What banks didn’t learn from the Libor scandal

Wall Street Journal editor David Enrich met secretly at train stations and Burger Kings with the man at the center of a financial scandal that involved 18 of the world’s biggest banks and dozens of people across 11 countries and four continents. Enrich has now recounted the true tale in his book “The Spider Network — The Wild Story of a Math Genius, A Gang of Backstabbing Bankers and One of the Greatest Scams in Financial History.”

It’s the saga of the scandal involving Libor, or the London interbank offered rate, a standard that determines interest rates paid on trillions of dollars of financial products, including mortgages, credit cards, and car loans. Tom Hayes, a trader for both UBS and Citigroup, and the key player in the Libor scandal, went along with other traders, brokers, and their bosses with a scheme to manipulate Libor to benefit their trades. The scam, which began around 2006 and went on for several years, cost the banks and the public billions of dollars.

In a recent interview, Enrich, the Journal’s financial enterprise editor, discussed how he got Hayes to reveal his side of the story in those secret meetings, and how the banks may have not learned anything from the scandal:

Did writing the book make you think about the ethics of the banking industry or of any industry?

I’ve been covering the banking business for a long time so I wasn’t shocked to see that there was a lot of bad behavior in the industry, but I was surprised by the extent of it. It was duplicity of a very high order. What surprised me most and led me to think about how ethics works in banks and business is the way that culture affects decision-making and affects people’s actions. In this industry, the culture is to make as much money as quickly as possible at all costs, and no behavior is deemed too wild or inappropriate.What drew you to this scandal and to Tom Hayes?

I found his story captivating. Sources began painting a much different picture of Hayes than authorities, who said he was an aggressive trader, a bully, not careful about what he said. I gained unusual access to him; he was mildly autistic and incredibly socially awkward, happier eating a bucket of fried chicken and watching “Seinfeld” reruns than going to a Michelin-star restaurant. Now, he’s sitting alone in a maximum-security prison in London, and as far as I can tell, is the only banker in jail for crimes committed during the scandal.

Did the banks learn their lesson?

No. What banks learned was there’s a price for misconduct, but that price is actually pretty manageable. A bank CEO gets in trouble and has to pay a huge fine, but it’s not coming out of his pocket; it’s coming out of the shareholders’ pocket. Now, there’s more scrutiny on them so they need to be on relatively good behavior, but as memories of the financial crisis fade, I think the pendulum is going to swing back to “anything goes.”

What will surprise readers?

A lay person will be surprised by the corruption. But people who know the industry will be much more surprised by the human portrait. I think they may put themselves in Tom Hayes’ shoes and understand how he fell into this trap, and how the banking system, regulators, and prosecutors all played their own role in letting this happen. The number of complicit parties is much greater than they must have all realized.

Why did this scandal go on so long?

No one was paying any attention. There were red flags over the years that were missed or disregarded by regulators, who were more interested in fostering their jurisdictions as good places for banks to locate than in preventing misconduct. They wanted to encourage bankers to set up in New York, London, Hong Kong, Tokyo, and the way to do it wasn’t to make the banking industry a rigorous, heavily scrutinized environment but to make it a nice, friendly atmosphere to operate in. 

Enrich spoke at a campus talk sponsored by the MBA Finance track and the MIT Golub Center for Finance and Policy April 13.