This week’s 14-year prison sentence for Tom Hayes, the former UBS and Citigroup trader convicted of conspiracy to defraud, was a landmark moment in the cleanup of the City after the financial crisis.
Hayes’s offence – manipulating the London Inter-Bank Offered Rate, or Libor, to benefit his trading book and thus enlarge his bonus – played no role in any banking collapse. But his systematic attempts to cheat the financial system over a long period were part of a deeply rotten culture, as Mr Justice Cooke made clear in his sentencing remarks.
“The seriousness of this offence in the context of the Libor benchmark and banking is hard to overstate,” he said. “High standards of probity are to be expected of those who operate in the banking system, whether they are bankers involved in dealing with deposits and the lending of money, or traders in an investment banking context. What this case has shown is the absence of that integrity which ought to characterise banking.”
It is impossible to calculate the losses suffered by counterparties to Hayes’s trades, but Libor’s importance in the financial system is immense. Its influence on interest rates extends to mortgage rates affecting millions. A long prison sentence is appropriate, even if 14 years strikes many as too severe, given that an armed robber might receive less.
But the troubling aspect of the case is not the length of the sentence. It’s this: Hayes could only have rigged Libor for so long if his bosses either failed to supervise him properly or preferred to ignore his tactics. Why weren’t they also in the dock?
The judge argued, fairly, that inadequate supervision should not deflect from the seriousness of Hayes’s actions: “The fact that others were doing the same as you is no excuse, nor is the fact that your immediate managers saw the benefit of what you were doing and condoned it and embraced it, if not encouraged it.” Yet a cultural cleanup of the banking and financial system will look like a depressing hunt for scapegoats if accountability extends only to the (admittedly well-paid) troops on the trading floor.
This problem will not be eradicated easily, since the supervisors’ plea of “I didn’t know” is hard to counter. The regulatory answer is meant to be the new Senior Managers Regime, designed to ensure individual accountability by requiring that specific tasks and responsibilities are attached to named individuals. The regime, covering banks, brokers, investment firms and insurers, is intended to mean ignorance can no longer be an excuse. Senior individuals must show they were awake and took reasonable steps to prevent misbehaviour.
That’s the theory – and it is laudable. But we also want to see it work in practice and applied broadly. Already, one can hear grumbles from banks that their organisations are so complex, so big and, in some cases, so international that assigning responsibility to individuals is too hard. Regulators must resist such lobbying. If an institution is so complex that its management lines are blurred, it is probably too complex full stop; it should reorganise itself to fit the new regulatory approach.
The other moral from the Hayes case is that traders at investment banks should be brought within the scope of the new regime. It is bizarre that this hasn’t happened already. The principle should be quite simple: if, in the normal course of your duties, you can damage the integrity of the financial markets, you are a senior manager and thus covered by the accountability regime.
Cultural change is not easy, and will require more effort than this week’s welcome demonstration that serious cases of fraud on the trading floor can be prosecuted successfully.
Greece may survive this crisis, but trouble could erupt elsewhere
Greece’s prime minister, Alexis Tsipras, appears to be making progress on a new €86bn bailout deal with his eurozone partners: a Brussels spokeswoman said on Friday that a new memorandum of understanding between the country and its creditors was being drafted.
Much could still go wrong before Tsipras gets his money – and the compromises he will have to make may yet split his party and force a snap election. But even if Tsipras survives, the punitive nature of the deal he has struck with Germany and other creditors means Greece’s economy, and public finances, will remain under severe pressure for years to come.
And sadly, this is unlikely to be the last sovereign debt crisis the citizens of the eurozone will have to endure.
Greece wasn’t the only country that was able to take advantage of euro membership (and the markets’ implicit assumption that Germany would ultimately bail out its neighbours) to borrow beyond what might otherwise have been its means. Several other member countries, including Italy and Portugal, have debt burdens that could yet prove unmanageable in the coming years – particularly if inflation remains weak and economic growth fails to bounce back strongly.
And as Greece’s experience has graphically shown, there is no mechanism for adjustment built into the euro system – until a crisis erupts, by which time it is already too late.
Marchel Alexandrovich of City consultancy Jefferies pointed out in a recent note that even a modest disappointment on GDP growth (which boosts tax revenues) or inflation (which erodes the real value of debt) could leave the governments of Italy, Spain and even France deep in deficit.
“In the world of fiscal arithmetic, there is no room for disappointment, either in terms of real GDP growth, or inflation. Which is precisely why the European Central Bank will remain extremely vigilant to any overseas developments that may derail the European recovery,” he said.
With long-term global interest rates expected to drift upwards as the Federal Reserve tightens monetary policy – perhaps as soon as September – he believes the ECB could be forced to expand its €60bn-a-month quantitative easing programme to prevent the eruption of a new crisis, perhaps many hundreds of miles away from Athens.
Dearer dairy is the answer
When there are winners, there are losers, too. While the nation continues to flock to discount supermarkets such as Lidl, Aldi and Asda, spare a thought this weekend for Britain’s dairy farmers, who claim that those retailers’ milk price cuts are forcing them out of business.
Raise a cheer for Marks & Spencer and Waitrose, lauded by protesting farmers as the only major chains to pay a sustainable price not just for their milk but for cream and cheese, too.
Morrisons has been the focus of most of the farmers’ protests, for refusing to guarantee a price for milk that covers the cost of production. Now the Bradford-based store has agreed to meet farmers to look at whether there’s room for compromise.
The protests have left a sour taste, but the willingness to meet is raising hopes of a sweeter outcome for Britain’s milk producers – and perhaps a slightly more expensive pinta for the rest of us.
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