I remember that I replied: ‘Yes, this could be very serious.’
I didn’t ask more. I probably didn’t want to know.
When I got back home to North London, I was still in shock. I felt sick, vomiting several times while trying to make sense of what I had learned.
The incident brought back very clear memories of my spontaneous reaction when Louise Story, a journalist from the New York Times, called me out of the blue in early March 2009. I was on my way to see Ian, my lawyer. When I came out of Great Portland Street tube station, I could see that someone had tried to call my mobile. The number began with +1 212. New York? I had no idea who it was, so I dialled the number.
I cannot remember what she said. But somehow she knew about my mismarking and wanted me to confirm it, and then comment and elaborate on a theory linking it to the senior management at Merrill Lynch.
‘It’s a misunderstanding,’ I recall replying, and quickly hung up.
Although I never expanded on the words, I was referring to the whole situation, which to my mind was immensely complicated. I could not explain over the phone in a way she would understand. But at the time, I don’t think I fully understood it either.
Ian’s law firm was only a few minutes’ walk from the tube station. The conversation had made me uneasy, so when I mentioned it to him he took control of the situation, went into another room and called the newspaper. I remember from our conversation afterwards that the journalist had claimed that I had a nickname in the market: ‘The 900 Million Dollar Gorilla’. Ian asked me whether this was true. ‘I’ve never heard it before,’ I said.
‘Thought so,’ he replied. ‘I told her she wasn’t allowed to write that.’
It was, however, quite clear that she was going to write a story and that it could be on the front page of The New York Times the next morning. We decided to let Merrill Lynch know about the upcoming article. I don’t know if this was necessary, but it felt like the right thing to do at the time. I knew that I had done something wrong, and wanted to help put things right in any way possible.
The newspaper story with the headline ‘Undisclosed Losses at Merrill Lynch Lead to a Trading Inquiry’ went like this.4 The day on which Lehman Brothers went bankrupt in September 2008, Bank of America agreed to buy Merrill Lynch, which otherwise would also have gone bankrupt. The acquisition was supposed to go through on 1 January 2009. However, during the last quarter of 2008, Merrill Lynch lost another $13.8 billion (there had been huge losses previously) on risky investments and complex derivatives, which forced Bank of America to seek a second rescue package from Washington, DC, i.e. the American taxpayers.
Bank of America’s shareholders (who, in essence, had bought Merrill Lynch) did not know about the losses. Nor did they know that senior management at Merrill Lynch had decided to speed up the bonus payments ahead of the takeover. Rather than paying bankers and traders (and themselves) during the spring, which was the norm, the bonus payments would take place on New Year’s Eve, only a few hours before Bank of America would formally take over the assets and liabilities of the 100-year-old investment bank.
As Brad Hintz, an analyst with Sanford C. Bernstein & Company, told the newspaper: ‘There is a massive cultural disconnect in the trading area. You have Bank of America, where it would seem foreign to ride a motorcycle without wearing a helmet, and at Merrill, the legacy is still there, from the CDOs [collateralised debt obligations] and the risks they took on.’
The analyst was certainly right about the culture. I had taken an enormous amount of risk and had not been wearing a helmet.
‘Of particular concern are the activities of a Merrill currency trader in London, Alexis Stenfors, whose trading has come under scrutiny by British regulators, according to people briefed on the investigation,’ the New York Times wrote. Although the newspaper seemed to be right about Merrill Lynch, and more or less so about me too, I didn’t feel that the story made sense. Who was the Bank of America executive who ‘spoke on the condition that he not be named because of the delicate nature of the inquiry’? Why did the journalist write that risk officers had ‘discovered irregularities’ in my trading account during my holiday, making it sound like I was some kind of fugitive? What did I have to do with the Bank of America takeover of Merrill Lynch?
It was a misunderstanding.
But it got a lot worse. Within 48 hours, it seemed like every newspaper and TV channel had reported on the story. It spread like wildfire. The Guardian, Financial Times, Wall Street Journal, Sydney Morning Herald, Sky News. The Evening Standard rang the doorbell while I was making pancakes for my daughters. A picture of me, looking startled in my favourite long-sleeved shirt (emblazoned with the logo of Swedish rock band Kent), appeared on the front page the next day.5 Someone told me that a local paper close to the Finnish town I grew up in even went on to claim that I had caused the global financial crisis. Later, Jon Snow, the anchor for Channel 4 News, analysed me on his blog.
‘You’re famous now!’ a broker from Tradition texted.
Yes, but for the wrong reasons, I thought.
I desperately wanted to comment on some of the things that were being said. However, until Merrill Lynch (and Bank of America, of course) had concluded their investigation, I was still an employee and had to follow their rules. I was not allowed to talk. Even so, I am not sure that I would have been able to make myself feel less misunderstood. I was completely out of touch with reality after my years as a trader. It would take some time before I rediscovered the ability to reflect upon things.
I knew that my acquaintance, the former broker I met in Borough Market, had done something very serious. If LIBOR were to be manipulated, thousands of companies and millions of people would be affected. But equally, it was quite clear that he did not understand how. To him, LIBOR was just a number. An important number, yes, but important only for a few traders and brokers who traded derivatives linked to it. He had no idea what LIBOR really was and how extremely important it had become.
I was certain that he, one day, would feel very misunderstood.
Almost exactly a year later, in July 2012, the LIBOR scandal erupted.
***
When, on 3 August 2015, Tom Hayes was found guilty of LIBOR manipulation and sentenced to 14 years in prison,6 I skimmed through an ever-growing list of articles about him. By now, the newspapers had stopped reporting on what LIBOR was. What until 2012 had been known to only a few traders and bankers was now general knowledge. The Telegraph provided a list of the most hilarious and outrageous quotes from the world’s first LIBOR trial. ‘Just give the cash desk a Mars bar and they’ll set [LIBOR] wherever you want,’ Tom had told a broker in 2006. ‘Not even Mother Teresa wouldn’t manipulate LIBOR if she was setting it and trading it,’ he had said in an interview with the Serious Fraud Office (SFO).7 Comments such as these did not look good in a newspaper, or in front of a jury, of course. But during 15 years on the trading floor I had heard much worse.
One quote forced me to pause and reflect. ‘I used to dream about LIBORs,’ Tom had told prosecutors. ‘They were my bread and butter, you know. That was the thing. They were the instrument that underlined everything that I traded.’
I used to be woken up at 1.30 a.m. every morning by LIBORs. Brokers in Asia texted me ‘run-throughs’ of where the market expected LIBOR would be later that day when London woke up. I remembered how I, too, used to have dreams about LIBOR.
LIBOR is sometimes said to be the world’s most important number. It is therefore not surprising that the ‘LIBOR scandal’, or the discovery that the number had been manipulated by banks, has also been coined the greatest banking scandal in history. From an academic perspective, the whole episode has put the integrity of arguably the most important ‘price’ in economics and finance into question. However, the real issue is not academic at all. LIBOR is used not only in more than $350 trillion worth of financial derivatives, but also in mortgages, bonds, and corporate and student loan contracts – as well as in
valuation methods relating to accounting, tax, risk management and central bank policy. Although investigations, litigation processes and criminal proceedings are still ongoing, it is already safe to conclude that a vast number of people and institutions have been affected by the manipulation of LIBOR rates by banks. Benchmarks referencing interest rates are of crucial importance for society by virtue of being deeply rooted in the financial system as a whole. They affect not only central banks and other banks and financial institutions, but also corporations, investors and households. That is why the LIBOR manipulation has had consequences far beyond the few dozen traders and banks involved in setting the rate. If you have a mortgage, student loan or credit card, it is quite possible that you are exposed to LIBOR. And even if you manage all your finances under the mattress, it is probable that you have been affected indirectly by the manipulation.
LIBOR was not an isolated incident. Other benchmarks that were supposed to reflect how banks lend to each other were also manipulated, such as the Euro Interbank Offered Rate (EURIBOR) and the Tokyo Interbank Offered Rate (TIBOR). As was the lesser-known ISDAfix, a widely used reference rate for complex interest rate derivatives. Even the largest market on earth – the $5.1 trillion-a-day foreign exchange market – was found to have been subject to a conspiracy between banks.
It appears, then, as if banks have used their power to secretly abuse markets, manipulate benchmarks and defraud customers in virtually all the markets in which I had actively been a trader for 15 years. When people talked about a cultural and ethical crisis in the world of finance, I was definitively one of those who had ‘been there’.
***
The second purpose of this book is to try to explain, through my eyes, what this world looked like. To a degree, it is an exploration into the sometimes seemingly arcane benchmarks and acronyms that few people had heard of before the scandals broke – and the markets for certain financial instruments that Warren Buffett famously referred to as ‘weapons of financial mass destruction’.8
It is also about trading psychology, strategies and techniques in these markets that, despite being ethically and legally questionable, seem to have been passed down from one generation of traders to the next. It is about the banks creating, selling and trading all those financial instruments, and the culture of risk taking and money making in the City and on Wall Street. Most of all, however, it is about perceptions about these markets and the people working in them. No matter how convenient they are, perceptions can be deceptive.
From August 2007 onwards, everything I did as a trader came to focus on what the former Chairman of the Federal Reserve Alan Greenspan famously termed ‘the barometer of fears of bank insolvency’.9 Greenspan argued that LIBOR, when put in a specific context, was a kind of fear index related to banks.
He was right. The fear was measurable. And because it was measurable, fear could also be bought and sold. Which is what I did.
CHAPTER 1
THE BAROMETER OF FEAR
My first encounter with LIBOR came in August 1992. I had finished a semester at the University of Cologne as part of a university exchange programme, and was given the chance to extend my stay in Germany for five months by doing an internship.
I had just written an essay entitled ‘Exchange-rate Risks and Hedging Strategies’, and sent an application to the second-largest bank in Frankfurt: Dresdner Bank. They seemed to like that I was interested in derivatives and foreign exchange markets and invited me to an interview. A month later, I found myself in the back office for interest rate derivatives.
I rented a cheap room in the Bahnhofsviertel, just a few blocks from the central station and within walking distance from the bank. It struck me that the heroin addicts who inhabited the red light district and the park next to it did not seem to pay any attention to the swarms of bankers in dark suits who walked past them every morning. But the ignorance seemed mutual.
I was seated next to a gold trader who was approaching retirement and for some reason did not have a desk on the trading floor below. He was probably 40 years older than me and constantly made jokes in an amusing Düsseldorf dialect. I liked him. Somehow, he had access to the vault in the basement, which held the bank’s stock of gold bars. Once (he was probably eager to impress), he took me downstairs. It was huge and looked exactly as I’d imagined it would from watching films. He invited me to hold one of the bars. I can still remember how astonished I was by its weight.
I was fascinated by the buzz on the twenty-seventh floor, where the trading took place. I had never seen anything like it. Grown men (there were not many women around) in suits shouting down phone lines, shouting at each other, or doing both at the same time. But I was also intrigued by the large numbers on the time-stamped trade tickets that were passed to the back office throughout the day. They could be 10, 50 or 100 million deutschmarks (or dollars, pounds, francs …). And they all related to the newly invented derivative instruments: interest rate swaps, forward rate agreements, cross-currency basis swaps, caps, floors and so on.
The actual work I did, however, was not that exciting. When a deal was done on the twenty-seventh floor, the trader would scribble some details on a ticket the size of an A5 sheet of paper. Each ticket was numbered and had boxes that had to be filled in: Instrument, Counterparty, Buy/Sell, Benchmark, Maturity, Currency, Amount, Trade Date, Fixing Date, Settlement Date, Deal Rate.
We regularly took the elevator down one floor to pick up the tickets. I then had to check whether the trade details corresponded to the deal confirmations sent out to the counterparties, and whether the confirmations sent by the counterparties corresponded to the confirmations sent by the bank. They had to match. What mattered to us in the back office was that clients and banks received their trade confirmations promptly, and that the correct payments were made and received. Some clients were more important than others, we were told, and their deals needed to be processed faster. Some traders also appeared to be more important than others, and their trades had to be prioritised.
Everything else was just about numbers, and after having seen thousands of such trade tickets, the fascination with the big numbers gradually wore off. It was just a job, and equally monotonous as sorting and packaging tomatoes, which I had done throughout the whole summer in 1989. It was like a factory. A box filled with 10 kilograms of vegetables had been replaced by a box filled with 10 million deutschmarks’ worth of financial derivatives written on a feather-light piece of paper.
Of all the things that were checked on the trade tickets, the ‘Benchmark’ was probably the one that received the least attention. The box simply contained a five-letter word in capital letters: LIBOR, FIBOR (Frankfurt Interbank Offered Rate), sometimes PIBOR (Paris Interbank Offered Rate).
The five-letter words referred to which interest rate would be referenced when the contract was settled at some point in the future. The rate would then ultimately determine whether the bank (or the client) had made or lost money – and how much – by having done the deal in the first place.
The interest rate was simply a number provided by Telerate, a market data and information provider that competed with Reuters. Every day, around lunchtime, page 3750 on Telerate would be updated with the new LIBOR interest rates for different currencies (US dollars, British pounds, Swiss francs, etc.) and for maturities ranging from one day to one year. Page 22000 would contain the FIBOR rates, page 20041 was dedicated to PIBOR, and so on.
The numbers looked a bit like The Matrix: a grid of orderly sequences of flickering green numbers filling up a black screen.
***
I have often said to people that I became a trader almost by accident, but that is only partially true. The fact is that I had been interested in foreign currencies, foreign languages and international affairs since I was a child. I quite liked maths, and went on to study at the Stockholm School of Economics. In that sense, trading was undoubtedly a job where I would be able to make use of my skills, while also having the opportunity to an
alyse international trends and events on a daily basis.
However, when I returned to Sweden to finish my master’s degree in December 1992, there were not many jobs around in finance (or at all, to be honest). Sweden was recovering from a devastating banking crisis and the situation in Finland, my home country, was even worse. The Soviet Union, Finland’s biggest trading partner, had collapsed and a long era of austerity had arrived. Everyone, it seemed, had a hiring freeze, not least the banks, which were either bankrupt, had been nationalised, or were afraid of going bankrupt or being nationalised.
The only ad that I found on the noticeboard outside the Student Union matching my educational background was from Midland Montagu. It was a British bank with a tiny office in Stockholm, and they were looking for money market trainees. I applied, stating in my letter dated 17 June 1993 (freely translated): ‘Starting as a money market trainee would not only be a great challenge, but also provide me with great pleasure and stimulation. Even though I lack rigorous work experience, I am somewhat familiar with, and particularly have a burning interest in, money markets and economics.’
From then on, things moved quickly. I got an interview, and they offered me a job – not as a trader but as a sales person. At the time, I didn’t really know the difference between the two, but I happily accepted anyway. The client base consisted of insurance companies, pension funds and large Swedish multinationals making cars, refrigerators, phones or flat-pack furniture. I would be given a list of (the least lucrative) clients and I had to try to convince them to buy or sell T-bills (treasury bills), government bonds and mortgage bonds.
The basic idea behind these products was rather simple. Imagine you decide to lend £1,000 to a friend for a year, and that your friend promises to pay back the whole amount plus £100 in interest. You have now entered into a standard loan contract where you run the risk that your friend might not be able to pay the money back. A T-bill, however, would work as follows. Your friend announces that they want to borrow £1,000 and would be prepared to pay it back with £100 in interest. They issue a piece of paper stating that £1,100 will be paid to whoever happens to own that paper in a year’s time. From your perspective, this is a slightly better proposition. Should you, in a couple of months’ time, begin to doubt your friend’s ability to pay the whole amount, you could try to sell the paper to someone else (perhaps even an enemy). Your friend might like the T-bill idea too, because, in theory, money could be borrowed from almost anyone. In reality, however, only large institutions are able to raise money this way.
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