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How to get away with financial fraud

Dan Davies in The Guardian


Guys, you’ve got to hear this,” I said. I was sitting in front of my computer one day in July 2012, with one eye on a screen of share prices and the other on a live stream of the House of Commons Treasury select committee hearings. As the Barclays share price took a graceful swan dive, I pulled my headphones out of the socket and turned up the volume so everyone could hear. My colleagues left their terminals and came around to watch BBC Parliament with me.

It didn’t take long to realise what was happening. “Bob’s getting murdered,” someone said.

Bob Diamond, the swashbuckling chief executive of Barclays, had been called before the committee to explain exactly what his bank had been playing at in regards to the Libor rate-fixing scandal. The day before his appearance, he had made things very much worse by seeming to accuse the deputy governor of the Bank of England of ordering him to fiddle an important benchmark, then walking back the accusation as soon as it was challenged. He was trying to turn on his legendary charm in front of a committee of angry MPs, and it wasn’t working. On our trading floor, in Mayfair, calls were coming in from all over the City. Investors needed to know what was happening and whether the damage was reparable.

A couple of weeks later, the damage was done. The money was gone, Diamond was out of a job and the market, as it always does, had moved on. We were left asking ourselves: How did we get it so wrong?

At the time I was working for a French stockbroking firm, on the team responsible for the banking sector. I was the team’s regulation specialist. I had been aware of “the Libor affair”, and had written about it on several occasions during the previous months. My colleagues and I had assumed that it would be the typical kind of regulatory risk for the banks – a slap on the wrist, a few hundred million dollars of fines, no more than that.

The first puzzle was that, to start with, it looked like we were right. By the time it caught the attention of the mainstream media, the Libor scandal had reached what would usually be the end of the story – the announcement, on 27 June 2012, of a regulatory sanction. Barclays had admitted a set of facts, made undertakings not to do anything similar again, and agreed to pay finesof £59.5m to the UK’s Financial Services Authority, $200m to the US Commodity Futures Trading Commission and a further $160m to the US Department of Justice. That’s how these things are usually dealt with. If anything, it was considered quite a tough penalty.

But the Libor case marked the beginning of a new process for the regulators. As well as publishing their judgment, they gave a long summary of the evidence and reasoning that led to their decision. In the case of the Libor fines, the majority of that evidence took the form of transcripts of emails and Bloomberg chat. Bloomberg’s trading terminals – the $50,000-a-year news and financial-data servers that every trader uses – have an instant-messaging function in addition to supplying prices and transmitting news. Financial market professionals are vastly more addicted to this chat than teen girls are to Instagram, and many of them failed to realise that if you discussed illegal activity on this medium, you were making things easy for the authorities.

The transcripts left no room for doubt.

Trader C: “The big day [has] arrived … My NYK are screaming at me about an unchanged 3m libor. As always, any help wd be greatly appreciated. What do you think you’ll go for 3m?”

Submitter: “I am going 90 altho 91 is what I should be posting.”

Trader C: “[…] when I retire and write a book about this business your name will be written in golden letters […]”.

Submitter: “I would prefer this [to] not be in any book!”

Perhaps it’s unfair to judge the Libor conspirators on their chat records; few of the journalists who covered the story would like to see their own Twitter direct-message history paraded in front of an angry public. Trading, for all its bluster, is basically a service industry, and there is no service industry anywhere in the world whose employees don’t blow off steam by acting out or insulting the customers behind their backs. But traders tend to have more than the usual level of self-confidence, bordering on arrogance. And in a general climate in which the public was both unhappy with the banking industry and unimpressed with casual banter about ostentatious displays of wealth, the Libor transcripts appeared crass beyond belief. Every single popular stereotype about traders was confirmed. An abstruse and technical set of regulatory breaches suddenly became a morality play, a story of swaggering villains who fixed the market as if it was a horse race. The politicians could hardly have failed to get involved.

It is not a pleasant thing to see your industry subjected to criticism that is at once overheated, ill-informed and entirely justified. In 2012, the financial sector finally got the kind of enemies it deserved. The popular version of events might have been oversimplified and wrong in lots of technical detail, but in the broad sweep, it was right. The nuanced and technical version of events which the specialists obsessed over might have been right on the detail, but it missed one utterly crucial point: a massive crime of dishonesty had taken place. There was a word for what had happened, and that word was fraud. For a period of months, it seemed to me as if the more you knew about the Libor scandal, the less you understood it.

That’s how we got it so wrong. We were looking for incidental breaches of technical regulations, not systematic crime. And the thing is, that’s normal. The nature of fraud is that it works outside your field of vision, subverting the normal checks and balances so that the world changes while the picture stays the same. People in financial markets have been missing the wood for the trees for as long as there have been markets.

Some places in the world are what they call “low-trust societies”. The political institutions are fragile and corrupt, business practices are dodgy, debts are rarely repaid and people rightly fear being ripped off on any transaction. In the “high-trust societies”, conversely, businesses are honest, laws are fair and consistently enforced, and the majority of people can go about their day in the knowledge that the overall level of integrity in economic life is very high. With that in mind, and given what we know about the following two countries, why is it that the Canadian financial sector is so fraud-ridden that Joe Queenan, writing in Forbes magazine in 1989, nicknamed Vancouver the “Scam Capital of the World”, while shipowners in Greece will regularly do multimillion-dollar deals on a handshake?

We might call this the “Canadian paradox”. There are different kinds of dishonesty in the world. The most profitable kind is commercial fraud, and commercial fraud is parasitical on the overall health of the business sector on which it preys. It is much more difficult to be a fraudster in a society in which people only do business with relatives, or where commerce is based on family networks going back centuries. It is much easier to carry out a securities fraud in a market where dishonesty is the rare exception rather than the everyday rule.

 

Traders at Bloomberg terminals on the floor of the New York stock exchange, 2013. Photograph: Brendan McDermid / Reuters/REUTERS

The existence of the Canadian paradox suggests that there is a specifically economic dimension to a certain kind of crime of dishonesty. Trust – particularly between complete strangers, with no interactions beside relatively anonymous market transactions – is the basis of the modern industrial economy. And the story of the development of the modern economy is in large part the story of the invention and improvement of technologies and institutions for managing that trust.

And as industrial society develops, it becomes easier to be a victim. In The Wealth of Nations, Adam Smith described how prosperity derived from the division of labour – the 18 distinct operations that went into the manufacture of a pin, for example. While this was going on, the modern world also saw a growing division of trust. The more a society benefits from the division of labour in checking up on things, the further you can go into a con game before you realise that you’re in one. In the case of several dealers in the Libor market, by the time anyone realised something was crooked, they were several billions of dollars in over their heads.

In hindsight, the Libor system was always a shoddy piece of work. Some not-very-well-paid clerks from the British Bankers’ Association would call up a few dozen banks and ask: “If you were to borrow, say, a million dollars in [a given currency] for a 30-day deposit, what would you expect to pay?” A deposit, in this context, is a short-term loan from one bank to another. Due to customers’ inconvenient habit of borrowing from one bank and putting the money in an account at another, banks are constantly left with either surplus customer deposits, or a shortage of funds. The “London inter-bank offered-rate” (Libor) market is where they sort this out by borrowing from and lending to each other, at the “offered rate” of interest.

Once they had their answers, the clerks would throw away the highest and lowest outliers and calculate the average of the rest, which would be recorded as “30-day Libor” for that currency. The process would be repeated for three-month loans, six-month loans and any other periods of interest, and the rates would be published. You would then have a little table recording the state of the market on that day – you could decide which currency you wanted to borrow in, and how long you wanted the use of the money, and the Libor panel would give you a good sense of what high-quality banks were paying to do the same.

Compared with the amount of time and effort that goes into the systems for nearly everything else that banks do, not very much trouble was taken over this process. Other markets rose and fell, stock exchanges mutated and were taken over by super-fast robots, but the Libor rate for the day was still determined by a process that could be termed “a quick ring-around”. Nobody noticed until it was too late that hundreds of trillions of dollars of the world economy rested on a number compiled by the few dozen people in the world with the greatest incentive to fiddle it.

It started to fall apart with the onset of the global financial crisis in 2007, and all the more so after the collapse of Lehman Brothers in 2008, when banks were so scared that they effectively stopped lending to each other. Although the market was completely frozen, the daily Libor ring-around still took place, and banks still gave, almost entirely speculatively, answers to the question “If you were to borrow a reasonable sum, what would you expect to pay?”

But the daily quotes were published, and that meant everyone could see what everyone else was saying about their funding costs. And one of the telltale signs that a bank in trouble is when its funding costs start to rise. If your Libor submission is taken as an indicator of whether you’re in trouble or not, you really don’t want to be the highest number on the daily list. Naturally, then, quite a few banks started using the Libor submission process as a form of false advertising, putting in a lowballed quote in order to make it look like they were still obtaining money easily when, in fact, they could hardly borrow at all. And so it came to pass that several banks created internal message trails saying, in effect, “Dear Lowly Employee, for the benefit of the bank and its shareholders, please start submitting a lower Libor quote, signed Senior Executive”. This turned out to be a silly thing to do.

All this was known at the time. There was an article in the Wall Street Journal about it. I used to prepare PowerPoint slides with charts on them that had gaps for the year 2008 because the data was “somewhat hypothetical”. Even earlier, in late 2007, the Bank of England held a “liaison group” meeting so that representatives from the banks could discuss the issue of Libor reporting. What nobody seemed to realise is that an ongoing fraud was being committed. There was a conspiracy to tell a lie (to the Libor phone panel, about a bank’s true cost of funding) in order to induce someone to enter into a bargain at a disadvantage to themselves. The general public caught on to all this a lot quicker than the experts did, which put the last nail in the coffin of the already weakened trust in the financial system. You could make a case that a lot of the populist politics of the subsequent decade can be traced back to the Libor affair.

Libor teaches us a valuable lesson about commercial fraud – that unlike other crimes, it has a problem of denial as well as one of detection. There are very few other criminal acts where the victim not only consents to the criminal act, but voluntarily transfers the money or valuable goods to the criminal. And the hierarchies, status distinctions and networks that make up a modern economy also create powerful psychological barriers against seeing fraud when it is happening. White-collar crime is partly defined by the kind of person who commits it: a person of high status in the community, the kind of person who is always given the benefit of the doubt.

In popular culture, the fraudster is the “confidence man”, somewhere between a stage magician and the trickster gods of mythology. In films such as The Sting and Dirty Rotten Scoundrels, they are master psychologists, exploiting the greed and myopia of their victims, and creating a world of illusion. People like this do exist (albeit rarely). But they are not typical of white-collar criminals.

The interesting questions are never about individual psychology. There are plenty of larger-than-life characters. But there are also plenty of people like Enron’s Jeff Skilling and Baring’s Nick Leeson: aggressively dull clerks and managers whose only interest derives from the disasters they caused. And even for the real craftsmen, the actual work is, of necessity, incredibly prosaic.

The way most white-collar crime works is by manipulating institutional psychology. That means creating something that looks as much as possible like a normal set of transactions. The drama comes later, when it all unwinds.

Fraudsters don’t play on moral weaknesses, greed or fear; they play on weaknesses in the system of checks and balances – the audit processes that are meant to supplement an overall environment of trust. One point that comes up again and again when looking at famous and large-scale frauds is that, in many cases, everything could have been brought to a halt at a very early stage if anyone had taken care to confirm all the facts. But nobody does confirm all the facts. There are just too bloody many of them. Even after the financial rubble has settled and the arrests been made, this is a huge problem.

 

Jeffrey Skilling and Sherron Watkins of Enron at a Senate commerce committee hearing in 2002. Photograph: Ron Edmonds/AP

It is a commonplace of law enforcement that commercial frauds are difficult to prosecute. In many countries, proposals have been made, and sometimes passed into law, to remove juries from complex fraud trials, or to move the task of dealing with them out of the criminal justice system and into regulatory or other non-judicial processes. Such moves are understandable. There is a need to be seen to get prosecutions and to maintain confidence in the whole system. However, taking the opinions of the general public out of the question seems to me to be a counsel of despair.

When analysed properly, there isn’t much that is truly difficult about the proverbial “complex fraud trial”. The underlying crime is often surprisingly crude: someone did something dishonest and enriched themselves at the expense of others. What makes white-collar trials so arduous for jurors is really their length, and the amount of detail that needs to be brought for a successful conviction. Such trials are not long and detailed because there is anything difficult to understand. They are long and difficult because so many liars are involved, and when a case has a lot of liars, it takes time and evidence to establish that they are lying.

This state of affairs is actually quite uncommon in the criminal justice system. Most trials only have a couple of liars in the witness box, and the question is a simple one of whether the accused did it or not. In a fraud trial, rather than denying responsibility for the actions involved, the defendant is often insisting that no crime was committed at all, that there is an innocent interpretation for everything.

In January this year, the construction giant Carillion collapsed. Although they had issued a profits warning last summer, they continued to land government contracts. It was assumed that, since they had been audited by KPMG, one of the big-four accounting firms, any serious problems would have been spotted.
At the time of writing, nobody has been prosecuted over the collapse of Carillion. Maybe nobody will and maybe nobody should. It’s possible, after all, for a big firm to go bust, even really suddenly, without it being a result of anything culpable. But the accounting looks weird – at the very least, they seem to have recognised revenue a long time before it actually arrived. It’s not surprising that the accounting standards bodies are asking some questions. So are the Treasury select committee: one MP told a partner at KPMG that “I would not hire you to do an audit of the contents of my fridge.”

In general, cases of major fraud should have been prevented by auditors, whose specific job it is to review every set of accounts as a neutral outside party, and certify that they are a true and fair view of the business. But they don’t always do this. Why not? The answer is simple: some auditors are willing to bend the rules, and some are too easily fooled. And whatever reforms are made to the accounting standards and to the rules governing the profession, the same problems have cropped up again and again.

First, there is the problem that the vast majority of auditors are both honest and competent. This is a good thing, of course, but the bad thing about it is that it means that most people have never met a crooked or incompetent auditor, and therefore have no real understanding that such people exist.

To find a really bad guy at a big-four accountancy firm, you have to be quite unlucky (or quite lucky if that was what you were looking for). But as a crooked manager of a company, churning around your auditors until you find a bad ’un is exactly what you do – and when you find one, you hang on to them. This means that the bad auditors are gravitationally drawn into auditing the bad companies, while the majority of the profession has an unrepresentative view of how likely that could be.

Second, there is the problem that even if an auditor is both honest and competent, he has to have a spine, or he might as well not be. Fraudsters can be both persistent and overbearing, and not all the people who went into accountancy firms out of university did so because they were commanding, alpha-type personalities.

Added to this, fraudsters are really keen on going over auditors’ heads and complaining to their bosses at the accounting firm, claiming that the auditor is being unhelpful and bureaucratic, not allowing the CEO to use his legitimate judgment in presenting the results of his own business.

Partly because auditors are often awful stick-in-the-muds and arse-coverers, and partly because auditing is a surprisingly competitive and unprofitable business that is typically used as a loss-leader to sell more remunerative consulting and IT work, you can’t assume that the auditor’s boss will support their employee, even though the employee is the one placing their signature (and the reputation of the whole practice) on the set of accounts. As with several other patterns of behaviour that tend to generate frauds, the dynamic by which a difficult audit partner gets overruled or removed happens so often, and reproduces itself so exactly, that it must reflect a fairly deep and ubiquitous incentive problem that will be very difficult to remove.

By way of a second line of defence, investors and brokerage firms often employ their own “analysts” to critically read sets of published accounts. The analyst is meant to be an industry expert, with enough financial training to read company accounts and to carry out valuations of companies and other assets. Although their primary job is to identify profitable opportunities in securities trading – shares or bonds that are either very undervalued or very overvalued – it would surely seem to be the case that part of this job would involve the identification of companies that are very overvalued because they are frauds.

Well, sometimes it works. A set of fraudulent accounts will often generate “tells”. In particular, fraudsters in a hurry, or with limited ability to browbeat the auditors, will not be able to fake the balance sheet to match the way they have faked the profits. Inflated sales might show up as having been carried out without need for inventories, and without any trace of the cash they should have generated. Analysts are also often good at spotting practices such as “channel stuffing”, when a company (usually one with a highly motivated and target-oriented sales force) sells a lot of product to wholesalers and intermediaries towards the end of the quarter, booking sales and moving inventory off its books. This makes growth look good in the short term, at the expense of future sales.

Often, an honest auditor who has buckled under pressure will include a cryptic-looking passage of legalese, buried in the notes to the accounts, explaining what accounting treatment has been used, and hoping that someone will read it and understand that the significance of this note is that all of the headline numbers are fake. Nearly all of the fraudulent accounting policies adopted by Enron could have been deduced from its public filings if you knew where to look.

More common is the situation that prevailed in the period immediately preceding the global financial crisis.Analysts occasionally noticed that some things didn’t add up, and said so, and one or two of them wrote reports that, if taken seriously, could have been seen as prescient warnings. The problem is that spotting frauds is difficult and, for the majority of investors, not worth expending the effort on. That means it is not worth it for most analysts, either. Frauds are rare. Frauds that can be spotted by careful analysis are even rarer. And frauds that are also large enough to offer serious rewards for betting against them come along roughly once every business cycle, in waves.

Analysts are also subject to very similar pressures to those that cause auditors to compromise their principles. Anyone accusing a company publicly of being a fraud is taking a big risk, and can expect significant retaliation. It is well to remember that frauds generally look like very successful companies, and there are sound accounting reasons for this. It is not just that once you have decided to fiddle the accounts you might as well make them look great rather than mediocre.

If you are extracting cash fraudulently, you usually need to be growing the fake earnings at a higher rate. So people who are correctly identifying frauds can often look like they are jealously attacking success. Frauds also tend to carry out lots of financial transactions and pay large commissions to investment banks, all the while making investors believe they are rich. The psychological barriers against questioning a successful CEO are not quite as powerful as those against questioning the honesty of a doctor or lawyer, but they are substantial.

And finally, most analysts’ opinions are not read. A fraudster does not have to fool everyone; he just needs to fool enough people to get his money.

If you are looking to the financial system to protect investors, you are going to end up being disappointed. But this is inevitable. Investors don’t want to be protected from fraud; they want to invest. Since the invention of stock markets, there has been surprisingly little correlation between the amount of fraud in a market and the return to investors. It’s been credibly estimated that in the Victorian era, one in six companies floated on the London Stock Exchange was a fraud. But people got rich. It’s the Canadian paradox. Although in the short term, you save your money by checking everything out, in the long term, success goes to those who trust.

Libor scandal: the bankers who fixed the world’s most important number

Liam Vaughan and Gavin Finch in The Guardian


At the Tokyo headquarters of the Swiss bank UBS, in the middle of a deserted trading floor, Tom Hayes sat rapt before a bank of eight computer screens. Collar askew, pale features pinched, blond hair mussed from a habit of pulling at it when he was deep in thought, the British trader was even more dishevelled than usual. It was 15 September 2008, and it looked, in Hayes’s mind, like the end of the world.

Hayes had been woken up at dawn in his apartment by a call from his boss, telling him to get to the office immediately. In New York, Lehman Brothers was hurtling towards bankruptcy. At his desk, Hayes watched the world processing the news and panicking. As each market opened, it became a sea of flashing red as investors frantically dumped their holdings. In moments like this, Hayes entered an almost unconscious state, rapidly processing the tide of information before him and calculating the best escape route.

Hayes was a phenomenon at UBS, one of the best the bank had at trading derivatives. So far, the mounting financial crisis had actually been good for him. The chaos had let him buy cheaply from those desperate to get out, and sell high to the unlucky few who still needed to trade. While most dealers closed up shop in fear, Hayes, with a seemingly limitless appetite for risk, stayed in. He was 28, and he was up more than $70 million for the year.

Now that was under threat. Not only did Hayes have to extract himself from every deal he had done with Lehman, he had also made a series of enormous bets that in the coming days interest rates would remain stable. The collapse of Lehman Brothers, the fourth-largest investment bank in the US, would surely cause those rates, which were really just barometers of risk, to spike. As Hayes examined his trading book, one rate mattered more than any other: the London interbank offered rate, or Libor, a benchmark that influences $350 trillion of securities and loans around the world. For traders such as Hayes, this number was the Holy Grail. And two years earlier, he had discovered a way to rig it.

Libor was set by a self-selected, self-policing committee of the world’s largest banks. The rate measured how much it cost them to borrow from each other. Every morning, each bank submitted an estimate, an average was taken, and a number was published at midday. The process was repeated in different currencies, and for various amounts of time, ranging from overnight to a year. During his time as a junior trader in London, Hayes had got to know several of the 16 individuals responsible for making their bank’s daily submission for the Japanese yen. His flash of insight was realising that these men mostly relied on inter-dealer brokers, the fast-talking middlemen involved in every trade, for guidance on what to submit each day.

Brokers are the middlemen in the world of finance, facilitating deals between traders at different banks in everything from Treasury bonds to over-the-counter derivatives. If a trader wants to buy or sell, he could theoretically ring all the banks to get a price. Or he could go through a broker who is in touch with everyone and can find a counter-party in seconds. Hardly a dollar changes hands in the cash and derivatives markets without a broker matching the deal and taking his cut. In the opaque, over-the-counter derivatives market, where there is no centralised exchange, brokers are at the epicentre of information flow. That puts them in a powerful position. Only they can get a picture of what all the banks are doing. While brokers had no official role in setting Libor, the rate-setters at the banks relied on them for information on where cash was trading.

Most traders looked down on brokers as second-class citizens, too. Hayes recognised their worth. He saw what no one else did because he was different. His intimacy with numbers, his cold embrace of risk and his unusual habits were more than professional tics. Hayes would not be diagnosed with Asperger’s syndrome until 2015, when he was 35, but his co-workers, many of them savvy operators from fancy schools, often reminded Hayes that he wasn’t like them. They called him “Rain Man”.

By the time the market opened in London, Lehman’s demise was official. Hayes instant-messaged one of his trusted brokers in the City to tell him what direction he wanted Libor to move. Typically, he skipped any pleasantries. “Cash mate, really need it lower,” Hayes typed. “What’s the score?” The broker sent his assurances and, over the next few hours, followed a well-worn routine. Whenever one of the Libor-setting banks called and asked his opinion on what the benchmark would do, the broker said – incredibly, given the calamitous news – that the rate was likely to fall. Libor may have featured in hundreds of trillions of dollars of loans and derivatives, but this was how it was set: conversations among men who were, depending on the day, indifferent, optimistic or frightened. When Hayes checked the official figures later that night, he saw to his relief that yen Libor had fallen.

Hayes was not out of danger yet. Over the next three days, he barely left the office, surviving on three hours of sleep a night. As the market convulsed, his profit and loss jumped around from minus $20 million to plus $8 million in just hours, but Hayes had another ace up his sleeve. ICAP, the world’s biggest inter-dealer broker, sent out a “Libor prediction” email each day at around 7am to the individuals at the banks responsible for submitting Libor. Hayes messaged an insider at ICAP and instructed him to skew the predictions lower. Amid the chaos, Libor was the one thing Hayes believed he had some control over. He cranked his network to the max, offering his brokers extra payments for their cooperation and calling in favours at banks around the world.

By Thursday, 18 September, Hayes was exhausted. This was the moment he had been working towards all week. If Libor jumped today, all his puppeteering would have been for nothing. Libor moves in increments called basis points, equal to one one-hundredth of a percentage point, and every tick was worth roughly $750,000 to his bottom line.

For the umpteenth time since Lehman faltered, Hayes reached out to his brokers in London. “I need you to keep it as low as possible, all right?” he told one of them in a message. “I’ll pay you, you know, $50,000, $100,000, whatever. Whatever you want, all right?”

“All right,” the broker repeated.

“I’m a man of my word,” Hayes said.

“I know you are. No, that’s done, right, leave it to me,” the broker said.

Hayes was still in the Tokyo office at 8pm when that day’s Libors were published. The yen rate had fallen 1 basis point, while comparable money market rates in other currencies continued to soar. Hayes’s crisis had been averted. Using his network of brokers, he had personally sought to tilt part of the planet’s financial infrastructure. He pulled off his headset and headed home to bed. He had only recently upgraded from the superhero duvet he’d slept under since he was eight years old.

Hayes’s job was to make his employer as much money as possible by buying and selling derivatives. How exactly he did that – the special concoction of strategies, skills and tricks that make up a trader’s DNA – was largely left up to him. First and foremost he was a market-maker, providing liquidity to his clients, who were mostly traders at other banks. From the minute he logged on to his Bloomberg terminal each morning and the red light next to his name turned green, Hayes was on the phone quoting guaranteed bid and offer prices on the vast inventory of products he traded. Hayes prided himself on always being open for business no matter how choppy the markets. It was his calling card.

Hayes likened this part of his job to owning a fruit and vegetable stall. Buy low, sell high and pocket the difference. But rather than apples and pears, he dealt in complex financial securities worth hundreds of millions of dollars. His profit came from the spread between how much he paid for a security and how much he sold it for. In volatile times, the spread widened, reflecting the increased risk that the market might move against him before he had the chance to trade out of his position.

All of this offered a steady stream of income, but it wasn’t where the big money came from. The thing that really set Hayes apart was his ability to spot price anomalies and exploit them, a technique known as relative value trading. It appealed to his lifelong passion for seeking out patterns. During quiet spells, he spent his time scouring data, hunting for unseen opportunities. If he thought that the price of two similar securities had diverged unduly, he would buy one and short the other, betting that the spread between the two would shrink.

Everywhere he worked, Hayes set up his software to tell him exactly how much he stood to gain or lose from every fraction of a move in Libor in each currency. One of Hayes’s favourite trades involved betting that the gap between Libor in different durations would widen or narrow: what’s known in the industry as a basis trade. Each time Hayes made a trade, he would have to decide whether to lay off some of his risk by hedging his position using, for example, other derivatives.

Hayes’s dealing created a constantly changing trade book stretching years into the future, which was mapped out on a vast Excel spreadsheet. He liked to think of it as a living organism with thousands of interconnected moving parts. In a corner of one of his screens was a number he looked at more than any other: his rolling profit and loss. Ask any decent trader and he will be able to give it to you to the nearest $1,000. It was Hayes’s self-worth boiled down into a single indisputable number. 

Tom Hayes was a phenomenon at UBS, one of the best the bank had at trading derivatives. Photograph: Bloomberg via Getty Images

By the summer of 2007, the mortgage crisis in the US caused banks and investment funds around the world to become skittish about lending to each other without collateral. Firms that relied on the so-called money markets to fund their businesses were paralysed by the ballooning cost of short-term credit. On 14 September, customers of Northern Rock queued for hours to withdraw their savings after the bank announced it was relying on loans from the Bank of England to stay afloat.

After that, banks were only prepared to make unsecured loans to each other for a few days at a time, and interest rates on longer-term loans rocketed. Libor, as a barometer of stress in the system, reacted accordingly. In August 2007, the spread between three-month dollar Libor and the overnight indexed swap – a measure of banks’ overnight borrowing costs – jumped from 12 basis points to 73 basis points. By December it had soared to 106 basis points. A similar pattern could be seen in sterling, euros and most of the 12 other currencies published on the website of the British Bankers’ Association each day at noon.

Everyone could see that Libor rates had shot up, but questions began to be asked about whether they had climbed enough to reflect the severity of the credit squeeze. By August 2007, there was almost no trading in cash for durations of longer than a month. In some of the smaller currencies there were no lenders for any time frame. Yet, with trillions of dollars tied to Libor, the banks had to keep the trains running. The individuals responsible for submitting Libor rates each day had no choice but to put their thumb and forefinger in the air and pluck out numbers. It was clear that their “best guesses” were unrealistically optimistic.

A game of brinkmanship had developed in which rate-setters tried to predict what their rivals would submit, and then come in slightly lower. If they guessed wrong and input rates higher than their peers, they would receive angry phone calls from their managers telling them to get back into the pack. On trading floors around the world, frantic conversations took place between traders and their brokers about expectations for Libor.

Nobody knew where Libor should be, and nobody wanted to be an outlier. Even where bankers tried to be honest, there was no way of knowing if their estimates were accurate because there was no underlying interbank borrowing on which to compare them. The machine had broken down.

Vince McGonagle, a small and wiry man with a hangdog expression, had been at the enforcement division of the Commodity Futures Trading Commission (CFTC) in Washington for 11 years, during which time his red hair had turned grey around the edges. A practising Catholic, McGonagle got his law degree from Pepperdine University, a Christian school in Malibu, California, where students are prepared for “lives of purpose, service and leadership”.

While his classmates took highly paid positions defending companies and individuals accused of corporate corruption, McGonagle opted to build a career bringing cases against them. He joined the agency as a trial attorney and was now, at 44, a manager overseeing teams of lawyers and investigators.

McGonagle closed the door to his office and settled down to read the daily news. It was 16 April, 2008, and the headline on page one of the Wall Street Journal read: “Bankers Cast Doubt on Key Rate Amid Crisis”. It began: “One of the most important barometers of the world’s financial health could be sending false signals. In a development that has implications for borrowers everywhere, from Russian oil producers to homeowners in Detroit, bankers and traders are expressing concerns that the London interbank offered rate, known as Libor, is becoming unreliable.”

The story, written at the Journal’s London office near Fleet Street, went on to suggest that some of the world’s largest banks might have been providing deliberately low estimates of their borrowing costs to avoid tipping off the market “that they’re desperate for cash”. That was having the effect of distorting Libor, and therefore trillions of dollars of securities around the world.

The journalist’s sources told him that banks were paying much more for cash than they were letting on. They feared if they were honest they could go the same way as Bear Stearns, the 85-year-old New York securities firm that had collapsed the previous month.

The big flaw in Libor was that it relied on banks to tell the truth but encouraged them to lie. When the 150 variants of the benchmark were released each day, the banks’ individual submissions were also published, giving the world a snapshot of their relative creditworthiness. Historically, the individuals responsible for making their firm’s Libor submissions were able to base their estimates on a vibrant interbank money market, in which banks borrowed cash from each other to fund their day-to-day operations. They were prevented from deviating too far from the truth because their fellow market participants knew what rates they were really being charged. Over the previous few months, that had changed. Banks had stopped lending to each other for periods of longer than a few days, preferring to stockpile their cash. After Bear Stearns there was no guarantee they would get it back.

With so much at stake, lenders had become fixated on what their rivals were inputting. Any outlier at the higher – that is, riskier – end was in danger of becoming a pariah, unable to access the liquidity it needed to fund its balance sheet. Soon banks began to submit rates they thought would place them in the middle of the pack rather than what they truly believed they could borrow unsecured cash for. The motivation for low-balling was not tied to profit – many banks actually stood to lose out from lower Libors. This was about survival.

Ironically, just as Libor’s accuracy faltered, its importance rocketed. As the financial crisis deepened, central bankers monitored Libor in different currencies to see how successful their latest policy announcements were in calming markets. Governments looked at individual firms’ submissions for clues as to who they might be forced to bail out next. If banks were lying about Libor, it was not just affecting interest rates and derivatives payments. It was skewing reality.

There was no inkling at this stage that traders such as Hayes were pushing Libor around to boost their profits, but here was a benchmark that relied on the honesty of traders who had a direct interest in where it was set. Libor was overseen by the British Bankers Association (BBA). In both cases, the body responsible for overseeing the rate had no punitive powers, so there was little to discourage firms from cheating.

When McGonagle finished reading the Wall Street Journal article, he emailed colleagues and asked them what they knew about Libor. His team put together a dossier, including some preliminary reports from within the financial community. In March, economists at the Bank for International Settlements, an umbrella group for central banks around the world, had published a paper that identified unusual patterns in Libor during the crisis, although it concluded these were “not caused by shortcomings in the design of the fixing mechanism”.

A month later, Scott Peng, an analyst at Citigroup in New York, sent his customers a research note that estimated the dollar Libor submissions of the 18 firms that set the rate were 20 to 30 basis points lower than they should have been because of a “prevailing fear” among the banks of “being perceived as a weak hand in this fragile market environment”.

While there was no evidence of manipulation by specific firms, McGonagle was coming around to the idea of launching an investigation.

In 2009, Hayes was lured away from UBS to join Citigroup. The head of Citigroup’s team in Asia, the former Lehman banker Chris Cecere, a small, goateed American with a big reputation for finding new ways to make money, had been given millions of dollars to attract the best talent – and Hayes was his round-one pick.

It wasn’t just the $3m signing bonus that had won Hayes over. The promise of a fresh start at one of the world’s biggest banks, with him at centre stage in its aggressive expansion into the Asian interest-rate derivatives market, had proved too tempting to resist. After persuading him to join, Cecere boasted to colleagues that he’d found “a real fucking animal”, who “knows everybody on the street”.

 

Citigroup in Canary Wharf, London Photograph: DBURKE / Alamy/Alamy

Cecere set in motion plans for Citigroup to join the Tibor (Tokyo interbank offered rate) panel which, Hayes would crow, was even easier to influence than Libor because fewer banks contributed to it. Hayes wanted to hit the ground running when he started trading, and being able to influence the two benchmarks that helped determine the profitability of the bulk of his positions was an important step. Another was bringing Citigroup’s own London-based Libor-setters on board.

On the afternoon of 8 December, Cecere was at his desk on the Tokyo trading floor. He had an office but seldom used it, preferring to be amid the action. He believed that six-month yen Libor was too high. After checking the submissions from the previous day, he was surprised to see that Citigroup had input one of the highest figures.

Cecere contacted the head of the risk treasury team in Tokyo, Stantley Tan, and asked him to find out who the yen-setter was and request that he lower his input by several basis points. It turned out the risk treasury desk in Canary Wharf was responsible for the bank’s Libor submissions.

“I spoke to our point man in London,” Tan wrote back to Cecere that afternoon. “I have asked him to consider moving quotes [lower]”.

Cecere checked the Libors again later that night and was annoyed to see that Citigroup had only reduced its six-month rate by a quarter of a basis point.

He wrote to Tan, “Can you speak with him again?”

The following day, Tan went back to the treasury desk in London as requested. He also forwarded the message chain to Andrew Thursfield, Citigroup’s head of risk treasury in London. The response he got back from his UK counterpart left little room for misinterpretation: it was a thinly veiled warning to back off.

Hayes, who sat just behind his boss, was not on the email chain, but Cecere sent it to him.

Thursfield was a straitlaced man in his forties who had spent more than 20 years in risk management at Citigroup after joining as a graduate trainee. He saw himself as the guardian of the firm’s balance sheet and didn’t take kindly to being told how to do his job by a pushy trader who knew nothing of the intricacies of bank funding.

Rather than lowering the inputs, Thursfield’s team increased its submission days later, pushing the published Libor rates higher. Hayes would have to try a different tack. On 14 December he sent an email to his London counterpart, asking him to approach the rate-setters directly.

“Do you talk to the cash desk and did we know in advance?” Hayes asked, referring to the bank’s decision to bump up its Libor submissions. “We need good dialogue with the cash desk. They can be invaluable to us. If we know ahead of time we can position and scalp the market.”

What Hayes didn’t realise was that no amount of schmoozing was going to get the rate-setters onside. Unlike some banks, Citigroup was taking the CFTC’s investigation into Libor seriously. In March 2009, Thursfield had personally delivered an 18-page presentation via video link to investigators on the rate-setting process. The cash traders weren’t about to risk their necks for someone they didn’t know who worked on the other side of the world.

It wasn’t just that they knew they were being watched. Thursfield was not only a stickler for the rules but had taken a personal dislike to Hayes when the pair had met three months earlier. It was October 2009, shortly after Hayes had accepted the job at Citigroup, and his boss had sent him to London to meet the bank’s key players.

“Good to meet you. You can help us out with Libors. I will let you know my axes,” Hayes said by way of an opening gambit when he was introduced to Thursfield.

Unshaven and dishevelled, Hayes told the Citigroup manager how the cash desk at UBS frequently skewed its submissions to suit his book. He boasted of his close relationships with rate-setters at other banks and how they would do favours for each other. Hayes was trying to charm Thursfield, but he had badly misjudged the man and the situation. The following day Thursfield called his manager, Steve Compton, and relayed his concerns.

“Once you stray on to talking about Libor fixings, I mean we just paid another $75,000 bill to the lawyer this week for the work they’re doing on the CFTC investigation,” Thursfield said. “Whoever is the desk head, or whatever, [should] have a close watch on just what he’s actually doing and how publicly. It’s all, you know, very much barrow-boy-type [behaviour].”

The knock on Hayes’s door came at 7am on a Tuesday, two weeks before Christmas 2012. Hayes padded down the bespoke pine staircase of his newly renovated home in Woldingham, Surrey, to let in more than a dozen police officers and Serious Fraud Office investigators. A year before, he had been fired from Citigroup, and shortly afterwards returned to the UK, where he married his girlfriend Sarah Tighe.

Hayes stood at his wife’s side as the officers swept through the property, gathering computers and documents into boxes and loading them into vehicles parked at the end of the gravel driveway. The couple had only moved in a fortnight before. Their infant son was upstairs in bed. Traffic was heavy by the time the former trader was led to the back of a waiting car. The 20-mile crawl from Surrey to the City of London passed in silence.

Bishopsgate police station is a grey, concrete building on one of the financial district’s busiest thoroughfares. In a formal interview, Hayes was told he had been brought in to answer questions relating to allegations that between 2006 and 2009 he had conspired to manipulate yen Libor with two of his colleagues. Hayes responded that he planned to help but would need time to consider the 112 pages of evidence so would not be answering any questions that day. It was late when he arrived back in Surrey.

In June, Barclays had become the first bank to reach a settlement with authorities, admitting to rigging the rate and agreeing to pay a then-record £290 million in fines. From the moment Barclays had settled, sparking a political firestorm that burned for weeks, Hayes’s destiny had been leading to this point. The Serious Fraud Office (SFO), which had previously resisted launching a probe into Libor rigging, was forced to reverse its position and on 6 July issued a statement announcing it would be undertaking a criminal investigation. That week the government launched its own review into the scandal. The British public and its politicians were out for scalps.

On 19 December, eight days after his arrest, Hayes was at home on his computer when a news bulletin popped up with a link to a press conference in Washington. As cameras flashed, Attorney General Eric Holder and Lanny Breuer, head of the Justice Department’s criminal division, took turns outlining the $1.5bn settlement the authorities had reached with UBS over Libor. The Swiss bank, they explained, had pleaded guilty to wire fraud at its Japanese arm. Then came the sucker punch.

“In addition to UBS Japan’s agreement to plead guilty, two former UBS traders have been charged, in a criminal complaint unsealed today, with conspiracy to manipulate Libor,” said Breuer. “Tom Hayes has also been charged with wire fraud and an antitrust violation.” Neither Tan nor Cecere has ever been charged with wrongdoing.

At that moment the full horror of the situation hit Hayes for the first time. The two most powerful lawyers in the US planned to extradite him on three separate criminal charges, each carrying a 20–30 year sentence. Less than 24 hours later, a member of Hayes’s legal team was on the phone to the SFO to discuss cutting a deal.

Fighting the charges seemed futile: the UBS settlement made reference to more than 2,000 attempts by Hayes and his colleagues to influence the rate over a four-year period. He was the star attraction, the “Jesse James of Libor”, as he would later tell it. The US authorities had yet to issue extradition papers, but it was only a matter of time.


RBS, Barclays and other banks fined in Swiss franc Libor case



So began a race to convince the SFO to take on Hayes as a sort of chief informant, who in return would receive leniency and, more importantly, an agreement that he would be dealt with in the UK.

To secure this arrangement Hayes had to agree to tell the SFO everything he knew and promise to testify against everybody involved. Crucially, he also had to plead guilty to dishonestly rigging Libor. It was not enough to admit trying to influence the rate. He had to confess that he knew it was wrong.

During two days of so-called scoping interviews to test his knowledge of the case, Hayes talked openly about his campaign to rig Libor, for the first time in his life. At the SFO’s offices near Trafalgar Square he admitted he had acted dishonestly and brought the investigators’ attention to aspects of the case they knew nothing about. The interviews covered everything from his entry into the industry and his trading strategies to how the Libor scheme began and the various individuals who helped him rig the rate. They barely had to prod to get him to talk. Hayes seemed to relish reliving moments from his past. His voice sped up when he talked about heady days piling into positions, squeezing the best prices from brokers and playing traders off against each other.

“The first thing you think is where’s the edge, where can I make a bit more money, how can I push, push the boundaries, maybe you know a bit of a grey area, push the edge of the envelope,” he said in one early interview. “But the point is, you are greedy, you want every little bit of money that you can possibly get because, like I say, that is how you are judged, that is your performance metric.”

Paper coffee cups piled up as Hayes went over the minutiae of the case. At one stage, Hayes was asked about how he viewed his attempts to move Libor around. The exchange would prove crucial.

“Well look, I mean, it’s a dishonest scheme, isn’t it?” Hayes said. “And I was part of the dishonest scheme, so obviously I was being dishonest.”

This article is adapted from The Fix: How Bankers Lied, Cheated and Colluded to Rig the World’s Most Important Number by Liam Vaughan and Gavin Finch

Record fines for currency market fix

BBC 
• From the sectionBusiness

Five of the world's largest banks are to pay fines totalling $5.7bn (£3.6bn) for manipulating the foreign exchange market, US officials say.

Four of the banks - JPMorgan, Citigroup, Barclays, RBS - have agreed to plead guilty to US criminal charges.

The fifth, UBS, will plead guilty to rigging benchmark interest rates.

Barclays was fined the most, $2.4bn, as it did not join other banks in November to settle investigations by UK, US and Swiss regulators.

US Attorney General Loretta Lynch said that "almost every day" for five years from 2007, currency traders used a private electronic chat room to manipulate exchange rates.

Their actions harmed "countless consumers, investors and institutions around the world", she said.

Cartel threat

Regulators said that between 2008 and 2012, several traders formed a cartel and used chat rooms to manipulate prices in their favour.

One Barclays trader who was invited to join the cartel was told: "Mess up and sleep with one eye open at night."

Several strategies were used to manipulate prices and a common scheme was to influence prices around the daily fixing of currency levels.

A daily exchange rate fix is held to help businesses and investors value their multi-currency assets and liabilities.

'Building ammo'

Until February, this happened every day in the 30 seconds before and after 16:00 in London and the result is known as the 4pm fix, or just the fix.

In a scheme known as "building ammo", a single trader would amass a large position in a currency and, just before or during the fix, would exit that position.

Other members of the cartel would be aware of the plan and would be able to profit.

"They engaged in a brazen 'heads I win, tails you lose' scheme to rip off their clients," said New York State superintendent of financial services Benjamin Lawsky.

Dhoni's Revenge

By Girish Menon

As the brickbats from aficionados of Test cricket kept piling on the abject Indian cricket team at the Oval yesterday, I was pleasantly amused by Dhoni's comment at the press conference following the Indian surrender. He stated, as quoted on Cricinfo, "Don't be so jealous of IPL". It made me ponder if Dhoni and his teammates have affected their revenge in such a cold blooded and undetectable manner.

Australia and England along with purists and other conservatives in cricket have for the past so many years been shouting that India did not care for Test cricket. The ICC however predicted that the new power structure in the ICC would restore Test cricket to its halcyon days. And this five Test series with India would showcase the new superpower's commitment to the 'soporific' game. Yet, by ending the Oval and Old Trafford Tests in three days Dhoni's men have put paid to such plans.

Given India's quick and abject defeats in two consecutive series in England, which county chief will have the gumption to bid   to host India's next Test match. The ECB have been running an auction and handing out Tests to the highest bidder. County grounds like the Oval hoped to attract the 'brown pound' in order to make a profit. With India's capitulation I doubt if future visits by the Indian team will attract the demand that we have seen recently.

The counties may hope to attract the 'white pound' to compensate for the Indian diaspora's absence. But cricket as a sport is dwindling in popularity as the coffers of most counties will reveal.

Indian advertisers might also be mad at the team's performances as the 'brown eyeballs' would be switching channels to avoid the shambles put up by Dhoni's men. They may henceforth demand the negation of 'home advantage' and creation of pitches that suit Dhoni's men. Thus match fixing, frowned upon by the ICC, may make a re-entry in the form of scripted matches all in the name of entertainment.

In the process, Dhoni's men would have wreaked sweet revenge not only on the lovers of Test cricket and the ICC but also on Andersen. For after all, what will his record as England's highest wicket taker be worth, if Test cricket is dead and the only records worth mentioning are set in the IPL?

More banking scandals to come, admits Treasury Minister Andrea Leadsom

Andrew Grice in The Independent

More scandals in the financial sector are in the pipeline, the Treasury Minister responsible for the City of London has admitted.

Andrea Leadsom, who previously worked in banking and finance for 25 years, warned that there were more "cringeworthy announcements" to come and that there was "still a lot of baggage" in the financial industry.

Ms Leadsom, who held senior roles at Barclays and Invesco Perpetual before becoming an MP, told the parliamentary magazine The House there was still a long way to go change the City’s culture. Asked whether it is learning the lessons of the financial crisis, she replied: "I would say that at the top echelons of the banks, absolutely. But I think there's quite a long way to go to really change the culture. I think it did become very transaction-oriented and I think it will take time to recover that. I think we are still going to see a lot of cringeworthy announcements."

She admitted that when she heard about the Libor interbank lending rate scandal, she thought: “Well, if Libor is rigged, then what wasn’t rigged?”

Mrs Leadsom said: "We've had a number of issues over bank wrongdoing. There are inquiries going on, there are some pretty serious allegations out there, we've still got PPI going on. There are still things happening and redress under way. So it's quite difficult to just forget about that and move on. There's still a lot of baggage.”

Shortly after she was appointed Treasury Economic Secretary in April, The Independent revealed that she had previously used trusts to reduce her potential tax bill and offshore banking arrangements for her buy-to-let property company.

In the interview, Ms Leadsom declined to say whether she would vote in favour of the HS2 project - even though it is championed by her Treasury boss George Osborne. It would affect her South Northamptonshire constituency and while she is a backbencher, she opposed the Bill paving the way for the scheme. “I’m absolutely firmly committed to getting decent compensation and mitigation for my constituents and I think there’s a long way to go yet,” she said.

She also departed slightly from the party line on Europe, saying that there might be case for leaving the EU. The founder of the Conservative Fresh Start project aimed at getting a better deal for the UK, she said: "Obviously [if there's] a nonsense reform that doesn't achieve anything, then it might be. But at the moment I've spent four years working extremely hard trying to find things that would make it worth staying in."

Ms Leadsom dismissed calls by Tory Eurosceptics for David Cameron to set out his shopping list of demands for the renegotiation of Britain’s membership terms.

Defending the controversial Help to Buy mortgage guarantee scheme, she said: “Overwhelmingly, it's achieving its aspiration of helping people to get their first home. I get many more letters from people saying 'I'm desperate to get a mortgage, why have you done this mortgage market review?' rather than people saying 'oh, you know, property prices are ridiculously high".

Cricket must confront the magnitude of fixing

The first step towards the solution is to appreciate the scale of the problem, something cricket still seems to be struggling to do

Former New Zealand international Lou Vincent. Photograph: Teaukura Moetaua/Getty Images

The sad truth is that the most recent spot-fixing revelations bring to mind nothing so much as Captain Renault’s line as he shuts down Rick’s Café in Casablanca: “I’m shocked, shocked, to find that gambling is going on in here.” What was it, exactly, about the evidence accrued in recent years that fixing has been committed in international and domestic cricket across all three formats by a mix of players, umpires, and administrators from across the Test-playing nations that has left us so startled by the allegations made by Lou Vincent?

Was the guilt of Salman Butt, Mohammad Asif, Mohammad Amir, Mervyn Westfield, Shariful Haque, Gurunath Meiyappan, Danish Kaneria, the Sri Lankan umpires Sagara Gallage and Maurice de la Zilwa not all the confirmation that was needed? Were the approaches reported by Shane Watson, Mashrafe Mortaza, Paul Nixon and so many others insufficient proof? Or is it that cricket, the community around the sport, is still in denial about the extent of the problem it is facing?

The allegations made by Vincent have, it is reported, been corroborated by at least three people, one a county player, another a friend in New Zealand, and the last involved in cricket but not as a player. Mal Loye, Brendon McCullum and Iain O’Brien have all said that they knew what Vincent was up to. Which rather begs the question as to why Vincent was allowed to go on playing top-level cricket for the Mid West Rhinos, Auckland, and the Khulna Royal Bengals long after he was trying to fix matches.

It is not just Vincent. The Anti-Corruption and Security Unit says it is monitoring more than 100 individuals around the world who it suspects of involvement in fixing. Depressing and distressing as it is to admit, this means that if you have been watching a lot of cricket and you have not been wondering whether at least some of what you have seen may have been fixed, you are either wilfully innocent or unwittingly naive. If that seems excessively cynical, then remember that as Sir Humphrey had it, that is only the label an idealist gives to a realist.

Time was when I would have thought differently. In the 2011 World Cup I was at Pallekele for a group match – almost a dead rubber – between New Zealand and Pakistan, which was illuminated by a spectacular century by Ross Taylor. It was all the more unexpected because he had been in such dismal form for so long, and had not scored a hundred in his last 48 ODI innings. This, though, was his lucky day. Kamran Akmal dropped him twice in his first full over at the crease. Thus reprieved, Taylor resolved to make the most of his good fortune and ground his way to 68 from 105 balls.

In the 46th over, bowled by Shoaib Akhtar, Taylor clicked. He hit a four past point, followed it with three sixes and another four. With two wides, the over cost 28. The 48th, bowled by Abdul Razzaq, was dearer still. It went for 30, and again there were a couple more wides in among it all. Taylor hit 62 off the final 16 deliveries he faced and, together with Nathan McCullum and Jacob Oram, scored 114 runs in the last six overs of the innings.

Startled journalists, long since snapped out of the torpor induced by the stifling heat, turned to each other, incredulous, exhilarated. And then an email arrived in my inbox, sent by a colleague who is not especially keen on cricket but who has an excellent eye for a news story. It said, simply, “Do we think this is legit?”

Pop. A pinprick to a party balloon. It had not even occurred to me to ask whether I was watching anything other than wonderful batting against some woeful bowling. The elation I felt seeped away and, in my irritation, I snapped back a short reply. The thing is, though I did not admit it at the time, he was right to ask. Only six months before, three Pakistan players had been caught spot-fixing in the Lord’s Test. Rumours, unsubstantiated, still swirled around some of their players. I knew all that, but in the excitement of the moment l preferred to suspend my disbelief, which is, after all, what we want to do when watching sport. I was thrilled by the fact that what I had seen seemed almost unbelievable. My colleague was only suggesting that it might be exactly that.

There is no evidence to suggest that any aspect of that match between Pakistan and New Zealand, least of all Taylor’s performance, was fixed. But the unpalatable question put to me is one that those of us who love cricket should be asking ourselves, and each other, far more often than we tend to do. Especially when you think that the sport we support has such a long history of fixing and cheating, and that, as Ian Chappell has just written, its administrators have so often sought to soft-soap the offences have come to light.

Later in 2011, I switched across to cover the athletics circuit in the run-up to the 2012 Olympics. The small band of British athletics writers are a convivial lot but as sceptical as any group I’d ever worked with. And understandably so. Some of them had been on the beat since the early 1980s and, until Usain Bolt, of seven winners over nearly 30 years of men’s 100 metres finals only Donovan Bailey, successful in 1996, made it to retirement without his medal getting at least figuratively tarnished. A lifetime spent lionising athletes who are later found to have cheated is enough to disabuse even the most misty-eyed of us of our romantic notions.

On the athletics circuit, I learned, when something is celebrated as being too good to be true, the first thing to ask is, in private, if not in public, is whether it really is. Bitter experience means fans and journalists feel compelled to ask awkward questions. Similar thinking informed the remarks made by the US swim coach John Leonard about the Chinese swimmer Ye Shiwen during the London Olympics. Leonard remembered the 1976 Olympics, when the East German women’s team, who were later found to have been doping, swept the swimming events. He had his suspicions, but said nothing about them, and regretted his silence ever after. So he decided that the next time he had misgivings about a performance, he would speak out about his doubts, which turned out to be unfounded.

Switch back to cricket, where there seems to be a striking lack of such scepticism – partly because the offences can be so subtle, and so similar to the inadvertent actions of innocent players. But even the more ham-fisted examples, like Amir’s infamous no-ball in the Lord’s Test of 2010, seem to provoke little suspicion. Amir was, as Cricinfo’s ball-by-ball commentator put it at the time, “a good half metre over the line”. Cricket fans, journalists too, simply weren’t, and perhaps still aren’t, attuned to the possibility that a player may be cheating. Sequences of no-balls, strikingly soft dismissals, sudden de-accelerations in the scoring rate, incongruously stodgy batting, these things should all raise red flags. Was a player involved in the ICL, or one of the teams implicated in fixing in the BPL, IPL, or county cricket? Are there whispers about him on the circuit? Is the match being televised in India? Are there curious betting patterns around the match online? Combinations of these criteria make it reasonable to ask “is this legit?” even if, as is likely, you do not know the answer.

The trouble is, of course, that you risk being paralysed by a paranoia that prevents you from being able to enjoy the sport. The idea that spectators and media will be forced to think this way is anathema to the authorities. The alternative, what they would have us do, is choose to believe wholeheartedly in what we see and leave them to make their investigations. These would be the same authorities, in the ICC’s case, who are about to appoint N Srinivasan as chairman even though he has been suspended from the BCCI by the supreme court of India while investigations are held into his conduct regarding allegations of spot-fixing in relation to his son-in-law and involving the team he owns, the Chennai Super Kings.

As is so often the case, the first step towards the solution is to confront the magnitude of the problem, something cricket still seems to be struggling to do.

Cricket fixing scandal: The day I confronted Lou Vincent

We in the New Zealand team knew without a shadow of doubt that our ex-colleague was cheating

Fixer: New Zealand players watched Lou Vincent score one from nine balls in the ICL and smelt a rat Photo: GETTY IMAGES

By Iain O'Brien, Former New Zealand player

10:30PM BST 16 May 2014

“Did you?” “Huh?” “Did you, you know, do some dumb things while you were playing?” I was sitting across from Lou Vincent, the ex-New Zealand cricketer and ex-team-mate of mine. We were in a curry house, not far from the HAC Ground in London, where we had both just played in a charity Twenty20. It was Aug 30, 2012 and I hadn’t seen Lou for a long time; in a lot of ways, intentionally. I didn’t really want to be seen with him, associated with him or considered a mate of his.

We did, and do have, one thing in common; we both suffer with mental illness. That was the basis for a lot of what we talked about that day.

Lou had been touring in a camper van spreading his story of MI and raising awareness. What he was doing seemed great, but what he had been doing wasn’t.

I knew he had been up to no good. It becomes evident, as a player, that what you see is not always real. That moment you learn that wrestling on TV isn’t real. It is acting. It is hard to believe at first and then, when you have watched a lot, or been around it endlessly, you see it for what it really is. There is no going back.

On a Test tour of Bangladesh, 2008, we, the New Zealand team watched a lot of the Indian Cricket League; the ‘rebel’ T20 competition in its first year. We watched some of the most unbelievable cricket. Unbelievable in a way that we could not believe how obvious what was going on: leaving and or padding up to straight ones, run outs by massive distances in curious circumstances, batsmen playing out maidens, no-balls and wides just too big and too often to be natural mistakes. It looked a shambles. 

And this included Lou Vincent. He had walked away from a New Zealand contract to take part in a lucrative league. We knew what was going on.

Without a shadow of doubt Lou was fixing. From our Bangladesh telephone sims (when touring, typically, we buy or are provided with a local sim), players who had Lou’s number would text him with some rather unpleasant messages about what he was doing. He was called a “fixer”, a “cheat” and many more unprintable things.

Lou denied any involvement. I asked him again if he had “fixed”, if he had been a part of it. He straight out rejected my line of questions. I showed him a scorecard from a game I had watched live. I had the scorecard saved as a bookmark on my phone browser so that we could talk specifics. I showed it to him. He put his one run from nine balls, playing out a first-over maiden, to just good bowling. I called that “rubbish”.

Lou is a quality player. For a fix he promised to score, 30 inside three overs. He failed, but a player with that quality does not score one from nine balls. I have not spoken to Lou since.

It happens here, in the UK. More than in just the matches we have read about from Lou’s accounts.

I was commentating on a match at Chelmsford and Danish Kaneria, the Essex and Pakistan leggie, bowled one of the biggest wides I have ever seen. It was the first ball of a spell. In the box we were flabbergasted at how flagrant it was.

In the previous two World Twenty20s I watched a highly respected player swap his bat, make sure that the cameras caught it by taking a long time to complete the act, on three occasions. A wicket fell in the next over, either him or his partner. A coincidence? I don’t think so. A change of bat can be a sign to a bookie that the fix is on.

I have seen others too. The ones outlined by Vincent. I watched the Sussex v Kent game which we now know contained spot-fixing and I sensed something was up.

The issue is, knowing and proving. Should I, as an ex-player and now commentator, be reporting suspect activity to the Anti-Corruption and Security Unit? Maybe I should.

But, I feel it is so rife that they would get overrun by what I see as suspect actions which have become so blatant that it is hard to believe they even care about our game anymore.

Iain O’Brien played 22 Tests for New Zealand and now works as a BBC commentator based in the UK