Deutsche Bank Was Emphatic About Manipulating Libor
If you want proof that journalism is doomed, consider the Deutsche Bank Libor settlement. There was a time when I could make a good living just reading through Libor settlement documents, picking out funny ungrammatical quotes from e-mails and instant messages, block-quoting them, boldfacing the particularly ridiculous lines, and saying "come on!" or words to that effect after each quote. But now the Commodity Futures Trading Commission cuts out the middleman: It pulls out the funny quotes and puts them in a separate easy-to-use document, even bolding the silliest bits. The CFTC doesn't add "come on!" but it's implied. 1 What is left for me to do?
So I mean just go read that then. Compared with other Libor manipulators, Deutsche Bank is paying much the largest settlement, a total of about $2.5 billion to the U.S. Commodity Futures Trading Commission, the U.S. Department of Justice, the New York Department of Financial Services and the U.K. Financial Conduct Authority. The fines are so big in part because the New York DFS is newly involved, and I must say that DFS already looks like an old pro at Libor settlements; its announcement does an even better job of collecting and artfully boldfacing funny quotes than the CFTC's does. It also doesn't help that Deutsche Bank stonewalled investigators: The FCA fined Deutsche Bank almost as much for failing "to deal with the Authority in an open and cooperative way" as it did for actually manipulating Libor. 2
But I like to think that Deutsche faced the stiffest penalty because it was the most egregious abuser of CAPS LOCK:
London U.S. Dollar Trader 1: COULD WE PLS HAVE A LOW 6MTH FIX TODAY OLD BEAN?
New York U.S. Dollar Trader 2: LIBOR HIGHER TOMORROW?
U.S. Dollar LIBOR Submitter: shouldn't be
New York U.S. Dollar Trader 2: COME ON. WE ALWAYS NEED HIGHER LIBORS !!! HAHA
U.S. Dollar LIBOR Submitter: haha, i'll do my best fkcer
London MMD Manager: DON'T FORGET TO SET A HIGH FIX TODAY!
Barclays Senior Euro Swaps Trader: I told them they're going to set it at 2.13
London MMD Manager: goodness! that's going to hurt
Come on. 3
One thing that I sometimes think about Libor manipulation is that it created a sort of market -- a demented and sad market, sure, but a market. Some banks bet on higher Libors and some banks bet on lower Libors, and their bets moved Libor not in the direct simple way that bets usually move prices (you buy a thing, your buying pushes up the price, etc.), but in an indirect corrupt way in which the derivatives traders with the bets convinced the Libor submitters at their banks to just change Libor to suit their bets. You could think both that the Libor manipulators were doing bad immoral things, and that they caused no net damage: Libor more or less reflected supply and demand for Libor, which is not quite the same as reflecting supply and demand for short-term unsecured interbank lending. The supply and demand for short-term unsecured interbank lending was often, roughly, nil; Libor was "the rate at which banks don't lend to each other." But there was a ton of demand for a number to be plugged into floating-rate debt and interest-rate derivatives, with some banks wanting that number to be high and some wanting it to be low, and their respective lying to each other could have created an uneasy equilibrium in that market.
There's some suggestive evidence for that view in the Deutsche Bank quotes. From the CFTC (emphasis and alteration the CFTC's):
London MMD Manager: Subject: “$ LIBORS: 83, 89, 96 and 11
LOWER MATE LOWER !!
U.S. Dollar LIBOR Submitter: will see what i can do but it’ll be tough as the cash is pretty well bid
London MMD Manager: [Another U.S. Dollar Panel Bank] IS DOIN IT ON PURPOSE BECAUSE THEY HAVE THE EXACT OPPOSITE POSITION - ON WHICH THEY LOST 25MIO SO FAR - LETS TAKE THEM ON!!
U.S. Dollar LIBOR Submitter: ok, let's see if we can hurt them a little bit more then
And from the DFS (emphasis DFS's):
On July 16, 2009, a managing director and the Head of the London Money Market Derivatives desk discussed the strength and accuracy of the Euro LIBOR panel in comparison to the EURIBOR panel. The managing director asked, "u think the quality of the euro-libor panel is 4.5bps better than euribor?" The Head of the London Money Market Derivatives desk responded yes, and the managing director replied, "not so sure, i have a hard time to believe if so many banks say they can better than the market while they are a part of it." The Head of the London Money Market Derivatives desk stated, "theyre all lying anyway." The managing director replied, "there is a philosophical saying: ‘one greek says: "all greeks are lying" who do u trust?"
That's some heavy philosophy on the trading desk. Come on. 4
On the other hand there is also some evidence that this model is wrong, and that all, or at least most, of the banks worked together at the expense of the people not in the room. The Justice Department's settlement includes a guilty plea from DB Group Services (UK) Limited, a Deutsche Bank London subsidiary, and a deferred prosecution agreement with Deutsche Bank. The guilty plea is for wire fraud, for "engaging in a scheme to defraud counterparties to interest rate derivatives trades by secretly manipulating U.S. Dollar LIBOR contributions," while the deferred prosecution agreement is for antitrust violations for "rigging Yen LIBOR contributions with other banks." Fraud can be competitive, but antitrust suggests that they were all in it together.
And in fact there are many messages between Deutsche Bank manipulators and their buddies at other banks that suggest not a war of high-Libor banks against low-Libor banks, but rather a market that was easily manipulated by a plurality of banks acting together as a team. 5 Here's one from the Justice Department:
Trader K-1: nice fixing!!!
Trader K-1: why so low?
Trader-3: why not !
Trader K-1: who gets f*cked on that? I assume its all you short end guys ripping off an end user.
In a way it's a shame that the Libor settlements are mostly about collecting and typesetting embarrassing instant messages. The interesting question in Libor manipulation is whether it caused a net harm: Did Bank X push Libor up while Bank Y pushed it down in ways that mostly reflected and equilibrated underlying interest-rate market dynamics? Or did the banks mostly work together in a way that systematically enriched them as a group at the expense of their clients as a group?
This seems like a very hard question, but also one that is of curiously little interest to the regulators. Among those regulators, the U.K. FCA has the most detailed mechanism for determining penalties; it is explicitly supposed to consider "the amount of benefit gained or loss avoided." It completely shrugged off that determination for Deutsche Bank:
Deutsche Bank sought to manipulate LIBOR and EURIBOR submissions in order to improve the profitability of its trading positions. The Authority has not determined the amount of benefit gained.
Isn't that question -- for Deutsche Bank, and for the Libor-manipulating banks as a whole -- the important one? Shouldn't the Libor manipulating banks be assessed on the economic impact of their manipulation, and not just on who had the most bad quotes?
By the fines.
See paragraph 6.35 of its order: The penalty was 126 million pounds for "Deutsche Bank’s breaches of Principles 5 and 3," and 108 million pounds for breaching Principle 11. "Principle 5 requires firms to observe proper standards of market conduct," "Principle 3 requires firms to take reasonable care to organise and control their affairs responsibly and effectively, with adequate risk management systems," and "Principle 11 requires firms to deal with their regulators in an open and cooperative way, and to disclose to the appropriate regulator appropriately anything relating to the firm of which that regulator would reasonably expect notice."
All the boldface is the CFTC's, not mine or Deutsche Bank's.
One more, from the DOJ:
Manager-1: libors any requests?
Trader-1: HIGH FREES, LOW 1MUNF
Manager-1: what levels?
I love that he spells "three" as "free" and "month" as "munf." Also in all caps of course.
Also good is this quote from the FCA, which suggests that the banks would help their allies but not their enemies:
Manager B: “man, will you call [Panel Bank 2], please?”
External Trader A: “yes, and [Panel Bank 3]”
Manager B: “don’t tell them that it’s for me, because they hate me”
External Trader A: “of course not”
Manager B: “I am beeeeeeeeeegging you”
Or here is a dialogue in which a Deutsche Bank trader explains to an "unknown caller" how a UBS trader allegedly manipulated Libor:
Unknown Caller (UC): You are telling me that the [UBS] is manipulating right?
Trader-11: Yeah. I mean yesterday [the UBS trader] came to me, ok, and said “hello mate,” “hello,” “I’ve got a big reset, that was yesterday, and about 750, uh…75 million yen dv01, can you put it low?” …
Trader-11: And [the UBS trader] said, ‘can you put it low?’ I said, ‘yeah, ok.’ At the end…at the end of the day, [laughter] it went down [unintelligible] bps when I think cash is better bid.
The unknown caller is intrigued:
UC: That means [UBS] is asking 16 banks to…to…to ask you guys to put it high.
Trader-11: Maybe not…not 16 banks, but you know, if he knows eight banks, that’s enough.
But also worried:
UC: Is that...is that legal or illegal?
Trader-11: No, that’s illegal. No, that’s illegal… .
To contact the author on this story:
Matt Levine at firstname.lastname@example.org
To contact the editor on this story:
Zara Kessler at email@example.com