The Spider Network is a great story of a math genius and a gang of backstabbing bankers. The book details one of the greatest scams in financial history. The author is David Enrich, a Wall Street Journal’s award-winning business reporter.
In a nutshell, the scandal involves something that very few non-financial people have heard of but is enormously important. It’s called LIBOR which is an acronym that stands for the London Interbank Offered Rate. This is a kind of international benchmark that represents the interest rate at which various banks offer to lend short-term loans to one another in the interbank market. LIBOR is so important because it is the DNA for the interest rates that people around the world pay their mortgages. Credit cards, student loans or car loans are also valued by this benchmark. This is also a basis for the interest rates the multinational companies pay when they borrow money, or even when cities borrow money, their interest rates are often based on LIBOR. The LIBOR is compiled every day by a group of bankers who basically conduct an estimation of how much it costs them to borrow funds from each other. Suddenly, a bunch of bankers figured out that this rate was extremely easy to manipulate and decided to operate in order to enhance their own financial positions and make a lot of money by trading assets valued on LIBOR.
The story concentrates on an analyst named Tom Hayes who is a mildly autistic mathematician and a star trader for a succession of the world’s biggest banks. Throughout his career, he makes a ton of money these banks and is heavily recruited by one bank after another as UBS, Goldman Sachs and other banks of that calibre.
There are other characters portrayed in the book, nevertheless, what I would like to emphasize is that most of these guys, at the moment they arrived at the bank out of their business school, they are specially trained to basically hunt for loopholes, weaknesses and inefficiencies in order to push as far as they could every single time with the sole goal being to make as much money as they can and as quickly as they can. In that context, it is not that surprising that such scandals are rough and it is even more surprising that they are being encouraged to push as far as they can and occasionally they push a little too far.
I assume the story is a kind of manifestation of what happened in reality. What the general public expected was to see some CEO or top executive to be put in jail for all the mess and drama that was caused by the financial crisis. Despite enormous public pressure on politicians and prosecutors to find some bank employees to hold accountable for all the misconduct and harm that was done to the economy into the world, what happened instead of going after these people, they exposed some mid-level traders, people like Tom Hayes who definitely had their roles in the whole procedure, but didn’t fuelled whole crisis. The story ends and Tom Hayes goes to jail. He gets a very long prison sentence (around 14 years) and probably he is the only person connected to the banking industry who is currently in prison for crimes committed during the financial crisis. Business leaders who were responsible for establishing the culture in these institutions and, in a large extent, being in charge of the policies and practices that occur underneath them were intact.
The worst thing is the fact that the method by which the crisis was managed didn’t do anything to solve the broader problems and it explains why there is still so much anger and suspicion aimed at banking sector. The aforementioned approach doesn’t seem effective and surely it doesn’t seem like a good way to deter or prevent future bad practices.
The Spider Network: The Wild Story of a Math Genius, a Gang of Backstabbing Bankers, and One of the Greatest Scams in Financial History
by David Enrich
Complexity of ideas
Size: 384 pages
Other information and reviews of this book on Goodreads:
More information about LIBOR manipulation on Wikipedia: https://en.wikipedia.org/wiki/Libor_scandal
What is LIBOR on Investopedia: https://www.investopedia.com/terms/l/libor.asp