I just finished reading The Spider Network by David Enrich.  It’s the story of the Libor-rigging scandal, by some people’s lights the biggest financial fraud in history.  Just to remind you, Libor is the London Interbank Offered Rate. Libor was supposedly being set by many participant banks sending to a central authority their cost of borrowing.  By (roughly) averaging the reported costs, an index could be derived that measured the actual cost of borrowing.  Literally trillions of dollars of financial instruments world-wide are tied to Libor.  If it is not an accurate representation of true borrowing costs, many thousands of individuals and institutions are either paying too much or receiving too little (or vice versa) on derivate securities, home mortgages, student loans, etc.

Because no one was paying particularly close attention and because so many players in the financial world are of easy virtue, many people got the idea of working together to manipulate the rate in order to benefit their trading positions.  The book focuses on Tom Hayes, who worked mostly for UBS in Japan where he worked with others to manipulate both Libor and a Japanese equivalent (Tibor) in order to increase his profits.

The story is a fascinating one.  And horrifying.  It tells the sort of tale that students of behavioral ethics would expect in a setting where incentives are high, policing is lax, and the human ability to rationalize is nearly unlimited.

The focus of the story is complicated slightly by the fact that Tom Hayes may well have Asperger’s Syndrome and his defense attorneys (unsuccessfully) argued that this should be taken into account in deciding his guilt or innocence.  I do not address whether the presence of Asperger’s necessarily impact Hayes’ ability to form criminal intent.  But it is undeniable that most of his accomplices in the fraud, which was widespread and went well beyond Hayes (though he seems to have been the most aggressive player), were not on the spectrum.

There are many lessons to be learned from The Spider Network, but as a behavioral ethicist I would emphasize these:

  • Ethical fading is rampant in the financial industry. The focus in so many parts of the markets is solely on money, causing ethical issues to fade into nothingness.  Enrich writes:  “Hayes didn’t spend much time thinking about whether what he was doing was right or wrong.  Those weren’t values he assigned to his job.  His sole criterion was whether what he was doing was making money.”  Enrich emphasized, in describing the scheme, “Morals were never part of the equation.”  Our Ethics Unwrapped videos on ethical fading and moral myopia make this unsurprising.
  • Those who wish to act ethically must consciously and conscientiously keep ethics in their decisional framework. That often does not happen in the finance industry.  Hayes was at RBS before he joined UBS.  Enrich writes of how traders in RBS fought over unsophisticated customers whom they could rip off. “Shouting matches on the trading floor over who had the right to the [‘dumb money’] customers were routine.  No one thought of it in moral terms. It was just part of the game, just the way things worked.”  We have a nice video on framing that I call to your attention.
  • Participants in the scheme such as Tom Hayes repeatedly asserted that “[e]veryone in the industry was doing more or less the same thing.” Any third grader knows that this is no excuse for committing fraud, and fraud was the essence of the scheme.  That many actors were engaged in the fraud, however, means that it would naturally have seemed less wrong than otherwise.  That is the conformity bias in action.  Please check out that video.  It also means that one of the most common rationalizations used in business—“If I hadn’t done it, someone else would have”—is also operable.  Indeed, one UBS banker said: “It’s our natural right [to fraudulently manipulate the Libor rate]. Any other bank would do the same.”
  • Incrementalism (the slippery slope) also shows its ugly head here. As the scheme began in small ways, Enrich writes regarding Hayes and his cabal that: “Without fully realizing it, they were entering into a partnership that would, a few years hence, be construed as a criminal enterprise that embodied greed, recklessness, and hubris—in essence, everything that made Wall Street evil. At the time, it seemed like business as usual.”  We have a great video on the incrementalism
  • Our “tangible and abstract” video is also relevant. When Hayes put together his defense of Libor manipulation, he emphasized that 99.9% of his trades were with other banks….not with unsophisticated investors.  This misses two points.  Fraud is still fraud even if the victim of your fraud is sophisticated rather than unsophisticated.  Second, Hayes completely ignores the thousands and thousands of nameless, faceless, but very real investors, state governments, home owners, and students who had to pay more than they should have because their payments were tied to Libor.  Again, we have a video on the bias of tangible and abstract.
  • Much research indicates that among the situational factors that can adversely affect moral judgment is money. Focusing on money causes people to act in antisocial ways that often have unethical consequences.  When Alexis Stenfors, who knew Hayes and has written his own book about the scandal, lectured on the topic, according to Enrich, he said:
    • “Toss aside everything you’ve learned about economics, … the simple, clean world of rational individuals and profit-maximizing institutions. That’s not a realistic reflection of the financial industry—The Hunger Games is more like it. Everyone is acting to enhance his own interest. When other people are no longer useful, you stab them in the back. ‘It’s not necessarily about money—it’s about winning,’ he explained.  Normal systems of morals and ethics don’t apply.  He recounted how he and his [Wall Street] colleagues kept trading as if nothing had happened when the planes hit the twin towers [on September 11, 2001] and how traders openly looked down on their lesser colleagues.”


Upon reflection, Mr. Stenfors now has this take on the Libor scandal:


“The issue with LIBOR has always been ethics. Or the lack of them.  LIBOR manipulation was unethical, even though the process lacked regulation and legal precedents. It was unethical regardless of whether it was widespread or maybe even encouraged by senior management. LIBOR manipulation was unethical, even if, as suggested by a recent BBC Panorama investigation, officials at the Bank of England knew about it.  But then it was embedded in an unethical culture.”


Additional Resources:


Dobson, John, Behavioral Assumptions of Finance, in Finance Ethics: Critical Issues in Theory and Practice 45 (J. Boatright, ed. 2010).


Enrich, David, The Spider Network: The Wild Story of a Math Genius, a Gang of Backstabbing Bankers, and One of the Greatest Scams in Financial History (2017).


Hendry, John, Ethics and Finance: An Introduction (2013).


Stenfors, Alexis, Barometer of Fear: An Insider’s Account of Rogue Trading and the Greatest Banking Scandal in History (2017).


Stenfors, Alexis, “The Scandal Might Be Over but LIBOR Ethics Remain Fundamentally Flawed,” econotimes.com, May 12, 2017.


Vaughan, Liam & Finch, Gavin, The Fix: How Bankers Lied, Cheated and Colluded to Rig the World’s Most Important Number (2017).