Barometer of Fear: An Insider’s Account of Rogue Trading and the Greatest Banking Scandal in History was first published in 2017 by Zed Books Ltd, The Foundry, 17 Oval Way, London SE11 5RR, UK
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Copyright © Alexis Stenfors 2017
The right of Alexis Stenfors to be identified as the author of this work have been asserted by him in accordance with the Copyright, Designs and Patents Act, 1988
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ISBN 978-1-78360-928-4 pb
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CONTENTS
Acknowledgements
Abbreviations
Introduction: ‘It’s a misunderstanding’
1. The barometer of fear
2. ‘Why did you do it?’
3. Superheroes and beauty pageants
4. The LIBOR illusion
5. The value of secrets
6. Conventions and conspiracies
7. Rotten apples
8. The perfect storm
Glossary
Notes
Bibliography
Index
ACKNOWLEDGEMENTS
Maria, I cannot thank you enough for your endless support, encouragement and optimism with this project ever since I scribbled down those first few sentences in February 2009. ‘Skriv boken!’ were two words that meant a lot to me during the writing process. It has been a rocky ride and, yes, I wish I had chosen a somewhat different path. Rebecca and Magdalena, thank you for being such wonderful daughters. I am so happy to have been given the opportunity to be a more present father since you were eight and six.
Ian Ryan, many thanks for getting me into the habit of taking mental and written notes of important events, and for enlightening me about the difference between law and morality. Ken Barlow, thank you for motivating me to explain things I take for granted. You have been a great editor and listener throughout this project. Judith Forshaw, thank you for the copyediting and your love of language.
I am also grateful to many of you on the trading floors across the world, whether still physically there or in memory alone.
ABBREVIATIONS
ACI
Association Cambiste Internationale
BBA
British Bankers’ Association
BBAIRS
BBA Interest Rate Settlement
BIS
Bank for International Settlements
CDO
collateralised debt obligation
CDOR
Canadian Dollar Offered Rate
CDS
credit default swap
CEO
chief executive officer
CIA
Central Intelligence Agency
CIBOR
Copenhagen Interbank Offered Rate
CME
Chicago Mercantile Exchange
CPI
Consumer Price Index
CRS
cross-currency basis swap
ECB
European Central Bank
ERM
Exchange Rate Mechanism
EU
European Union
EURIBOR
Euro Interbank Offered Rate
FBI
Federal Bureau of Investigation
FCA
Financial Conduct Authority
FIBOR
Frankfurt Interbank Offered Rate
FRA
forward rate agreement
FSA
Financial Services Authority
FX
foreign exchange
GDP
gross domestic product
HELIBOR
Helsinki Interbank Offered Rate
ICMA
International Capital Market Association
IMM
International Monetary Market
IRS
interest rate swap
ISDA
International Swaps and Derivatives Association
KLIBOR
Kuala Lumpur Interbank Offered Rate
LIBOR
London Interbank Offered Rate
LIFFE
London International Financial Futures and Options Exchange
NIBOR
Norwegian Interbank Offered Rate
OIS
overnight index swap
OPEC
Organization of the Petroleum Exporting Countries
OTC
over the counter
PIBOR
Paris Interbank Offered Rate
PRA
Prudential Regulation Authority
SEC
Securities and Exchange Commission
SFO
Serious Fraud Office
SIMEX
Singapore International Monetary Exchange
STIBOR
Stockholm Interbank Offered Rate
STIRT
Short-term Interest Rate Trading
TAF
Term Auction Facility
TIBOR
Tokyo Interbank Offered Rate
TIFFE
Tokyo International Financial Futures Exchange
INTRODUCTION
‘It’s a misunderstanding’
‘How can the FSA be sure you will not do this again?’ This is the last question I can remember from my interview with the UK financial regulator on 24 August 2009. Whenever I reconstruct that day in my head, or the events that led up to my being compelled to attend the meeting in Canary Wharf, I try to recall what I answered. The easiest option would be, perhaps, to listen to the CD recordings of the interview. Signed and sealed copies are held by both the regulator and myself.
For some reason, though, I do not want to force myself into being reminded of that precise moment, or what led up to it. So no, I am not going to listen to the recordings.
I do, however, remember exactly what I was thinking when the last question was shot across the table (the phrasing of it made it quite clear that the hearing was approaching its end). The sky was unusually clear that day, and I looked briefly out of the window to my left. I never wanted to go through this again, would never put myself in a position where I had to go through this again. That, then, was my answer.
***
Six months earlier, after 15 years working in the foreign exchange and interest rate derivatives markets, I had been labelled a ‘rogue trader’.
I had gone to India on holiday, and on the second day (it was 17 February 2009) I made a phone call to my manager at Merrill Lynch, who, as it happened, was also away from the office, telling him I wanted to talk. He said he was in a ski lift in Switzerland, and told me that he would call back in two or three hours. When he did, he initiated a conversation that would become the most difficult of my life.
I informed him that my trading books were overvalued and had been so since mid-January. I had hoped that this would only be temporary but the markets had continued to move against me.
‘How much are we talking about?’ he asked.
‘It could be 100 million.’
‘Why didn’t you tell me?’
‘I really don’t know,’ I replied. ‘But now I feel ashamed. I want to apologise.’
Having opened the floodgates, the q
uestioning began. I was interrogated about risk, volatility, hedging, 2008, liquidity, the credit crunch, Lehman Brothers, Merrill Lynch, other people’s losses, price movements, my previous boss, Bank of America, bonuses, profits, honesty, 2009, management, pressure, smoothing of profit and loss, exhaustion.
Towards the end of our 45-minute conversation he asked: ‘Could this be a momentary lapse of reason?’
‘Yes,’ I replied.
‘This is obviously very serious,’ he said. ‘It could go all the way up to the FSA.’
‘What do you mean by that?’ I asked, having never had anything to do with the regulator, let alone met anyone from the Financial Services Authority.
‘My job could be in danger. You’re a good trader, and I just wish you’d told me earlier.’
I apologised again.
‘How long will you be on holiday?’ he asked, winding up the conversation.
‘Until 2 March.’
‘Let’s talk about it when you come back. In the meantime, call me if anything new comes up and I’ll do likewise,’ he responded. Before hanging up, he told me to enjoy the rest of my holiday.
I had just admitted to mismarking my books by $100 million, and the conversation had ended with ‘Enjoy your holiday!’
It didn’t make sense.
At that moment, my confusion very quickly turned into suspicion, and suspicion turned into fear. I no longer trusted my boss. The fact that he wished me well made me certain he was hiding his real intentions, and I did not want to be judged within the four walls of a Merrill Lynch boardroom.
I desperately wanted an objective opinion on the situation, so decided to call an employment lawyer and explain everything in detail. When, a few hours later, my case was passed on to Ian Ryan, a partner and Head of Business Crime and Professional Discipline at Finers Stephens Innocent, I began to realise the scale of the problem. What, then, was the right thing to do? I made the decision to fly back to London in order to see him the next day. Back home, I also booked a session with a psychotherapist. Over the following months, there would be many sessions, both with the lawyer and with the psychotherapist.
It took about two weeks before the New York Times got hold of my mobile number. A media storm ensued, as well as investigations on both sides of the Atlantic.
In the end, it was claimed that my actions had resulted in the loss of $456 million for Merrill Lynch. It was a lot of money, but it did not involve criminality. The Irish Financial Regulator (Merrill Lynch had many trading entities, and many trades were done, presumably for tax reasons, in the name of Merrill Lynch International Bank Limited Dublin) fined the bank €2.75 million in October 2009. The regulator concluded that the bank had an inadequate month-end independent price verification process and had failed to put in place a well-defined and transparent line of supervisory responsibility. Moreover, there had been a failure to supervise my ‘activity’ and to manage effectively market risk limits in respect of my activities.1 Effectively, they had shirked their responsibility to oversee what I was doing.
In March 2010, when the FSA had concluded its investigation, I was handed a five-year prohibition order. This was, in effect, a ban from working in the City of London. Considering the status of the FSA and of the City of London as a global financial centre, it basically meant being barred from working in the financial services industry anywhere in the world. The case was closed.
***
This book project started when I sent myself an email on 19 February 2009. The email contained everything I could remember of what had happened two days previously. I wrote it to myself out of fear and paranoia and not thinking much more about it. It finished in the middle of a sentence, in the middle of a word. Perhaps I got interrupted. Perhaps I needed a break. I can’t remember.
Most likely, I wanted to decipher the words and short sentences I had written on page after page in the notepad from the hotel. Some of them simply read like this:
no market, no liquidity
Why hide?
46 min
1 min enjoy holiday 2 weeks
WHO TO TRUST?
Asgamar (‘vultures’ in Swedish)
If I thought this was this serious I had resigned
Pressure
Higher up
Apologise
WHAT TO DO?
Since I had been a teenager, I had been writing notes, diary entries and (both finished and unfinished) letters. This time, however, it was different. It was difficult to explain how I felt when I scribbled down those notes and what was truly going on inside my head when, three weeks later, my name suddenly appeared on the front pages of newspapers across the world. As I was still employed by the bank, I could not speak to journalists to put my version across. And as I was suspended pending an investigation, I was not allowed to speak to any colleagues, clients or competitors either. My world had shrunk drastically, and I knew nothing would ever be the same again. I felt that the media reporting was narrow and one-sided and writing became a way of letting off steam.
I also wanted to create a counterbalance on my Google history. I knew that my daughters, who were eight and six years old at the time, would one day look me up on the internet. When – not if – that happened, I wanted to be able to explain and tell the story from my perspective. They would forget that I had ever been a trader, but I wouldn’t. Gradually, the purpose of the writing became less about taking notes and organising memories, and more about the search for some kind of understanding. I began reading what others had written about ‘people like me’ and the world I had worked in for 15 years. As I continued to receive numerous questions about myself, about trading, about banks and about the episode in 2009 – many of which were extremely difficult to answer – I began to structure these thoughts.
Therefore, the first purpose of this book is an attempt to describe why, when looking out of that window in Canary Wharf in August 2009, I felt that I would never want to go through it again. Why I would never put myself in a position where I had to go through it again. Where did that fear come from?
There was, however, another element that kept me moving forward during this episode. I had always wanted to do a PhD, and a lifelong dream had now been granted an unusual beginning. Despite everything that was going on around me (not to mention within myself), I managed to put together a research proposal and send it off to Costas Lapavitsas, a professor at SOAS, University of London. Reading it now, the proposal looks both unprofessional and non-academic. I had not set foot in a university for 15 years. My writing style had been heavily influenced by the trading floor lingo I had picked up over the years. Rather than a clearly constructed research plan, I sent across fragments and observations that I thought were important, and that had bothered me deeply for a while.
One such observation I introduced in the heading ‘London Interbank Offered Rate (LIBOR2) manipulation’. Another was ‘Foreign exchange (FX) order books’. Both of these outlined how the foreign exchange and money markets were systematically manipulated, how it was being covered up, and how it affected people all over the world. I was mostly concerned by the fact that 99.99 per cent of people were completely unaware of the fact that it was going on.
Costas, who agreed to become my supervisor, seemed to believe in my radical statement that LIBOR, contrary to what all academic textbooks said, was not a market at all. It was something different. I could not put my finger on precisely where the problem lay, but there was a problem. I had seen it with my own eyes. However, when I approached SOAS in April 2009 (only a month after the media storm), I could not foresee the enormous scandal that would unfold three years later.
My PhD was never intended to study financial markets as ‘scandals’.3 In 2011, however, when I realised that this was, in fact, exactly what they one day would be regarded as, I decided to keep my academic work strictly academic, and instead share some of the anecdotes later. The reason why I felt the need to compartmentalise my academic work, separate from my personal relationship with
the financial markets, was as follows.
On a sunny afternoon during the summer of 2011, I met up with a former colleague and money market broker for a couple of beers in Borough Market, not far from London Bridge. He had sent me warm and encouraging text messages back in March 2009, at a time when I was feeling extremely isolated. I had not been allowed to reply to any of his messages, as he counted as a person Merrill Lynch had forbidden me from having any contact with during the investigations into my trading activities. Now, however, I had slowly begun to find my feet again and truly appreciated when ex-colleagues, ex-competitors, ex-clients and ex-brokers invited me out for a beer or two to chat about the good old days. Although it was nice to meet up again after more than two years, I also had a couple of questions relating to my PhD research that I thought he could shed some light on. I had traded LIBOR derivatives amounting to billions of dollars on a daily basis. He had acted as an intermediary, matching banks that wanted to buy with banks that wanted to sell.
He said he felt sorry for what I had gone through during 2009, and passed on regards from former competitors who occasionally claimed that they missed having me around, especially Tom Hayes, who had been the biggest player in the Japanese yen market and with whom I had traded more or less daily for a number of years.
Then, evidently unaware of the scale of what he had done, he brought up LIBOR manipulation in the Japanese yen market. He did not use the word ‘manipulation’, but I immediately understood what he was referring to. He casually, but also somewhat nervously, asked me whether I thought he had done anything wrong by being part of ‘it’.
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