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European banking editor at The Wall Street Journal
David Enrich followed Tom Hayes, convicted on manipulating Libor, for more than 2 years as part of this story. The links to his five-part story of "The Unraveling of Tom Hayes" are below:
This Q&A took place between 9/18/15 and 9/23/15. Unanswered questions have been hidden
13 questions
Author of: "Superpower", President of Eurasia Group
How would you grade the process of European financial reform since 2010? Has momentum ground to a halt?
European banking editor at The Wall Street Journal
Hi Ian. Thanks for the question. Reform of the European banking industry remains a work in progress, but I don't think momentum has ground to a halt.

Europe, especially relative to the U.S., was very slow to tackle the problems in its banking industry after the financial crisis erupted in 2008. But in the past couple years, European banks have raised tens if not hundreds of billions of dollars in new capital. They are getting out of extraneous businesses. They have become much more conservative in deciding what types of loans and other assets to invest in. (Ironically, this is a source of friction with European policymakers, who are desperate for banks to do more lending.)

In the past year or so, much of the pressure for further reform has shifted from the public sphere to behind-the-scenes cajoling from the new pan-eurozone banking regulator, controlled by the European Central Bank. The ECB has been pushing hard for banks to have far more capital to absorb unexpected losses than they are required to under international capital requirements. Again, this remains a work in progress -- investors and analysts still perceive a number of large European banks as lacking adequate capital.

One of the wildcards here is the trouble that banks keep getting into with regulators and law-enforcement authorities all over the world. The Libor scandal is a good example of this. Banks have been forced to pay billions of dollars in penalties, and to plead guilty to crimes, to resolve the allegations of wrongdoing. The pipeline of investigations -- not just into Libor, but also things like money laundering, sanctions violations and a variety of types of market manipulation -- is practically overflowing. This is necessary to clean up a broken system, but all the penalties make it harder for banks and the broader financial system to regain solid footing.
Do you think there's something about the work culture of finance that allows for or even encourages fraudulence?
European banking editor at The Wall Street Journal
Hi Catherine. The short answer is yes. Bankers and traders historically have been encouraged, from the first day they set foot in the office, to make money at virtually all costs. At least until recently, the sole metric by which they were judged was how much revenue they generate for their employers. They are trained to find and then exploit tiny inefficiencies in the markets in which they operate. Pushing the envelope is often considered a job requirement.

To be clear, banks and other financial institutions are NOT encouraging their employers to violate the law or act unethically. But nor are they always very clear about where to draw the line. That's one of the interesting things I've learned through following Tom Hayes. He is mildly autistic (Asperger's syndrome) and has trouble interpreting subtle nonverbal cues and seeing shades of grey. He saw his job as to push as hard as he could to make money for his employer. There were no explicit rules against manipulating Libor, and he witnessed colleagues and competitors doing small things to skew the rate. He figured he would take things a step further. His bosses knew about and encouraged what he was doing. I'm certainly not condoning that behavior, but it's not hard to see how someone like Hayes ends up crossing the line, and I think it is at least partly a function of incentives woven into the fabric of the financial industry.

One important caveat: The industry in the past couple years has made important strides toward cleaning up its act. Bankers and traders are no longer compensated solely on their revenue; they also are judged on their compliance with rules and their overall behavior. Until the pendulum swings back in the other direction, I think lawless banking-industry behavior will be less widespread than in the past.
Hey David, thanks so much for answering our questions. What would you consider was your most important quality as a reporter in the research and writing of this story?
European banking editor at The Wall Street Journal
Hi Hanna. I think there were a few traits that really helped. As I mentioned in response to Jieun's question, patience was essential. That isn't always one of my strong suits, so I had to work at it. At least as important, though, was being a good listener and having an open mind. A lot of the time, Tom really just wanted someone to talk to. He felt, with good reason, that most of the world, and certainly most of the media, viewed him as an evil crook. That must have been a really lonely place to be. I let him talk incessantly about the stuff that mattered to him, only occasionally interrupting him with questions or changing the subject. I sometimes called him out on what I thought was revisionist history or convenient excuses, and he came to trust that I was being honest and straightforward with him. Ultimately it boiled down to some of the same characteristics that define any healthy relationship: Mutual trust and respect, and honesty.
Researcher @ Harvard | Parlio community manager
Thank you for taking our questions, Mr. Enrich.

I understand that you followed this story closely for 2.5 years (the article is fascinating and so personal). But how were you able to gain the trust of Tom Hayes and his wife to cover his story in the first place, and also throughout the few years? They obviously knew that you were going to publicize his stories, select text messages, etc. I'm amazed how you were able to graciously gain the trust of one of the most scandalized man along with his wife's.
European banking editor at The Wall Street Journal
Hi Jieun. I'm glad you liked the article. I have spent a lot of time thinking about how I managed to gain Tom's trust. At first, I think he was desperate for someone to listen to him without assuming he was guilty, and I was willing to do that. Tom was desperate for his side of the story to be told -- he believed, and continues to believe, that he has been made a scapegoat -- but his hands were tied about speaking publicly.

I was very patient. He and his wife told me from the start that theywould eventually be able to speak publicly, but that it wouldn't be for a very long time. One of the great things about the Wall Street Journal is that we can take the long view on projects like this. My editor, Bruce Orwall, was supportive of me spending a lot of time building up a relationship without it necessarily translating into an immediate, or even medium-range, story. In today's media environment, that is a real luxury, and I am grateful that I had that opportunity.

Ultimately, I managed to convince Tom and Sarah that they should go along with this project because I would tell their story in what I perceived as a fair, nuanced way. They had to trust that my idea of fair would be at least somewhat consistent with theirs.
VP, Global Integrated Content Solutions at The Economist
Beautifully told story, David. You paint a vivid picture of a naif. I was struck by the level of his self-delusion and wonder if you think that is unique to Tom or systematic to that culture?
European banking editor at The Wall Street Journal
Thanks Jeff, glad you liked the story. Tom is a pretty unique character. In a decade covering the banking industry, I've never encountered anyone like him -- which is part of the reason I had so much fun telling his story. Tom is mildly autistic (Asperger's), which helps him focus intensively and to excel at certain tasks but also makes it harder for him to see things from other people's perspectives. I think that is part of the reason he so badly miscalculated his odds of success in court. (He would argue that he didn't miscalculate his odds of success and that, instead, he is the victim of a biased judge, overzealous prosecutors and malicious banks.)
First of all, thank you for taking the time to be a part of this Q&A.

It's clear that financial fraud is a big factor to regard, when anything wants to understand the financial system. Especially when we talk about flaws. So my question to you is, from you point of view what is the biggest problem in the trading? I think of loopholes and anything else that opens up the possibility of fraud?
European banking editor at The Wall Street Journal
Thanks Andreas. I think the cause of fraud has less to do with loopholes than it does with the culture inside banks. As I mentioned in my response to Catherine (above), banks historically have encouraged their employees to do whatever it takes to make money, and it is inevitable that a certain percentage of employees will take things too far. While no institutions encourage their employees to commit fraud, some banks historically have not policed their employees very aggressively and have inadvertently incentivized bad behavior by paying out huge rewards for financial success, without much scrutiny of how that success is achieved.
How important is corporate governance (having a Chinese wall) between divisions within banks to reduce opportunities for fraudulent behavior?
European banking editor at The Wall Street Journal
Corporate governance, including Chinese walls between divisions, is important. In some recent trading frauds, the perpetrators originally worked in the "back office" of banks and used their knowledge of the bank's internal plumbing to conceal their activities. But this wasn't part of the Libor scandal or, for that matter, any of the recent industrywide scandals involving market manipulation or other violations of laws. I think governance and having a compliance department is more important when it comes to discouraging or detecting bad behavior by rogue employees, as opposed to more systemic problems such as the Libor scandal. (And those individual criminal acts, while troublesome, represent a fairly minor problem compared to the systemic criminal acts.) The bigger issue is culture, and specifically the degree to which employees are incentivized, whether through money or praise or promotions, to push the envelope and make money at all costs.
Do you think the recent impact on the Chinese market will affect the European banking industry at all? If yes, what impacts will it have?
European banking editor at The Wall Street Journal
Hi Desmond. China's economy is too big for problems there not to affect the world's other major economies. As such, it's clearly going to have some impact on the European economy and, therefore, its banking and financial system. The most obvious repercussion is that if China's economic growth slows dramatically, that is going to have a negative impact on demand for everything from cars and consumer goods, some of them made in Europe, to commodities, whose prices matter to many European businesses and financial institutions. To the extent that the world's economy slows as a result of China's problems, that will certainly have a negative impact on Europe's banks, whose profits are closely linked to the health of the continent's economy. But I doubt this will have more than a modest effect on the banks. The one exception could be for some of the British banks that have big operations in China, including Standard Chartered and HSBC. The Chinese slowdown, and the likely ripple effects in other Asian economies, could complicate those banks' growth ambitions.
Audience Engagement Consultant, digital strategy specialist
How are scandals/crises like these influencing immigration policies and international employment?

One of my frustrations with reactionary policy making in these circumstances is that they're so 'remote' from normal understanding of the financial markets yet they can result in very real penalties for the little guys.
European banking editor at The Wall Street Journal
Hi Kate. I don't think that the Libor scandal (or any other recent banking scandals) directly influenced immigration policies. However, years of banking crises and scandals certainly hurt many western economies. And weak economies and financial anxiety presumably have altered some people's views toward immigration. I'm not sure I'm answering your question; let me know if not.
Founder, 10 TRAITS Leadership Institute; UN Virtual Mentor
Thanks David for answering our questions. Here's mine: Could something viewed as a *flaw* or loophole in the financial system now viewed as fraud, actually be viewed as a *breakthrough* when repurposed to solve the problems of national debit, banding and credit? That is, using a transition fee - a Financial Settlement Tax - on every transaction - or purchase of products and services - made by a government. This idea is being proposed by former Wall Street financier, Scott Smith, an early pioneer in structured finance, developing the model for conduit financing.
European banking editor at The Wall Street Journal
Hi Alexia. To be honest, I'm not entirely sure how this proposed tax would work, so I'm not qualified to answer this question. Sorry.
Do you think that Barclays -- and by extension Bob Diamond -- took the fall by "going first," or do you think that the malfeasance was worse there than at other banks?
European banking editor at The Wall Street Journal
Hi Paras. Barclays definitely was punished for being the first bank to settle Libor-rigging charges back in 2012. The actual amount the bank paid -- about $450 million -- was smaller than what some of its competitors would pay (UBS, Deutsche Bank and Rabobank hold the records for biggest penalties), but the toll the settlement exacted on the bank's management was unparalleled. Remember that it wasn't just CEO Bob Diamond who lost his job. His deputy, Jerry del Missier, also resigned, as did the bank's chairman, Marcus Agius. Barclays was certainly a bad actor when it came to Libor, but its misconduct was actually limited compared to some rival banks.

It was a very rare example of senior executives being held personally accountable for the actions of their underlings, and it helped ensure that the scandal became huge news all over the world. On the other hand, Barclays's misconduct actually did involve, or at least was connected to, Diamond and del Missier, unlike the misconduct at most of the other banks, so in that sense it's less surprising (and less unfair) that the executives lost their jobs. In any case, all of the deposed executives left with their personal fortunes more or less intact, so...
Financial Consultant/ Investment Advisory Representative
With the advancement and deeper involvement of technology in our financial systems, such as the advent of robo-advisers, do you see financial fraud decreasing or just becoming more difficult to catch?
European banking editor at The Wall Street Journal
Hi Joon. I don't see why the advancement of technology would make fraud less common. Sure, banks and others are constantly developing new and improved ways to prevent and detect fraudulent activity (inside and outside their institutions), but technological advances also give would-be fraudsters new weapons to commit their crimes and to cover their tracks. As I mentioned in responses to some other questions here, I think the biggest determinant of whether banks and their employees get involved in fraudulent activity is their culture. It is no accident that institutions with aggressive, envelope-pushing cultures have gotten in more trouble than institutions with more button-down, risk-averse cultures. To me, technology is not the key factor.
Thanks David for taking the time to answer our question. My question to you: Do you think the regulatory reform the U.S. took after the financial crisis, such as Dodd frank, is effective and would be able to prevent another crisis, finally what could have been added to it to guarantee total prevention of another crisis?
European banking editor at The Wall Street Journal
Hi Mohamed. Yes, I think that U.S. reforms like Dodd-Frank have been effective and are making the financial system safer. By requiring banks to hold more capital and to stop engaging in certain risky activities, it addresses some of the contributors to the past financial crisis. The reforms also make the financial system less profitable, which upsets people who work in the industry but might actually be a positive for financial stability and efficiency. After all, a healthy financial system is supposed to seamlessly distribute money from people who have extra (savers) to people who need it (borrowers). In a basic sense, huge banking profits are a sign that the industry is wringing money out of that process in a way that it is not contributing to economic efficiency.

But do I think that Dodd-Frank and other similar reforms will prevent another crisis? Absolutely not. Another crisis is inevitable. It's just unclear what form it will take or when it will occur. Financial crises have been fairly regular occurrences for centuries, and I don't see any reason for that pattern to stop now.

Similarly, I don't think there's any way to guarantee total prevention of another crisis, to use your words. The only thing that policymakers can do is try to ensure that banks are well positioned for the next crisis and that laws exist to minimize the chances that taxpayers need to bail out institutions that are collapsing. I think Dodd-Frank and other reforms have taken positive steps in that direction, but it's impossible to predict how all these new mechanisms will actually work when the next crisis hits.