Remember Libor? The men who rigged it are counting on you not to, after the collapse last week of most of the remaining criminal cases arising from an epic financial fraud that was all too real.
British courts overturned the convictions of six men across two cases for charges related to rigging the London Interbank Offered Rate, or Libor, during the 2008 financial panic. Libor at the time was a benchmark interest rate set by polling more than a dozen global banks once a day. It underpins hundreds of trillions of dollars in contracts. In a series of cases starting in 2012, prosecutors on both sides of the Atlantic claimed employees at several banks had tried to juke those daily submissions. They were not wrong.
In the case of former Barclays traders Philippe Moryoussef, Jay Merchant, Colin Bermingham, Jonathan Mathew and Alex Pabon, the U.K. Court of Appeal ruled the jury instructions at trial were defective. The conviction of five men who submitted false numbers to a global benchmark was undone by the wording of a judge’s charge, not by anything that exonerated their conduct. Juries had convicted on the evidence; a defective instruction sheet set the traders free. Britain’s Serious Fraud Office declined to contest their appeal, after its earlier case against two other bankers on similar charges was overturned on appeal for the same reason. A prosecution that folds at the first procedural setback tells you about the prosecutors, not the crime.
Separately, the same court quashed the conviction of Christian Bittar. The former Deutsche Bank trader was convicted of manipulating the Euro Interbank Offered Rate, Libor’s continental cousin. Mr. Bittar had pleaded guilty, and that plea — a man telling the court under oath that he fiddled the rate at which European banks lend to one another — has not been withdrawn, nor has any court found it false. His successful appeal turned on prosecutors misinterpreting the law, so he pleaded guilty to a crime that didn’t exist. That is a drafting failure at the crown, not an acquittal of the trader.
For those keeping score at home, this means that of the 19 or so traders convicted in Libor-related cases, only one conviction hasn’t (yet) been erased. In America, one prosecution case melted on appeal due to violations of the Fifth Amendment rights of the accused against self-incrimination. Another case fell apart when appellate judges on the Second Circuit Court of Appeals ruled there was no evidence their Libor submissions had been false or fraudulent. An appeal won because the government never proved its case is not a finding that the benchmark was clean. It is a finding that the prosecution was incompetent.
That leaves one case still outstanding. Peter Johnson, formerly of Barclays, pleaded guilty in Britain for fear that mounting a defense would bankrupt him. He has filed an appeal now, too, and stands an excellent chance of joining the parade of the unpunished. A man who admits under oath that he manipulated the price at which banks lend to each other has told the public what it needs to know. That he now regrets the bargain does not unsay it.
These columns saw all of this coming — in the other direction. So did the banks and their lawyers. As soon as the ruckus over Libor rigging started in 2012, it was obvious they would fight every case to exhaustion, that the courts would sooner or later find a way to let the traders off, and that the politicians who had just bailed the industry out would not lift a finger to hold it to account. The financial press was told it had fallen for the pat story about “greedy bankers.” It had the story right. Greedy bankers is exactly the story, and the daily submissions are the receipts.
Yet the record will not stay buried. Consider what the exonerators put forward as their exoneration. It emerged that in the crisis Barclays had told the New York Federal Reserve Bank its Libor quote was more a guess than a reality. The New York Fed had winked and nodded. That is not the conduct of an institution that thinks nothing criminal is happening. It is the conduct of a supervisor so incurious that a bank felt free to announce, in writing, to its own regulator, that it was sending a fabricated number into a rate underpinning the world’s contracts — and to expect a shrug. If anything, it indicts the supervision, not the submission.
At the same time, it emerged that in the depth of the crisis an official at the Bank of England had hinted to Barclays that it might be prudent to fudge its Libor submissions. The concern apparently was that Libor readings that were perceived to be too high could stoke market worries about the stability of the banks. A central bank official quietly urging a bank to shade its quote is an argument that the rot reached higher than the trading floor. It is not an argument that the trader who shaded it was innocent of shading it. The correct response to a supervisor who waves through fraud is to investigate the supervisor and keep prosecuting the fraud — not to let the fraud walk because the supervisor waved.
Libor fraud was billed by prosecutors, politicians and much of the press as the financial crime of the century. It was. What these cases have become is a demolition of enforcement, not of the charge — a whitewash for the ages. Nineteen-odd men were convicted of bending a rate that prices mortgages, student loans and sovereign debt in dozens of countries, and what is left standing after the appeals is one conviction. That is a case study in how financial fraud gets diluted out of existence by prosecutors who overreach on theory instead of proving submissions were false, by regulators who waved the conduct through in real time, and by courts that correctly throw out cases built on defective instructions and then let everyone pretend the underlying conduct was a mirage. An industry with enough money and enough lawyers can outlast the state. The public pays — in bailouts, in fines, in lost trust — while the men who rigged the rate walk free.
Something to remember when the next crisis comes: the benchmark was only as honest as the men filling it out, most of them were not honest, and the system that was supposed to punish them ran out of nerve. When the next rate is being polled in the next panic, the traders on the other end of the line will have read the same appeals judgments we all did.
