The Last Look…

For the second week in a row, we are writing about justice served around five years too late, following news that Tom Hayes and Carlo Palombo have had their convictions for Libor manipulation overturned.

As was the case with Mark Johnson, the former head of FX cash trading at HSBC, whose conviction for wire fraud was overturned in the US last week, Hayes and Palombo cannot get back the time spent in jail, but at least they can now lead something approaching a normal life without conviction-induced roadblocks. For the broader industry, yet again, we are asking, ‘why did it take so long and how were the guilty verdicts ever handed down?’

Over the past decade I have spent much more time studying the FX side of this issue than Libor, but there are similarities, and, naturally, differences. One thing that stood out to me was how so many caught up in the FX scandal, and who lost their jobs, were employed elsewhere. This tells me that the broader industry understood they were hard done by, and were mostly following what was widely seen as “normal practice”. The FX Global Code has redefined what is considered best practice, of course, but the fact remains, just about everyone caught up in the chatroom issue found employment elsewhere.

In the Libor world it seems very different, in that next to no-one involved was employed elsewhere. In some cases this could be due to their age, but the over-riding factor was the number of legal actions instigated against so-called perpetrators. Employing someone dismissed from a previous job (alongside many others) is one thing, taking on someone who has even had a brush with the legal system is another.

The similarities are there, however, not least how everyone seems to conveniently ignore the role of management. At P&L I often pointed out how those FX traders who were dismissed regularly had more engagement in chat rooms as one of their goals in their annual appraisal. Those goals are not set by the individual, they come from above. Equally, reading most reports around the Libor scandal, it is clear that orders were coming down from very senior levels to lowball submissions.

It is hard escaping the notion that senior managers worked their way down the ladder to find a suitable scapegoat that would save their jobs, but also satisfy the authorities desire for “heads”. I understand there is an element of the “Nuremberg defence” about this – and most rational people would understand that sharing customer information outside the business is wrong, as is delivering rates to a benchmark that you know are wrong – but there was no doubt the veiled threat of dismissal for failing to following orders, and, more pertinently, no real framework to protect those who refuse.

It is to be hoped that institutions and management in particular, will do more to protect individuals in the future, and not look at how far down the chain they can go to throw someone under the bus

More pertinently, as the judgement last week in the UK observed, the submissions for Libor were not necessarily wrong – they were an honest appraisal of the situation, something the original judge failed to observe when instructing the jury.

A couple of people have highlighted to me the cost of reform following the Libor scandal especially – most agree that in the absence of significant support in the top tier of players for existing solutions meant the FX Global Code was needed regardless – specifically the whole move away from the Ibors, however I don’t agree this was wasted money as they suggested.

Given the better market data that is available, and the push to rein in risk around capital levels in banks, reform of the benchmark process was going to be required at some stage, it just got impetus from the fines and lawsuits. There is a case to argue, as some did, that the replacements are just as open to abuse (albeit in a different form), but frankly that is a problem with all benchmarks or fixings – the perfect system does not exist.

I do not, therefore, think there is any value in trying to reverse course on replumbing the industry, rather lessons need to be learned about how to avoid similar mistakes. Without doubt there are better surveillance systems in place, and best practice guidelines are easily accessible, and as such, while the determined rule-breaker will succeed to a degree, the majority of poor behaviour will be picked up upon, and, importantly thanks to the best practice documents, the perpetrators will have no hiding place.

So the recovery from the decade of stress for Johnson, Hayes and Palombo (and others) is really a personal journey, largely because the industry has moved on. There will still be scandals, but the industry should do its best to mitigate them and accept them, sometimes as the price of innovation.

Hard-liners will see the overturned convictions as encouraging poor behaviour because the authorities will be reluctant to pursue similar actions in the future, but again I disagree, because what we have now are clear frameworks over what is, and is not, acceptable, so the prosecution teams can base their judgements on expert advice – something that was largely absent in the Libor and Johnson cases.

At the end of the day, the industry has had a much-needed shock to the system with the Libor and chatroom debacles, but it has responded to them well. The struggle has been on the part of individuals, three of whom have now been exonerated, albeit too late. It is to be hoped that institutions and management in particular, will do more to protect individuals in the future, and not look at how far down the chain they can go to throw someone under the bus.

colin@thefullfx.com