Why you should care when “Rain Man” takes the fall for the Multi-billion dollar LIBOR fraud

We live in a society in which the elites have maybe more power than they’ve ever had and a greater share of the wealth than they ever had in a very long time, but its not clear they have much in a sense of an obligation to society.

Michael Lewis  – Author: Liar’s Poker

Brief But Spectacular – the PBS Newshour

(by Daven Morrison) This week a financial insider involved in the LIBOR case was sentenced to 14 years in prison for illegal manipulation of the financial markets. For those who are not familiar with this case of fraud – you are not alone, of all the frauds I mention in lectures, LIBOR is the least well-known and the most confusing.

LIBOR is an acronym for London InterBank Offered Rate, which for non-interest rate wonks (which is likely close to 99% of the world) is the heart of interest rates around the world. This set number determines interest rates that tie to mortgages, commercial loans, inter-bank loans and loans between nations.  It is a number that is expected to be as trustworthy as the standard length of a meter, the temperature gauge of a thermometer or the weight of a kilogram. In other words if LIBOR is inaccurate than everything else that depends on LIBOR  is off – in other words the entire financial marketplace.

The amounts are stunning. By manipulating the rate, select banks were able to conceal their relative ill-health, as well as make unnatural profits to their advantage. This has ties to the average American. One estimate has noted roughly $6 billion in added interest rate payments US counties and municipalities (government) have had to pay, This is an additional 150% more than the $4 billion already paid[1]. Other estimates have put the cost of LIBOR in excess of $100 trillion. This problem is not new to myself and my coauthors. We were writing about this over two years ago in advance of the publication of A.B.C.s of Behavioral Forensics. In our text, LIBOR plays an important role in illustrating the problem of not only Bad Apples (individuals) but also Bad Crops (Industries). Our current thinking, since publishing “A.B.C.s,” is that LIBOR is an example of a Crazy Farmers’ Market (the whole system is rotten).

“This dwarfs by orders of magnitude any financial scam in the history of markets.[2]

Andrew Lo, MIT Professor of Finance

The individuals tied to LIBOR are elite. One does not graduate from a community college in the Midwest and then decide to get a job reporting and defining LIBOR. Therefore, to make an impact on the market, as was done around the crisis, and to move such large amounts of money is trusted to a select few. These are an informed and well-connected group of elite money managers in an insular profession. Therefore, to make these changes in a manner that is manipulative and intended for financial advantage likely requires some well coordinated tasks among special individuals.

(Because of my work experience as a Wall Street advisor) I know how much b-s  there is and I know how often people even in the financial world act like they know what is going on when they don’t’.

Michael Lewis  – Liar’s Poker

Brief But Spectacular – the PBS Newshour

 

Thomas Alexander William Hayes was one. Who was he? A recent article about his sentence was published this month in the Wall Street Journal

“Mr. Hayes, a mildly autistic mathematician whose quirky personality earned him the nickname “Rain Man” among colleagues…”[3]

As in the movie, Rain Man, it is likely that he did not work alone. He would be relatively shy, likely mathematically brilliant and also relatively easy to manipulate. Individuals on the autistic spectrum are at a particular risk of bullying. Biologically wired to not be comfortable with affect (emotion), it would be straightforward to stare down someone with autistic traits, and quite difficult for that person to stand up to someone who takes an aggressive stance with him or her.  But that does not mean an autistic man would not understand what was going on.

“I was very, very, very open, very transparent” about his tactics as a trader, Mr. Hayes said on July 10, his voice quavering. “All my managers knew. I had no reason to think that it was wrong.”[4]

This case is particularly revealing about how justice is dealt in the modern era. It has overtones of a fraternity that cheats at all opportunities and at all costs while presenting a face of angelic “best and brightest”. But when caught, the fraternity turns on its weakest member to take the fall. As Tom Cruise’s character did in the original move, the “Rain man” is merely a tool to be manipulated for easy money.

“Everyone’s talking about honesty and dishonesty and what did you think and what was your state of mind, but you know what? At the time I didn’t think about any of it. I didn’t think about whether this was right or wrong. And people go to work every day on the train or on their bike or however they get there, and they go to work and they do a job. And they don’t sit and think, ‘Is doing my job honest or dishonest?’ They do their job.”[5]

This breaks the mold of the common thinking about fraud. Legal definitions of fraud define it as one person[6] when we know that is not always the case. In the case of LIBOR it is very likely not true that it is one “bad apple”. We think it is very likely a bad crop (the entire industry), and potentially even a bad Farmer’s Market. If Mr. Hayes is the only one who goes to prison, this would be a miscarriage of justice.

According to the Senior Editor of A.B.C.s of Behavioral Forensics, Sridhar Ramamoorti, there is evidence of serious problems in this case. According to Dr. Ramamoorti: “Obviously, it appears there is no ‘ethical sensitivity’ at all, and in a highly competitive environment, and a ‘whatever it takes’ mentality, ethics must be sacrificed in order to succeed and win.  After all, by definition, ‘a hyperactive trader’, if he is a predatory fraudster, it is his job to commit fraud not to think like a philosopher and ponder over whether his actions are ‘right or wrong!’ “

Given the fact that LIBOR is the universal metric used to set standards for interest rates around the globe, and given the fact that it more than doubled the cost to the local and national government of the U.S. to service loans illegally rigged, LIBOR is not a fraudulent scam to forgive and forget. It is a sign that yet again the scale of fraud can scale to incredulous sums. Truly mind-boggling.

And, the ABC model bears critical relevance as it exposes that we are all in trouble when it is not one predatory fraudster but an entire industry (banking) that turns predatory with sinister dispassion.

“Burn baby, burn!

Enron Energy traders upon learning that wildfires would raise the cost of electricity to impoverishing rates to Californians and lead Enron to daily profits in the millions

Join us for more insights into behavioral forensics (behind fraud and similar white collar crimes) from the authors of A.B.C.s of Behavioral Forensics (Wiley, 2013): Sri Ramamoorti, Ph. D., Daven Morrison, M.D., and Joe Koletar, D.P.A., along with Vic Hartman, J.D. These distinguished experts come from the disciplines of psychology, medicine, accounting, law, and law enforcement to explain and prevent fraud. Because we are inspired to bring to light and address the fraud problems in today’s headlines, we encourage our readers to come back and revisit us regularly at BringingFreudtoFraud.com.