Can you explain to us what LIBOR is?
The London Interbank Offered Rate (LIBOR) is a benchmark, or index, showing the interest rate at which banks claim they can borrow money from each other. It’s linked to an enormous number of financial contracts, ranging from complex financial derivatives to mortgages and student loans. To put this into perspective: it’s more than ten times larger than the total value of all goods and services produced in the world last year. This is also why LIBOR been called ‘the world’s most important number’. However, when measured against other things, LIBOR also works as a ‘barometer of fear’ in the financial system. The fear that other banks might run out of cash and go bust.
What exactly did the banks do wrong in relation to LIBOR?
Everything was based upon the assumption that banks were honest when they inputted the numbers that would form LIBOR. This turned out to be false. Banks used the privilege as LIBOR-submitters to skew the figures in directions that were beneficial to them. This was either in order to profit from the LIBOR-indexed financial contracts that they had entered into, or by using it to portray themselves in an artificially good light during the financial crisis, thereby pretending that they were safer than they actually were. Many have been affected by the wrongdoing: central banks, pension funds, investors, households and students.
You were labelled a ‘rogue trader’. How do you feel about that label?
Even though it related to just six weeks of my life, 99.99% of my Google-hits relate to this episode. Rogue trading tends to be linked not only to trading, but also to dishonesty and white-collar crime. Yes, my actions resulted in huge losses for Merrill Lynch, but the UK regulator did not label me as dishonest, nor was there any suggestion of criminality involved. Therefore, even though I accepted guilt and admitted to having done something very wrong, I felt ‘rogue trader’ went too far. Newspapers, however, seemed to like the term so there was little I could do about it.
Today, I have accepted that the label will always be there. I deeply regret what I did, but I cannot change the past.
Have your views changed since leaving the financial sector?
I absolutely loved trading. However, working at the epicentre of the financial crisis made me very disillusioned. I felt that banking and trading had turned into something completely different from when I started as a trader fifteen years earlier. It was very ugly.
I knew many things had gotten out of hand, but I couldn’t pinpoint exactly what or where the problem was. The main reason I wanted to go back to university was to look at the world using a much wider lens. I have more or less been reading, analysing, writing and lecturing about the same things I used to think about as a trader.
On the whole, the process has made me more critical of a range of practises in banking and the financial markets. However, I’m also more critical towards some of the theories that have been taught at business schools and universities now for decades.
Barometer of Fear by Alexis Stenfors is available now