Davies - Lying for money: how fraud makes the world go round

LYING FOR MONEY

Dan Davies is a former regulatory economist at the Bank of England and analyst for a number of investment banks. His career has seen him tackle all manner of financial crookedness, including the LIBOR and FX scandals, the collapse of Anglo Irish Bank and the Swiss Nazi gold scandal. He has written for the Financial Times and the New Yorker among other publications.

HOW LEGENDARY FRAUDS REVEAL THE WORKINGS OF THE WORLD

DAN DAVIES

First published in Great Britain in 2018 by

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Copyright Daniel Davies, 20181

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A CIP catalogue record for this book is available from the British Library.

eISBN 978 1 78125 967 2

To Tess

Guys, youve got to hear this, I said. I was sitting in front of my computer, with one eye on a screen of share prices and the other on a live stream of the House of Commons Treasury Select Committee hearings. As the Barclays share price took a graceful swan dive, I pulled the headphones out of the socket and turned up the volume. My colleagues left their terminals and came around to watch BBC Parliament with me. It didnt take long to realise what was happening. Weve got to get hold of Tom. We all agreed. Bobs getting murdered.

Bob Diamond, the swashbuckling chief executive of Barclays, had been called before the committee to explain exactly what his bank had been playing at in the LIBOR scandal. The day before his appearance, he had made things very much worse by seeming to accuse the Deputy Governor of the Bank of England of ordering him to fiddle an important benchmark, then walking back the accusation as soon as it was challenged. He was trying to turn on his legendary charm in front of a committee of angry MPs and it wasnt working.

On our trading floor, calls were coming in from all over the City. Investors needed to understand what was happening and whether the damage was repairable. Tom was our designated expert on Barclays Bank but he was asleep five time zones away in New York. Without waiting to ask him I called his clients, a pretty serious breach of stockbroking etiquette. But it had to be done. The world was changing. Later that day, as Tom tried to keep in touch between meetings, he and I would exchange some harsh words, some of the only ones between us in a long working friendship.

A couple of weeks later, the damage was done. The money was gone, Bob Diamond was out of his job and the market, as it always does, had moved on. Over a glass or two of beer, Tom and I were repairing our fences and asking ourselves the unavoidable question: how did we get it so wrong?

He was the markets top analyst of British banks. I was the teams regulation specialist. Both of us had been aware of the LIBOR affair and had written about it on several occasions over the previous months. But we had assumed that it would be the typical kind of regulatory risk for the banks a slap on the wrist, a few hundred million dollars of fines, no more than that.

The first puzzle was that, to start with, it looked like we were right. By the time it caught the attention of the mainstream media, the LIBOR scandal had reached what would usually be the end of the story the announcement on 27 June 2012 of a regulatory sanction. Barclays had admitted a set of facts, made undertakings not to do anything similar again, and agreed to pay a fine of 59.5m to the UKs FSA and $160m to the US Department of Justice. Thats how these things are usually dealt with. If anything, it was considered quite a tough penalty.

But the LIBOR case marked the beginning of a new process for the regulators. As well as publishing their judgement, they gave a long summary of the evidence and reasoning which led to their decision. In the case of the LIBOR fines,

Ahhh, the transcripts.

Trader C: The big day [has] arrived My NYK are screaming at me about an unchanged 3m libor. As always, any help wd be greatly appreciated. What do you think youll go for 3m?

Submitter: I am going 90 altho 91 is what I should be posting.

Trader C: [] when I retire and write a book about this business your name will be written in golden letters []. Submitter: I would prefer this [to] not be in any book!

Perhaps its unfair to judge the LIBOR conspirators on their chat records; few of the journalists who covered the story would like to see their own Twitter direct message history paraded in front of an angry public. Trading is, for all its bluster, basically a service industry, and there is no service industry anywhere in the world whose employees dont blow off steam by acting out or insulting the customers behind their backs. But traders tend to have more than the usual level of self-confidence, bordering on arrogance in much the same way that the USA borders on Canada. And in a general climate in which the public was both unhappy with the banking industry and unimpressed with casual banter about ostentatious displays of wealth, the LIBOR transcripts appeared crass beyond belief. Every single popular stereotype about traders was confirmed. An abstruse and technical set of regulatory breaches suddenly became a morality play, a story of swaggering villains who fixed the market as if it was a crooked horse race. The politicians could hardly have failed to get involved.

It is not a pleasant thing to see your industry subjected to criticism which is at once overheated, ill-informed and entirely justified. In 2012, the financial sector finally got the kind of enemies it deserved. The popular version of events might have been oversimplified and wrong in lots of technical detail, but in the broad sweep it was right. The nuanced and technical version of events which the specialists obsessed over might have been right on the detail, but it missed one utterly crucial point: a massive crime of dishonesty had taken place. There was a word for what had happened and that word was fraud. For a period of months, it seemed to me as if the more you knew about the LIBOR scandal, the less you understood it.

Thats how we got it so wrong. We were looking for incidental breaches of technical regulations, not systematic crime. And the thing is, thats normal. The nature of fraud is that it works outside your field of vision, subverting the normal checks and balances so that the world changes while the picture stays the same. People in financial markets have been missing the wood for the trees for as long as there have been markets. And bankers have ended up in worse swamps than I did.

It is common for young men in a hurry to make rash career decisions. Few of us, though, have screwed it up quite as badly as a London banker by the name of Gauger. In 1822 he was making a career in the City. A good chap from a good family, nevertheless promotion was arriving slowly in the house of Thomas, Jenkins & Co., and so Gauger decided to do what bankers have done for generations: jump a few rungs up the ladder by taking a higher-risk opportunity in an emerging market. The job in question was the role of General Manager of the Bank of Poyais, a new British colony in Central America being established by Sir Gregor MacGregor, the war hero and minor Scottish nobleman. Gauger paid a considerable sum of his familys money to purchase this commission. His trust seemed to have been reciprocated when he took delivery of a chest full of $5,000 worth of newly printed Poyais Dollars to transport to the colonys capital, the fair city of St Joseph.