The intrigue surrounding the greatest financial fraud “of all time” could fill many a book and many a movie theatre. While the intrigue may make for riveting reading and viewing, the simple fact is this fraud comes with an exceptionally high cost for investors, consumers, and society as a whole.
How did the web of this manipulation grow so large? Where were the regulators and internal compliance people to snuff it out and bring some semblance of order to what can only be defined as “organized racketeering?”
While little focus has yet been shone on the regulators or those in compliance at the banks involved, we now begin to see some cracks in the Libor rigging foundation in terms of addressing the fact that senior executives were aware and involved in this manipulation.
Having spent many years on sales and trading desks on Wall Street, why am I so confident in stating that senior executives at these institutions were aware of this racket? Here are a list of reasons:
1. On every trading desk, the desk manager will “ALWAYS” inquire of each and every trader, “how are you making your money?” “With whom are you doing business?” “What do you need to grow your business?” The trading managers job is to “manage the traders.” Duh…
2. The trading managers ALWAYS have a seat on the trading desk and typically an office very closely nearby for off the desk meetings. As such the managers might be situated anywhere from 5 to 50 feet from those involved in the rigging. From there, the desk manager will report into the division head (Derivatives Head), if not the head of Fixed Income, both of whom would have offices on the trading floor. These individuals also will direct their focus and attention on those individuals and desks driving large revenue flows. They too will inquire the same questions as posed above. In very short order, the individual trader who generates hundreds of millions of dollars of revenue will be known by the most senior executives in the bank. These executives will not only know the individual but they will know the particulars of his business.
3. How else would the desk manager be aware of this manipulation? Their supervisory responsibilities mandate that they review the following: daily trade reports and periodic flagged electronic communication along the lines of e-mails and other forms (Bloomberg messages). To think that traders might simply utilize private cell phones or texting borders on the ridiculous. What would the managers see in the midst of reviewing trade reports? Trades that drive large profits which could then be questioned as to the nature of the transaction. What about the communications? Wall Street supervisory systems are set up to flag messages that have certain buzzwords — along the lines of those we have read in this scandal — that would set off bells and whistles that would make any firehouse proud.
Why didn’t any of these systems prevent the manipulation that clearly went on for years? Very simply, the senior executives charged with these responsibilities were overrun by the magic elixir of the VERY LARGE revenue streams connected to this multi-trillion market. These flows will incapacitate any sense of moral fiber that may otherwise be present in many of the executives involved. In very short order a sense of rationalization overwhelms any semblance of moral rectitude.
Will the regulators and prosecutors have the collective balls to connect these very simple dots and see that those arrested and prosecuted for these crimes go far beyond the traders on the desk and their pals at the inter-dealer brokers who were aiding and abetting the fraud?
Society and history will judge the regulators and prosecutors very harshly if they do not doggedly pursue the trail of manipulation and failed oversight to the very end of the line. Who knows? Perhaps in the process the prosecutors may learn that the trail might actually go through some revolving doors between Wall Street and Washington (and similar global outposts) and implicate some of the regulators themselves and the regulatory system at large.
I compel all those pursuing this trail to . . . navigate accordingly.
Sense on Cents/Libor Scandal
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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.
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