Comments on The Spider Network by David Enrich

I recently read David Enrich’s new book, The Spider Network: The Wild Story of a Math Genius, a Gang of Backstabbing Bankers, and One of the Greatest Scams in Financial History. This book focuses on Tom Hayes, a derivatives trader who was sentenced in Britain to prison for 14 years for his role in manipulating Libor (the London Interbank Offered Rate) in August 2015. The sentence was later reduced to 11 years.

The author highlights that Hayes was treated much more harshly than other people involved in Libor manipulation. Many of them are still working in the financial industry. Hayes’ prison sentence seems to be due to a flawed legal strategy, his own misjudgments, and his inability to distinguish between friends and enemies, and the fact that many people did not like him because of his strange personality. Enrich writes:

“Hayes still didn’t grasp what had really happened. These friends who were not friends, these bosses who now claimed not to be bosses, together they had just engineered their greatest trade of all: Hayes for their own freedom. He was the genius, the university man, the millionaire, the star. And he was the fool. Most of them had their money; his would be seized. They had their liberty; he was in prison. Yes, there had been a spider network. Hayes still didn’t realize that in the end, he’d been the fly.”

While Enrich, who had extensive access to Hayes and his wife, the lawyer Sarah Tighe, is clearly sympathetic to Hayes, his account of Hayes' trading practices and conduct, and that of others, portrays an unsurprising but dark view of this industry. Enrich presents clear evidence that Hayes was manipulating Libor and the public quotes for other interest rates, whatever he thinks of the relative severity of his punishment. 

If one is interested in this world, the book offers a compelling read. Not only does it show bad behavior and over indulgence, it also depicts a world where the temptations to cheat are significant. Not all cheating will come to light, but from time to time it will, and, unfortunately, it will sometimes cause market problems that hurt the general economy.

However, if one is looking for analysis of the economic significance of the Libor manipulation, which went both ways—up and down—this is not the place to find it. Some people and entities, such as pension funds which made unwise investments at the urgings of the financial industry, were no doubt hurt at times, but it is not clear how significant this was. The traders who did not play this game as well as Hayes were obviously hurt as well.

The damage to the economy from what financial actors did in the housing mortgage market and related markets was obviously far more significant. While the exact causes of the financial crisis of 2008 are open to debate, it is clear that financial market participants were acting badly. With respect to derivatives, one particular type, credit default swaps, played a role. The Libor manipulation seems puny in comparison, but perhaps it was easier to build a legal case against a significant player for Libor manipulation than it was for the broader 2008 financial debacle for which blame was widespread.  

One issue regular readers of this blog will not be surprised that I would point out is a misconception about Gary Gensler in the Clinton Administration. Enrich points out that he was a key person in some of the deregulatory initiatives of the Clinton Administration. Nevertheless, those of us who were there at the time were not surprised that he would take a tough line as head of the CFTC. (I mentioned this here before Gensler was confirmed.) Also, I have no doubt that lobbyists for the derivatives industry who met with Gensler and seemed to have fairly accurate information concerning debates in the Clinton Administration about what the CFTC was trying to do were also not surprised. The Treasury’s position as determined by both Secretary Rubin and Secretary Summers was that the CFTC under Chair Brooksley Born was on track to undermine legal certainty concerning certain OTC derivatives and legislation was needed to address this. Gensler carried out Treasury’s policy. In the event, bank regulators failed in the job of supervising what the banks were doing in this market. (The Dodd-Frank legislation in the Obama Administration provided the CFTC, as well as the SEC, explicit authority for OTC derivatives.)

Also, with regard to Gensler, as a New York Times review of this book comments: “Mr. Enrich takes particular pleasure in pointing out the irony that Mr. Gensler falsely took credit for initiating the Libor investigation (it had been underway for a year before his installation at the agency) given his historic role in undermining the C.F.T.C.’s authority.” I have no personal knowledge about what was happening at the CFTC during this period and don’t know whether, or to what extent, Gensler exaggerated his role.

Finally, for those interested in reading more about Libor manipulation, another interesting account is Erin Arvedlund’s 2014 book, Open Secret: The Global Banking Conspiracy That Swindled Investors Out of Billions. While this book discusses Hayes, it is not focused on him. Reading Arvedlund’s book in addition to Enrich’s book will provide as much information about the Libor manipulation as most readers will probably want.