposeful case sampling and related legal documentation was conducted, leading to data collection from these sources. A holistic case analysis was then accompanied by a thematic analysis to arrive at interpretations of each case.67 Selected Libor manipulation data is examined in the following categories: (a) internal manipulation within banks, (b) manipulation during the financial crisis, (c) internal conflicts of interest, (d) interbank collusion, and (e) use of interdealer brokers. The examination of this data allows for an exploration of specific fraudulent behavior and the creation of deviant markets by those who took advantage of opportunities provided by the structures of neoliberal finance capitalism.
Internal manipulation within banks
The earliest manipulative act referenced within court documents involved a UBS AG Libor submitter and trader. In 2002, a Yen submitter followed supervisory requests to manipulate Libor submission in order to help supervisor trading positions. The frequency of these acts did not become consistent until 2006 when UBS acquired another senior Yen trader who began manipulating Libor and continued until he left the institution in 2009.68 Between 2005 through 2006, this sort of internal request gained banking industry popularity as Rabobank, Deutsche Bank AG, the Royal Bank of Scotland (RBS), Lloyd’s Banking Group, and Barclays each began manipulating Libor submissions to favour trading positions. Citibank also utilized this technique starting in 2008.69
Requests for Libor rate changes came primarily from traders within the banks to manipulate submissions to strengthen their own banks’ positions. Specifically, at each institution, requests were made either for direct Libor submissions or for current Libor rate movement up or down depending upon favourable trading positions. Internal requests were conducted in various mediums including in-person requests, through online chats, email and Bloomberg terminals.70 UBS had the greatest number of individuals involved in specific manipulation of rates for trading positions, admitting that over three dozen traders and submitters from London, Zurich, and Tokyo made over 2,000 requests internally and externally.71
Manipulation during financial crisis
Banks’ public Libor submissions were used as perceived measures of financial health. If panel banks were reporting increased borrowing costs, it implied lenders were engaged in bank avoidance.72 Lenders avoided the bank due to liquidity problems as many banks were facing financial crisis onset in mid-to-late 2007. A higher Libor submission would mean higher borrowing costs, which would only be high if lenders felt a higher risk with lending to that bank.73 Bank management understood this and during the financial crisis certain managers suggested manipulating Libor submissions as a result.
Commodity Futures Trading Commission (CFTC) proceedings and Department of Justice documents conclusively indicate that three different banks manipulated their Libor submissions for reputational protection, including UBS, where requests came from management or senior management to manipulate Libor submissions.74 Each institution lowered its Libor submissions to be perceived as more financially stable when compared to other submissions of contributor panel banks.75 In UBS, for example, a manager suggested submissions 'err on the low side'.76
Internal conflicts of interest
Internal conflicts of interest faced by bank employees also served as important factors that led to Libor manipulation. For example, Deutsche Bank created one of the largest conflicts of interest through its 2006 collaboration of the pool trading desk and the money markets desk. This move ensured that cash traders, who were responsible for Libor submissions, sat next to derivatives traders. The profitability of derivatives trades tied to Libor influenced cash traders to manipulate submissions. The organizational goal was to align trading positions to increase bank profits. The 'Global Senior Manager' would sometimes sit at the desk amongst traders making favourable submission requests.77
Aside from these embedded conflicts of interest based on seating arrangements, multiple institutions also placed individuals in internal conflicts of interest. RBS, Deutsche Bank, and UBS each, at one time or another, empowered individuals who traded derivatives products to make Libor submissions. Considering many of these individuals were compensated based on trading book values, the incentive to manipulate submissions to favour trading positions was difficult to resist.78
Colluding with other individuals at similar contributor banks was also standard practice because Libor was calculated as an average of banks’ submissions. If a bank coordinated its submissions with another contributor panel bank, it could affect the rate more significantly than if it manipulated only its own submissions.79 Individuals responsible for contributor bank submissions understood this and worked to collude with other banks as a result. This collusion came in the form of one trader either instructing another trader to request a submission that favoured the first trader’s derivatives positions, or the traders of one contributor bank spoke with submitters of other contributor banks directly.80
This manipulative tactic was undertaken more at certain institutions than others, but often took the following form. Individual traders colluded with other traders, each working at different panel banks, with the purpose of manipulating their respective Libor submissions. Although in many of these cases, the banks remain unnamed at times— individual traders would contact the traders of other banks, each of whom would abide by requested Libor rate manipulations. The individual trader who made the original request would return the favour with compensation in other forms to the other traders who then often reciprocated the manipulation as compensation of a possible third trader.81 In some cases, institutions were also accused of organizational collusion with other panel banks to further manipulate Libor rates having knowledge and providing tacit support for these types of internal, fraudulent trader manipulations.82
Use of interdealer brokers
One of the primary instruments used by traders in their manipulative actions was through collusion with interdealer brokers. Interdealer brokers are used as an intermediary of buyers and sellers of specific securities that are usually illiquid and unable to be sold on the financial markets. Conducted on behalf of investment banks, they worked through offers from various banks and were consistently in communication with multiple banking institutions. Interdealer brokers communicate with numerous financial institutions to facilitate derivatives transactions or money markets, so they required an understanding of prevailing market conditions.83 For that reason, interdealer brokers provided input to panel banks for Libor submissions, as market condition is a consideration for determining submission. Distinctively during the financial crisis of 2008, when there was little to no interbank trades taking place, interdealer brokers’ Libor submission suggestions were particularly valuable.84
The extent of fraudulent behaviour among a variety of organizational entities was also extensive. ICAP, for example, a global firm of professional intermediaries that operates in the world's financial, energy and commodities markets, also worked alongside a ‘Senior Yen Derivatives Trader’ at UBS Securities Japan and worked later with another bank. Working with this trader led to ICAP complicity in the manipulative acts of this trader. The Senior Yen Derivatives Trader was one of the main clients of ICAP and made, over the course of the manipulation, more than 400 manipulative broker requests. ICAP brokers worked to manipulate ‘run thru’s’ they had been distributing to other panel banks in ways that favoured trading positions of the Senior Yen Trader. ICAP brokers also directly contacted other panel banks to suggest movements of their Libor submissions in the desired directions of that trader.85
The assistance of these brokers was particularly effective during the financial crisis of late 2007 through 2009, as interbank lending rapidly decreased. Considering there was very little interbank lending taking place, submitters became increasingly reliant on interdealer brokers for market information on which to base their Libor submissions. In fact, the CFTC order as to the ICAP stated that Bank-A’s submissions of one, three, and six-month Yen Libors were identical to Broker-1’s Suggestions 90% of the time in 2007 and 80% of the time in 2008. Considering the large portion of submissions that ICAP was quoted from that single bank, the total number of manipulated Libor submissions resulting from these broker actions presumably was monumental.86
Inadequate State Responses
Some Libor fraud cases were processed by legal systems, but initial State responses to allegations emphasized individual accountability. US and United Kingdom (UK) investigations first placed responsibility on traders who sought to influence Libor rate, managers who encouraged them, brokers who assisted the schemes, and rate-submitters themselves. Moreover, although it is not possible to accurately measure fraud extent, a modicum of prison sentences was meted out to low-level traders, a number of US and the UK financial institutions were fined, and several civil settlements were reached.
The UK’s Serious Fraud Office (SFO), for example, charged twelve people, beginning with the 2015 trial of Tom Hayes, accused of leading a global rate-rigging network of brokers and traders. Convicted of leading a conspiracy, Hayes was sentenced to eleven years in prison, serving half of it before being released in 2021.87 Thirteen traders were charged by SFO, but eight were acquitted in early 2016, four were found guilty, and one pleaded guilty. The SFO closed its investigation into the rigging of Libor in 2019.88 The first US convictions came in 2015 in New York (NY), when two former Rabobank employees were sentenced to one to two years in 2016, but these sentences were overturned in 2017.89 Despite the US Department of Justice (DOJ) charging of sixteen individuals with Libor fraud, many of these cases were either not referred to court or resulted in dropped charges or conviction reversals.90
US and European regulatory bodies actions resulted in multiple settlements, including bank fines of more than $9 billion for rigging Libor. Responses against organizations included a $453 million fine against Barclays and $100 million settlement in 2016 with forty-four American states over claims of Libor fraud.91 However, that sum represented only a fraction of the billions Barclays profited over the years by falsifying its Libor loan rates. Additionally, a 2018 case resulted in Citigroup agreeing to pay $100 million to settle charges brought by the NY Attorney General’s Office that its bankers manipulated Libor.92 Top executives from the banks, however, escaped personal responsibility.
Charges that financial institutions were rigging Libor were raised to the State as early as 2007 but were ignored. Quite to the contrary, the State was encouraging banks to submit low loan rate estimates following the 2007 financial crisis to hide crisis severity, thus protecting the financial elite, their organizations, and the global economic system.93 As far back as 2008 discussions of phasing Libor out or replacing it with new benchmark rates occurred when the Federal Reserve communicated its concerns over Libor manipulation to the Bank of England. Suggested reforms went unheeded and by 2012, Bank of England officials were denying allegations that the central bank encouraged some UK banks to underreport borrowing costs at the height of the 2008 crisis. Despite this, the UK government passed legislation in 2012 to strengthen financial regulation in general, and proposed Libor system reforms, when it created the Financial Conduct Authority (FCA). This new agency was provided centralized and expanded powers to investigate and regulate financial markets, including Libor. These changes to Libor were based on recommendations of a UK government report led by UK financier Martin Wheatley, who became the first FCA head. While many in the US argued that Libor had been totally discredited and should be discarded in favour of a new rate based on real transaction data, the Wheatley Report advocated more gradual changes.
In 2014 Libor was transferred from the BBA to a new entity, the Intercontinental Exchange Benchmark Administration, Ltd. (ICE). Harsher penalties for manipulation with a more transparent process for rate setting requiring Libor calculations anchored in more concrete transactions data would make the rate more difficult to manipulate. The Libor mechanism was kept for existing contracts and new contracts were allowed to use either Libor or a transaction-based benchmark rate until ongoing system reforms were completed. ICE also proposed a system where major banks would submit their cost of borrowing unsecured funds in ten currencies for fifteen maturities.94 However, during 2015, only about thirty percent of submissions for the key three-month U.S. dollar rate were based on actual transactions; the rest was guesswork, which allowed banks to engage in wishful thinking or follow the pack to avoid attracting attention.95 This initial reform was not the optimal formula for a reliable benchmark.
Additionally, a call for stricter rules on benchmark rates occurred in 2017 when the Bank of England’s working group concluded that SONIA (the Sterling Overnight Interbank Average Rate) was its preferred alternative. In that same year, a US Federal Reserve Committee proposed SOFR (Secured Overnight Financing Rate), a broad Treasury repurchase or repo rate to replace Libor. Rival rates were also promoted in Japan (TONAR) and Switzerland (SARON).96 In 2018 Fannie Mae, moreover, issued the market’s first-ever SOFR securities, based on actual overnight transactions where financial companies borrow cash using US Treasury securities, or government debt as collateral.97 In fact, the current neoliberalism stage is simply a 'political project aimed to restore capitalist class power in the aftermath of the economic and social crises of the 1970s'.98 Not surprisingly, State actions prior to Libor fraud proliferation, and after-the- fact enforcement actions merely contributed to the dominance of States’ alliance with global finance. Symbolic accountability foreclosed radical, systemic transformation and resulted only in penalties for a limited number of offending individuals and institutions, with Libor having continued as a benchmark for global lending rates up until the end of 2021.99
A group of private-market participants, the Alternative Reference Committee, convened by the Federal Reserve Board and the NY Fed, to transition from USD Libor to a more 'robust' reference rate was reconstituted in 2018 to coordinate Libor transition planning.100 Moreover, the FCA announced dates that panel bank submissions for all LIBOR settings will cease, after which representative Libor rates will no longer be available. Following December 31, 2021, there can now be no Libor-based contracts, with the US market mostly shifting to SOFR and by June 30, 2023, legacy contracts that reference the US dollar must be amended to a replacement rate.101
Some traders, banks, and financial institutions became involved in Libor scandal activity, while others did not. Rogue trading, though, has been a persistent feature of international financial markets over the past thirty years.102 The rush to internationalize, the conflict between rules and norms, and the failure of internal and external checks all partially contributed to Libor scandal deviant behavior. Important links between operational and market risk gaps in supervision may have also provided perpetrators’ time and place capabilities. Traders had to be sufficiently savvy to understand control weaknesses to overrule or ignore any internal controls. This was especially important given the complexity of daily frauds being perpetrated in collusion with others.
Libor fraud may have been perpetrated for individual personal financial gain or power, while simultaneously benefitting the banks and financial institutions based on unwritten rules of the organizations, which justified and normalized the deviation from formal rules, guidelines and laws.103 Advantages gained by perpetrators were based on legitimate incentive systems of the respectively involved banks and financial institutions. The fraud activities were not isolated, inadvertent or negligent events, but rather occurred repeatedly in line with organizational goals. Indeed, they may have been based on informal interpretations and unwritten action rules within organizations that normalized and justified the deviant practices.104 Critical political economic theorists argue that crime and deviance are related to the political-economic structure of society and are not events explainable by simple cause and effect relationships. Political economy is a part of a complex set of interdependencies, with individual, ethical, and other processual dimensions.105
Neoliberalism exacerbates capitalism’s assumption of the pursuit of economic gain through negotiated self-interest exchange as a fundamental right of each market participant.106 Profit-seeking and risk limitation are market driven normative behaviours and since capitalist institutions cannot ever fully contain uncertainty, new arrangements consistently offset outcomes on 'losers.' Libor interest rate falsification, for example, was promoted and facilitated by individuals and banks and financial institutions through specific and complex daily transactional acts in order to avoid structural uncertainty. Capitalism is often unstable, because at its core is risk taking and risk avoidance,107 the intent of Libor fraud perpetrators was to avoid this structurally created risk. The neoliberal capitalist legal order marks a restructuring of the economy of illegalities, which has been further developed with the rise of the financial sector.
Libor fraud illustrates the processes of how individual traders, the agents of the financial institutions, utilized structurally created mechanisms in a competitive closed system of benchmark interest rate setting to conduct fraud to gain edge on rivals and the broader market, resulting in predatory mass exploitation. Competition is central to capitalist economic theory, but 'free markets' hurt people, with the free-market process that Smith lauded satisfying mutual interests, also incentivizes scamming.108 Capitalist economic theory cannot separate the two — they must be inherent components of the same economic theory and as such, lead inevitably to differing manifestations of fraud.109
Mainstream criminologists argue that civil liability and criminal sanctions can be used as deterrents for fraudulent collusive behaviour. It is apparent, though, that Libor case sanctions were of limited value because such sanctions do not address structural incongruities. Despite a number of criminal cases, fines and civil settlements, most Libor frauds went unnoticed or resulted in modest reputational damage to their perpetrators.110 Libor fraud responses, in fact, concretize the axiom that within capitalism, there are two kinds of bourgeoisie legal systems. In the case of the former (e.g., traditional 'street' crimes), there are ordinary courts and punishments, while in the case of the latter (e.g., white collar crimes), administrative agencies and/or courts selectively apply accommodative sanctions that do nothing to alter the structural realities of pillage.111 The principles on which these systems are based are economic reflexes, reflecting and supporting existing economic arrangements.
Structural contradictions in the capital markets facilitated Libor financial crimes and are protected by those who held power and control the means of production.112 This especially applied to mortgage and financial frauds committed during the 2007-2010 recession for which no one was convicted. Indeed, the State intervened to bail out banks and major corporations on the verge of bankruptcy. In the case of Libor fraud, financial institutions and banks formed de facto cartels to manipulate rates to garner greater profits, generated higher commissions for traders, and avoided market liquidity rumors by submitting low interest rates during the beginning of the financial crisis — all with the structural collusion and passive permission of the State, which, following Bretton Woods, abdicated any true semblance of a preventative regulatory role.113 This is not to imply that Libor fraud was a microcosm of the financial system, but arguably was a predictable outcome of a broken structure when free market fundamentalism is in play.
The transformation of capitalism into a financialization system of exchange commodities was not met with a system of effective rule making and rule enforcement.114 Indeed, benchmark interest rates as an integral feature of markets were almost fully outside the scope of financial regulation. Some may argue that Libor fraud illustrates the need for regulatory capitalism to respond both on national and international levels, but much regulatory capitalism literature focuses solely on national-level regulation.115 The economic logic of capital, however, has never been inseparable from politics. The world’s major national, ruling classes continually, and increasingly, share a common interest in the stability of global capitalism.116
General motivation factors of such things as money, profit, narcissism, along with the ineffective reactive responses to Libor fraud may suggest that state-owned banks and financial institutions would provide more safety and stability. Balancing some form of state ownership and taking affirmative steps to strengthen the market through regulatory approaches may offer a more grounded approach. Regulatory theory assumes that government’s intervention and interaction improve the structure, conduct, and other affairs of corporate entities and, if implemented, may provide a modicum of control over the opportunistic structures of global neoliberalism. The approach can be a balanced one. Some form of state ownership and regulatory theory may be necessary because while politics and economics will never be separate, ultimately, the financial markets need to be accountable to someone.
Although it may be argued that regulatory approaches to financial compliance rules are ineffectual. there may have been several risk-based regulatory approaches that could have incorporated human behaviour (i.e., nudge strategies), that perhaps could have been more expeditiously and readily implemented to have limited Libor fraud damage. It is difficult to take the position that regulatory approaches, despite their weaknesses and vulnerabilities, are ineffectual, when the global financial system relies on them.
Although the Libor scandal brought about a degree of public oversight in which financial institutions and banks are no longer fully self-policed, state-corporate crime had long held that a 'love-hate relationship' exists between regulators and banks, one where regulators are often captured by banks.117 The fact that governments brought some cases, meted out some punishments, and were forced to enhance oversight, is consistent with this general conclusion and does not undermine it. Regulatory capitalism is often impotent in preventing and responding to financial sector deviance. Quite to the contrary, it may be argued that regulatory capitalism plays a collusive role in facilitating the occurrence and re-occurrence of global routinized crime (GRC).
Most importantly, the massive victimization produced by Libor fraud cannot be overlooked. When Libor fraud perpetrators priced Libor rates artificially high, billions were stolen from ordinary people, including new homeowners, holders of variable-rate mortgages, credit card holders, students with college loans, small business borrowers, and other consumers. In contrast, lowballing of Libor rates had equally devastating effects, costing bondholders, who were not parties to the scandal, billions in lower returns. Victims, including State and local governments, eliminated jobs, cut wages, and limited public services in order to balance budgets, thus increasing vulnerability to privatization. Libor frauds also adversely affected pension funds and retirees with fixed investments whose income was significantly lowered.
The financialization of capital poses challenges to the legitimacy of democratic rule.118 The manipulation of Libor rates produces powerful arguments for expropriation and reconstitution under public ownership and democratic control of the financial sector and more aggressive State regulation of global finance. As an initial step, financial institutions and banks can be brought under stricter public control. Admittedly, any proposed State control does not offer a complete solution so other strategies must include policies that 'revolve around the redistributions of social, political, and economic power as a plan for avoiding future securities trading catastrophes caused primarily by the concentrations of global capital'.119 Axiomatically, serious consideration regarding the restructuring of the global political economy must be undertaken to prevent the continual occurrence and re-occurrence of capitalist deviance by private financial institutions and banks. The institutions governing the world’s political economy entities must operate for the public welfare, not for the welfare of elites and their organizations.
Unregulated capital is driven by the systematic imperative of capital accumulation searching for markets and sources of surplus value whenever they may be found. The first axiom, therefore, for revolutionary change is that economics and politics are internally related. While formally separate they are in reality, 'distinct modes of the same totality'.120 Non-elite individuals possessing genuine power of self-determination must therefore develop and implement political economies. Conditions must be maximized by grassroots and working-class movements promoting praxis and resistance and eliminating privilege.
It may not be possible to stop investing in structures of oppression without at the same time exercising some manifestation of power. Keynes’s acceptance of the rationale of state intervention is well understood, but it is 'hard to imagine even the precarious Keynesian middle ground without the reconsidering the Marxian revolutionary impulse'.121 Replacement discourses are useful starts, but what must follow are replacement actions that include restitution. Libor fraud, like all GRC’s, results in massive victimization and illustrates the importance that justice must also include restitutive components. Libor fraud perpetrators who obtained rigged 'casino' profits must have their wealth expropriated and their resources seized and provided to victims.
Interest rate benchmarking within the neoliberal global political economy in many ways foreshadows new and continuing forms of GRC exploitative acts. Financial institutions and banks are simply too critically important to solely and fully remain in any private sector operating for private profit. A degree of public ownership of financial institutions and banks, like some utilities, may result in the public having greater direct democratic control of the market to prevent the rigging of interest rates for any private gain.
Libor fraud was predatory global deviance perpetrated by financial institutions and their actors within the context of historical materialism resulting from structurally created opportunities in the current neoliberal stage of capitalism. The disproportionate growth of finance, fostered by unfettered discretion on credit linked to the structural dynamics of accumulation, resulted in the increasing power of that sector and the decreasing power of any semblance of effective State regulation. Neoliberalism results in increasing complex financial structures that produced securitization of mortgages, collateral debt obligations, credit default swaps, and 'the obfuscation of risk through profit-rating agencies that stood to benefit by giving their approval to much of the business brought to them'.122 Interest rates and fictitious capital creation play prominent roles. Ironically, the distinct feature of Libor rates was that value was not determined by the free market, but through a daily election in which a selected sample of banks reported an interest rate which represented the rate at which it was ready to lend money. If every bank had announced honestly its preferred interest rate, there would have been no fraud, but banks were not so incentivized. In fact, methods of computing Libor provided banks incentives not to report their preferred interest rate, but rather to strategize as a function of expected reports of other banks and collude to avoid risk and attain advantages at others’ expense. Libor fraud was not solely the result of organizational and/or individual greed, but rather, a structural outcome constituted by a wide range of actors.
The credit system is pivotal to the expansion of accumulation and the structural dynamics of production and accumulation. Libor fraud was consistent with the structural development of capitalism because perpetrators operated in an unequal distribution of market power with relentless pressure to increase profits where potential benefits outweighed potential costs.123 Moreover, State regulation of finance sector activity is often significantly inhibited by the disproportionate influence of powerful interests in making and law enforcing and by the State’s need to continually foster capital accumulation. Simply stated, Libor fraud contributed to the conclusion that the economic and political stability of the world cannot be safely and solely entrusted to unregulated, national, and global capitalist markets.124
The massive global harm resulting from Libor fraud must not be overlooked. Any movement back to the Keynesian policies of 'better-managed capitalism' may not be possible given the globalized economy and entrenched power of capitalism’s financial oligarchy. Marx’s emphasis on class and inequality of wealth and power global, however, calls for proposals to replace, or at a minimum, restrict unfettered, minimally regulated capitalism with a more equitable model designed to improve the material conditions of the many. Any full transfer of financial sector ownership to governments, though, may not automatically guarantee the establishment of an egalitarian, democratically controlled economy. In fact, public financial institutions had a negative effect on the economy in, for example, India, China, and Pakistan.125 Proper legal designs to control State ownership, such as a minority-based governance structure, delineated roles and duties of government directors, statutory access to fiduciary claims against government directors, and disclosure rules, with some government ownership of the banking sector may be recommended.126 Perhaps a substantive state presence, as opposed to no state ownership at all, may improve performance and efficiency and may also reduce the likelihood of massive frauds such as Libor.127
The correct balance of limited public ownership and aggressive regulations may allow the public to participate in their economy and control the fruits of their labour more readily. Clearly, to avoid future plundering by the already rigged system of casino capitalism, the global economic system must be democratized to prioritize human rights over unmitigated private profit. Although, beyond the scope of this paper, this democratization may ultimately only be achieved in a socialist world where the common ideal is to guarantee support for basic needs and for more than responsible State ownership and regulation to free society. The only way of accomplishing this is to remove the 'gambling den' of the casino capitalist system and its structural contradictions that facilitated Libor fraud and replace it with a system that does not permit any rigging whatsoever and incentivizes legal compliance, holding those who do not comply fully accountable.
Managing capitalism is necessary because capitalism relies upon elements of uncertainty and risk and is a glorified gambling den, where dice throws decide the fate of millions and because its markets are not always self-correcting.128 Moreover, capitalism’s uncertainty implies a human psychological element guiding decisions made by capitalist economic agents, leading some perhaps to deal with uncertainty by estimating what other economic agents are likely to do. Since such estimates may be incorrect, calculative control of risk through fraud may result in this process.129
Libor Cases and Related Legal Documentation
Court Documents Source