“La sabiduría de la vida consiste en la eliminación de lo no esencial. En reducir los problemas de la filosofía a unos pocos solamente: el goce del hogar, de la vida, de la naturaleza, de la cultura”.
Lin Yutang
Cervantes
Hoy es el día más hermoso de nuestra vida, querido Sancho; los obstáculos más grandes, nuestras propias indecisiones; nuestro enemigo más fuerte, el miedo al poderoso y a nosotros mismos; la cosa más fácil, equivocarnos; la más destructiva, la mentira y el egoísmo; la peor derrota, el desaliento; los defectos más peligrosos, la soberbia y el rencor; las sensaciones más gratas, la buena conciencia, el esfuerzo para ser mejores sin ser perfectos, y sobretodo, la disposición para hacer el bien y combatir la injusticia dondequiera que esté.
MIGUEL DE CERVANTES Don Quijote de la Mancha.
La Colmena no se hace responsable ni se solidariza con las opiniones o conceptos emitidos por los autores de los artículos.
14 de septiembre de 2015
Was Tom Hayes Running the Biggest Financial Conspiracy in History?
Former UBS trader Tom Hayes leaving Westminster Magistrates on June 20, 2013, after appearing in court.
Photographer: Andrew Cowie/AFP via Getty Images
On a deserted trading floor,
at the Tokyo headquarters of a Swiss bank, 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 disheveled than usual. It was
Sept. 15, 2008, and it looked, he would later recall, like the end of
the world.
Hayes had been woken at dawn in his apartment by a call
from his boss, telling him to get into the office immediately. In New
York, Lehman Brothers was plunging into bankruptcy. At his desk, Hayes
watched the world process the news and panic. Each market as it opened
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 phenom at UBS, one
of the best the bank had at trading derivatives. All year long, the
financial crisis had 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 his seemingly limitless appetite for risk, stayed in.
He was 28 years old 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’d done with Lehman, but he’d made a series of enormous
bets that in the coming days, interest rates would remain stable. The
collapse of the fourth-largest investment bank in the U.S. would surely
cause those rates, which were really just barometers of risk, to spike.
As Hayes examined his tradebook, one rate mattered more than any other:
the London interbank offered rate, or Libor, a benchmark that influenced
$350 trillion of securities around the world. For traders like 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. During his time as a
junior trader in London, Hayes had gotten to know several of the 16
individuals responsible for making their bank’s daily submission for the
Japanese yen. His stroke of genius was realizing that these men mostly
relied on interdealer brokers, the fast-talking middlemen involved in
every trade, for guidance on what to submit each day.
Hayes
saw what no one else did because he was different. Hayes’s intimacy
with numbers, his cold embrace of risk, and his manias were more than
professional tics; they were signs that he’d been wired differently
since birth. Hayes would not be officially diagnosed with Asperger’s
syndrome until 2015, when he was 35, but his coworkers, many of them
savvy operators from fancy schools, often reminded Hayes he wasn’t like
them. They called him Rain Man. Most traders looked down on
brokers as second-class citizens, too. Hayes recognized their worth.
He’d been paying them to lie ever since he had.
By the time the
market opened in London, Lehman’s death was official. Hayes
instant-messaged one of his brokers in the U.K. capital to tell him what
direction he wanted Libor to move. “Cash mate, really need it lower,”
he typed, skipping any pleasantries. “What’s the score?” The broker sent
his assurances, and, over the next few hours, followed a well-worn
playbook. 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 was
often called “the world’s most important number,” but this was how it
was set: conversations among men who were, depending on the day,
indifferent, optimistic, or frightened. When Hayes checked later that
night, he saw to his inexpressible 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
seesawed, his profit and loss in one stretch went from minus $20 million
to plus $8 million in just hours. Amid the bedlam, Libor was the one
thing Hayes had some control over. He cranked his network to the max,
offering his brokers extra payments for their cooperation, and calling
in favors at banks around the world. By Thursday, Sept. 18, Hayes was
exhausted. This was the day he’d been working toward all week. If Libor
jumped today, his puppeteering would have been for naught. 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
dialed one of his most trusted brokers in London. “I need you to keep it
as low as possible, all right?” Hayes said. “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 office when that day’s Libor was published at noon in
London. The yen rate had fallen one basis point, while comparable money
market rates in other currencies continued to soar. Hayes’s crisis had
been averted. Using his network, he had personally tilted one of the
central pillars of the planet’s financial infrastructure. He pulled off
his headset and headed home to bed. He’d only recently upgraded from the
superhero duvet he’d slept under since he was 8 years old.
Thomas William Alexander Hayes had
always been an outsider. Raised in the urban sprawl of Hammersmith,
West London, in the 1980s, Hayes was bright but found it hard to connect
with other kids. His parents divorced when he was in primary school;
when his mother remarried, he moved to the leafy, affluent town of
Winchester. Hayes held onto his inner-city accent, traveling back to the
capital on weekends to watch Queens Park Rangers, perennial underdogs.
Lots
of British boys were die-hard football fans, but Hayes’s interest was
something more like obsession. Fixations are a symptom of Asperger’s,
along with social problems, elevated stress, and a propensity for
numbers over words. The kids in Winchester bullied him for it. Hayes
remained a peripheral figure in college, at the University of
Nottingham. While his fellow students took their summer holidays, he
paid for school by cleaning pots and lugging kitchen supplies for £2.70
an hour.
Seeking better money, Hayes won an internship at UBS in
London. After graduating, in 2001, he joined Royal Bank of Scotland as a
trainee on the interest rate derivatives desk. For 20 minutes a day, as
a reward for making the tea and collecting dry cleaning, he was allowed
to ask the traders anything he wanted. It was an epiphany. Unlike the
messy interactions and hidden agendas that characterized day-to-day
life, the formula for success in finance was clear: Make money and
everything else will follow. It became Hayes’s guiding principle, and he
began to read voraciously about markets, options pricing models,
interest rate curves, and other financial arcana.
Tom Hayes leaving Westminster Magistrates Court on June 20, 2013.
Photographer: Rex Features via AP Images
In
the laddish, hedonistic culture of the money markets, the awkward
21-year-old was an odd fit. On the rare occasions he joined other
bankers on their nights out, he stuck to hot chocolate. They called him
“Tommy Chocolate,” and blurted out Rain Man quotes like “Qantas
never crashed” as Hayes walked the trading floor. He was bad at banter,
given to taking quips and digs at face value. The superhero duvet was a
particular point of derision. The bedding was perfectly adequate, Hayes
thought; he didn’t see the point in buying another one.
Not
everyone in finance was a jerk. Hayes made a few friends, and he found
that his machine-gun approach to messaging and trading made him a
favorite among brokers, who didn’t care where a trader had gone to
school as long as he brought them deals. And ultimately, Hayes went
along with the jokes because the obsessive traits that had marginalized
him socially turned into power the moment he logged on to his trading
terminal. For all the ribbing, Hayes had found a place where he
belonged. He rose early, worked at least 12 hours a day, and rarely
stayed awake past 10 p.m. He often got up to check his trading positions
during the night.
Particularly, Hayes was taking positions in
interest rate swaps. Originally designed to protect companies from
fluctuations in interest rates, swaps were now mostly bought and sold
between professional traders at banks and hedge funds, another form of
high-stakes security to wager on. The market for swaps was exploding. In
2000, $50 trillion of the securities changed hands every year. In 2010,
it was $500 trillion. For Hayes, the complex calculations and constant
mental exertion came easily, but he found he had something rarer: a
steely stomach for risk. While other rookie traders looked to book gains
or curb losses quickly, Hayes rode out volatile market swings. In those
early years his results were mixed, but his superiors knew a natural
when they saw one. In 2004, Hayes was headhunted by Royal Bank of
Canada, a smaller outfit where Hayes could take a more prominent role.
He was given his own trading book focused on the yen derivatives market.
Traders
at the largest firms recall suddenly seeing minnow RBC taking the other
side of big-ticket deals. Hayes may have been baffled by the simple
rituals of office camaraderie, but when he looked at the serpentine
matrix of yen derivatives he saw clarity. “The success of getting it
right, the success of finding market inefficiencies, the success of
identifying opportunities and then when you get it right—it’s like
solving that equation,” Hayes would later say. “It’s make money, lose
money, and it’s just so pure.”
In the summer of 2006, Hayes was
poached again, this time by UBS. RBS, RBC, UBS—the name on the door
mattered little to Hayes, as long as he had a phone, his screens, and
the bank’s balance sheet to wager. The firm sent him to Tokyo, a major
promotion that officially retired his image as a cocoa-sipping,
blankie-clutching eccentric, and recognized him for what he’d become: an
aggressive and formidable trader.
In poker, there are two types
of player: tight folk who wait for the best hands, then bet big and hope
to get paid; and hawks who can’t resist getting involved in every hand,
needling opponents and scaring the nervous ones into folding. Hayes was
firmly in the latter camp. His M.O. was to trade constantly, picking up
snippets of information, racking up commissions as a market maker, and
building a persona as a high-volume, high-stakes risk-taker.
Hayes
moved to Japan just as the government raised interest rates for the
first time in a generation, reinvigorating a multitrillion-dollar market
that had been lying dormant. Most of the instruments he traded
referenced Libor. There are Libor rates for all the major currencies,
and for time frames ranging from overnight to 12 months. On any given
trade, Libor was the single most important number that determined profit
or loss. By now, Hayes knew that the art of trading involves building a
sense of the future based on incomplete and evolving information. Where
Libor would land tomorrow was the great unknowable. It became his
mission to control the chaos around him, to eradicate the shades of
gray. “I used to dream about Libor,” Hayes said years later. “They were
my bread and butter, you know. That was the thing. They were the
instrument that underlined everything that I traded. I was obsessed.”
Hayes loved his job, but
when things weren’t going his way, he hated it just as fiercely. On the
fifth floor of UBS’s Tokyo headquarters, he stared at his bank of
screens, fuming. It was October 2006. He’d only been at the bank a
matter of weeks and was already in a hole, on the losing side of a huge
bet on the direction of short-term interest rates. Yen Libor was
refusing to budge, and he was getting angrier.
While finance had
been transformed by technology over the past quarter century, the way
Libor was set remained rudimentary. Every day, banks in London told the
British Bankers’ Association how much it might cost them to borrow in
various currencies, for various lengths of time. There were 150 total
combinations. For each one, the top and bottom quarter of figures are
discarded, and the average of the remaining numbers became that day’s
Libor. That was it. Libor was a component in securities ranging from
U.S. student loans and credit cards to Kazakh gas futures, but it was
determined each day by just a handful of distracted, guesstimating
individuals.
Later that afternoon in Tokyo, Hayes was venting
about his predicament to one of his London brokers, a trusted confidant.
The broker offered to talk to his colleague, who was in charge of
e-mailing a daily Libor prediction—unofficial but handy—to the small
group of bankers that came up with the number. (The U.K. court has
ordered that the two men cannot be named because they are facing trial.)
The e-mail was supposed to be impartial, but if Hayes wanted, the
broker said, he could skew the guidance lower. Maybe some of the lazier
rate setters, those who didn’t do much business in the currency anyway,
would simply follow along.
For Hayes, it was a light-bulb moment.
He knew that banks had always tailored their Libor submissions to
benefit their own positions, but the system resisted tampering: no
single institution could have much impact on the overall rate when 15
other banks were doing the same thing. But Hayes had worked at enough
banks and befriended so many brokers that he realized he could sway
several submitters at once. He could pull their strings without them
even knowing it. And Hayes was on better terms with his brokers than
most. They had in Hayes a kindred spirit—a state school Londoner with a
cockney accent.
Tom Hayes Loses Last Gamble
Hayes’s
broker did as he was asked. The intervention didn’t make much
difference, but the idea had taken root. Later that month Hayes went
back to the broker, and also approached a second for good measure. This
time, Hayes wanted six-month yen Libor to go up. He had a 400 billion
yen ($3.3 billion) position about to mature, and every increase of a
hundredth of a percentage point (or basis point) was worth hundreds of
thousands of dollars. Hayes bombarded his brokers with IMs and phone
calls, and over the next few days the rate rose by almost three basis
points. Hayes e-mailed his boss, Mike Pieri, to express his delight that
the plan had worked—infinitesimally, but when multiplied by the size of
Hayes’s bets, valuably. Later that week, he wrote to his broker:
“Whatever it takes, bill me.”
Hayes discovered that Libor was not
only easy to manipulate, but cheap as well. The London broker had won
his colleague’s cooperation by dangling nothing more than a free curry.
Hayes began reaching out to traders he knew at other banks, asking for
their help in moving the rate. By the spring of 2007, his network had
grown to include traders at RBS and JPMorgan Chase. One of his recruits
was his stepbrother, Peter O’Leary, a graduate trainee at HSBC in
London.
After some small talk over e-mail in April, Hayes asked:
“Do you know the guy who sets yen Libors at your place? I think he
trades yen and scandi cash and his name is Chris Darcy.”
“Ha ha
yeah I do!” O’Leary typed. “His name is actually Chris Porter I think.
Everyone calls him Darcy, I think, cos he sounds pretty posh.”
Hayes
asked O’Leary to press his colleague for low three-month Libor. Every
basis point, he said, was worth $1 million. In a series of phone calls,
Hayes told his stepbrother how to make the approach, suggesting he
befriend the man over a few pints. O’Leary was reluctant, noting that
the rate setter worked on a different floor, in a different part of the
business. Hayes persisted, and O’Leary eventually hit his colleague up
for the favor. Tommy Chocolate had come a long way. Hayes later
apologized to O’Leary for involving him, and never asked for a Libor
favor again.
At UBS he showed no inhibitions. At regular 8:30 a.m.
meetings, he discussed his positions and explained to colleagues and
bosses how he planned to influence the rate. That summer, Hayes
formalized his arrangement with one of his interdealer brokers. On top
of the fixed monthly fee UBS paid for its services, Hayes negotiated an
additional £15,000 a month for helping to move the benchmark, £5,000 of
which was personally earmarked for the broker who sent the daily Libor
prediction e-mail.
A UBS spokesperson said: “To suggest that
Hayes had a 'light-bulb' moment at UBS about Libor manipulation is
ludicrous. Neither Hayes nor UBS invented or initiated LIBOR
manipulation. It was industry-wide conduct involving many banks and
brokers acting individually and collectively over a prolonged period of
time.”
Former trader Tom Hayes and his wife Sarah arrive at Southwark Crown Court in London on August 3.
Photographer: Peter Macdiarmid/Getty Images
Hayes
never knew for certain how much influence he had. But if he couldn’t
quite control the future, he could give it a shove in whatever direction
he wanted. Hayes later estimated that his ability to move the rate only
accounted for perhaps 10 percent of his profits—but in a cutthroat
business, it was an edge over his competitors that helped mark him as a
star at UBS and make $50 million for the bank in 2007. That September,
at a Tokyo swimming pool, he met a corporate lawyer named Sarah Tighe, a
fellow Brit far from home. Later, Tighe listened to Hayes ramble about
the fortune he made off the collapse of Northern Rock bank—and still
wanted to see him again. This was a keeper, someone who found his
idiosyncrasies endearing and his ambition attractive. Out of the chaos
of markets and everyday life, Tom Hayes was creating order.
This
account is based on more than 200 interviews with traders, brokers,
regulators, lawyers, and executives, as well as thousands of documents
and e-mails introduced at his eventual trial.
On an unseasonably cold April
morning in 2008, Vince McGonagle closed the door of his office at the
Commodity Futures Trading Commission in Washington and settled in to
read the morning papers. Small and wiry, with a hangdog expression,
McGonagle had been at the enforcement division of the CFTC for 12 years,
during which time his red hair had turned gray around the edges. He was
now a senior manager. The headline on Page 1 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 suggested that banks were providing
deliberately low estimates of their borrowing costs to avoid “tipping
off the market that they’re desperate for cash.” Before the financial
sector had begun to show signs of catastrophic weakness in early 2007,
few people in McGonagle’s world cared about Libor. The benchmark was an
important but predictable part of the financial plumbing that barely
moved from week to week or bank to bank. Now it had become a closely
followed indicator of stress in the markets.
As credit froze,
Libor in all currencies shot up. Banks with the highest submissions were
singled out as struggling. A daily game developed in which
Libor-setters, spurred on by senior executives, tried to predict what
their rivals would submit, and then come in slightly lower. With so
little trading in the cash market, it was impossible to check the
veracity of their submissions. Some analysts estimated that the
published rates were as much as 40 basis points below where they should
be. The motivation for lowballing had nothing to do with profit: This
was about survival. Central bankers and investors were hunting for any
sign of who might follow Bear Stearns into the abyss of bankruptcy.
McGonagle knew little about Libor, but the Journal
story made him suspicious. Shortly after joining the agency in 1996,
he’d been one of a team of lawyers appointed to investigate Dynegy, a
Texas energy company, over allegations it had lied about how much
natural gas it was buying and selling in order to influence the
commodity’s benchmarks. The CFTC and other agencies ultimately fined
Dynegy and more than two dozen other companies, including Enron, more
than $300 million.
There was no inkling in the spring of 2008 that
traders were pushing Libor around to boost their own profits, but to
McGonagle, the similarities were striking: Here was a benchmark that
relied on the honesty of traders who had a direct interest in where it
was set. While natural gas benchmarks were compiled by private
companies, Libor was overseen by the BBA, a London-based lobbying group
with a reputation as an industry cheerleader. In both cases, the body
responsible for overseeing the rate had no punitive powers, so there was
little to discourage firms from cheating.
A practicing Catholic,
McGonagle got his law degree from Pepperdine University, a Christian
school in California where he took more seriously than most the mission
of a life of “purpose, service, and leadership.” While classmates took
highly paid positions defending companies and individuals accused of
corruption, McGonagle built a career bringing cases against them.
That
week, he called a meeting of his closest lieutenants. Should they
investigate Libor fraud? The biggest obstacle they could see to
launching an investigation was the question of jurisdiction. When the
CFTC was formed in 1975, its directive was to regulate a futures and
options market dominated by farmers and corporations with exposure to
commodity prices. In the intervening years, derivatives ballooned into a
multitrillion-dollar industry, but the commission’s stature and
resources hadn’t grown commensurately.
The agency had a broad
remit to intervene in financial markets, but complex financial cases
were still automatically considered the preserve of the Securities and
Exchange Commission or the Federal Reserve. According to Washington
regulatory lore, Harvey Pitt, the SEC’s notoriously gruff chairman from
2001-02, was once discussing who had oversight of a particular product
with a counterpart at the CFTC when he lost his patience and bellowed:
“It’s pretty simple. Anything that is a security or a financial
instrument is ours. Anything that has four legs is yours.” That
perception rankled. With the financial crisis raging, here was an
opportunity for the CFTC to step up.
There were also the U.K.
authorities to consider. It was, after all, the London interbank offered
rate. McGonagle contacted his counterparts at the U.K.’s Financial
Services Authority about looking into Libor manipulation. The agency
wasn’t interested, bristling at the encroachment onto its turf. (The FSA
declined to comment.)
Undeterred, McGonagle ordered his team to
keep digging. In the weeks that followed, his staff learned that Libor
was a benchmark for billions of dollars of interest rate futures
contracts traded on the Chicago Mercantile Exchange. The CME fell
squarely within the CFTC’s purview. It was the green light he needed.
That summer the CFTC wrote to six banks requesting information on how
the Libor-setting process worked. It was the first tentative step in
what would become the biggest case in the agency’s history.
Hayes was sent the Journal
article by a worried friend, but brushed it off as irrelevant: fraud in
dollar Libor had nothing to do with his yen Libor trading book. By the
day Lehman Brothers fell in September 2008, Hayes’s system was working
better than ever. The money markets, the cardiovascular system of the
financial body, had gone into arrest as banks refused to lend to one
another and hoarded what cash they had, terrified that their
counterparts might not survive the night. The rate setters had no idea
what Libors to submit each morning and became even more dependent on
their brokers for guidance—brokers who were in Hayes’s pocket.
The
only issue was how to pay them enough to remain loyal. On Sept. 18,
with the market frozen and only a small window in which both Tokyo and
London markets were open, Hayes was struggling to find deals big enough
to reward those not on a fixed fee for their efforts. Then a novel idea
struck him. He called one of his brokers and suggested a so-called wash
trade, where counterparties place matching deals through a broker that
cancel one another out, but still trigger fees for the middleman. The
transactions were prohibited at many firms and served no commercial
purpose. It was purely a means to pay large amounts of “bro”—slang for
commission.
It took some explaining before the broker fully
understood what Hayes was proposing, but once he did, he was overjoyed.
“All right, let’s see what we can do, then,” the broker said, laughing.
“F------ hell. All right.” Hayes got traders at JPMorgan and RBS to go
along with the wash. The former did it as a favor. The latter extracted a
£500 lunch for his coworkers from a nearby restaurant. Hayes later told
the broker on a phone call that this was how he was going to pay him in
the future. (JPMorgan and RBS declined to comment.)
Over the next
11 months, Hayes paid more than £470,000 in kickbacks through wash
trades to his brokers, including a third he had recruited to his
network. If Hayes could manipulate the Libor system to protect his
profits at the peak of the worst crisis in memory, there seemed to be no
limit to what he could do next.
His success had started to draw
the attention of other players in the market. In the summer of 2008,
Goldman Sachs had approached Hayes about a job, offering him a $3
million signing bonus. Hayes declined, telling colleagues he was staying
loyal to the firm that had brought him to Tokyo. Privately, he worried
he wasn’t good enough to join the world’s most prestigious investment
bank.
A year later, in June 2009, he agreed to meet Chris Cecere, a
star trader at Citigroup, at the swanky, low-light jazz bar at the
Grand Hyatt Tokyo. Cecere had beer. Hayes stuck to orange juice, and
listened as Cecere outlined plans to build a world-beating derivatives
business, with Hayes at the center. He offered the same $3 million
signing bonus as Goldman. This time, Hayes said yes. Cecere boasted to
colleagues that he’d found “a real f------ animal.”
As Hayes’s stature shot up,
McGonagle and his team at the CFTC were stuck. Since asking banks to
volunteer information about the benchmark, the regulators had received a
few useful leads but in most instances were roundly ignored. And in the
months after the financial crisis, the enforcement division spent most
of its time investigating whether commodity speculators were behind a
huge spike in the price of crude oil.
In London, the BBA, the
trade body that oversaw Libor, had moved quickly to suppress talk of
rate manipulation. Responding to the Journal and other
publications, the lobbying group issued a statement claiming that the
uproar surrounding the benchmark was the result of misunderstandings by
journalists rather than any malfeasance at the banks. U.K. regulators
demonstrated no interest in learning the truth. They were busy trying to
save the financial system from meltdown. (The FSA, SFO, and BBA
declined to comment.)
By early 2010, only one firm, Barclays, was
still meaningfully cooperating with the CFTC’s Libor investigation. The
British bank had hired the agency’s former head of enforcement, Greg
Mocek, as an attorney to advise it on Libor after uncovering evidence of
blatant manipulation. Mocek remained close with his former colleagues
and took the view that it was better to admit everything and seek more
favorable treatment.
With a new administration in the White House,
the agency was led by Gary Gensler, a former Goldman Sachs executive
with a reported net worth of $60 million. Gensler, who describes himself
as “a short, bald Jew from Baltimore,” was tasked by President Obama
with regulating derivatives, which by now were blamed by many for
exacerbating the crisis. Since taking over as chairman in May 2009,
Gensler’s aim had been to bring “swagger” to the agency. Libor was
exactly the kind of meaty case he wanted to pursue, and he was eager to
get it restarted. One day in March, a package arrived that granted his
wish.
It was an audio CD from inside Barclays. Gensler, his
coterie, and members of the enforcement division gathered on scuffed-up
sofas and chairs in the waiting area outside his office—the only meeting
place with a working CD player—to listen. It was a telephone
conversation between two Barclays middle managers that had taken place
18 months earlier, during some of the most turbulent days of the crisis.
Speaking in a cut-glass English accent, one of the men told a
subordinate that he needed to start lowering the bank’s Libors. When the
more junior employee started to object, the first man told him the
order had come from the most senior levels of the bank, who in turn were
acting on instructions from the Bank of England.
The recording
stopped. Outside Gensler’s office, there was a stunned silence. The
discussion was so unambiguous it almost seemed like the two men knew
they were being recorded, one CFTC official recalled. After months of
frustration, here was the evidence that would break open the case. If
Barclays executives were discussing rigging Libor so openly, it seemed
logical that other banks were doing the same thing. (Barclays declined
to comment.)
The default position of the CFTC was
to jealously guard its cases, lest one of the larger agencies swoop in
and take over. But with the Barclays CD in hand, the investigators knew
they had no choice but to bring in the Department of Justice. The feds
had the power to force firms to cooperate with the probe, and could
criminally charge individuals. The CFTC’s avuncular acting head of
enforcement, Steve Obie, called his point person at Justice, a tall,
genial, gray-bearded attorney named Robertson Park. Obie and Park had
worked cases together over the years and still met up for the occasional
beer.
“Rob, drop what you’re doing and listen to this,” Obie
said. Holding the handset of his phone up to the computer speakers on
his desk, he played the Barclays recording down the line. When it was
over, Park’s first words were “Holy s---.”
The Justice
Department’s criminal division faced almost daily criticism in the press
for failing to hold banks to account for their part in causing the
crash. Here was a chance to hit back. Within a month, Park had put
together a team to begin its own probe into Libor.
That forced the
British to get involved. Libor may have been set by bankers in London
and overseen by the BBA, but the FSA had all along resisted what its
leaders saw as an expensive and politically messy inquiry. Since 2008,
its role had been essentially postal, receiving evidence from the banks
and forwarding it to the CFTC. Now, after a series of meetings, the FSA
consented to join the ranks of the U.S. investigators.
With its
new backup, the CFTC subpoenaed 16 banks, compelling them to hand over
evidence and make staff available for interviews. The agency also
instructed the banks to appoint external law firms to undertake
investigations into Libor-rigging and report back with their findings by
the end of the year.
Within weeks, boxes of evidence started
arriving at the CFTC. McGonagle and Obie’s investigators spent countless
hours in offices, slouched over their desks, cataloguing documents, and
listening to recordings. Wall charts were drawn up showing the
management structure and chain of command in different teams at
different banks. The language the traders used—their cryptic references
to “IMM dates” and “reset ladders” —was slowly deciphered.
One of
the subpoenaed banks was UBS. At its headquarters in Zurich, attorneys
filtered vast archives of chats and e-mails using keywords like “Lower
6m” and “favor.” One trader’s name cropped up more than any other.
Before Hayes could begin trading
at Citigroup, he had to wait out a three-month noncompete period. He
spent the time laying the groundwork for a fresh assault on Libor. He
arranged for a junior Citi trader in Tokyo, Hayato Hoshino, to relocate
to London and befriend the Libor submitters there so Hayes could pass on
his desired moves in the rate. Hayes also began the process of getting
the bank to join the panel that set Tibor—the Tokyo interbank offered
rate. In October, Hayes flew to London to meet Citi’s rate setters in
person.
Hayes was escorted upstairs at Citi’s European
headquarters in Canary Wharf and introduced to the head of the cash
desk, Andrew Thursfield. The first words out of Hayes’s mouth were:
“Nice to meet you. You can help us out with Libors.”
Thursfield
was a dour, straight-laced Englishman who’d spent more than two decades
in Citi’s risk-management department. Balding and bespectacled, with a
reedy voice and pedantic manner, he was more accountant than banker. He
liked to think of himself as the guardian of the firm’s balance sheet.
Hayes
was unshaven, rumpled, and oblivious. He told Thursfield how the cash
desk at UBS used to skew its submissions to suit his book and boasted of
his close relationships with rate setters at other banks and how they
would do favors for each other. Hayes was trying to charm Thursfield,
but he’d badly misjudged the man and the situation. Thursfield took an
instant dislike, and the next day called his manager with concerns about
the new hire. “Whoever is the desk head, or whatever,” Thursfield said,
should “have a close watch on just what he’s actually doing and how
publicly.” Hayes, he said, seemed very “barrow boy”—London finance slang
for a low-class poseur.
Tom Hayes at the Westminster Magistrates court in London on June 20, 2013.
Photographer: Lefteris Pitarakis/AP Photo
Hayes
couldn’t have chosen a worse person to offend. Citi was already
cooperating with the CFTC’s investigation into Libor rigging, and
Thursfield had even delivered an 18-page presentation via video link to
investigators in March 2009 on the rate-setting process. Hayes, for his
part, thought little of the meeting and later couldn’t even remember
Thursfield’s name.
When Hayes finally showed up to Citi’s offices
at Tokyo’s Shin-Marunouchi Building in December, his preparations
unraveled. Not only did the bank’s submitters tell him more than once
they couldn’t take his positions into account when setting Libor, even
his old allies started turning their backs on him. Word had leaked out
about the CFTC’s investigation, and people were getting nervous. “I
asked him a little while ago and he f------ said to me not to ask him
again but I will try, mate,” one broker told Hayes, who had been
badgering him. “They’ve all got right f------ funny on it recently.”
Hayes
also started making disastrously bad calls on the market and was
racking up big losses. In June, after a Citi colleague quit and leaked
details of Hayes’s trading book to his old boss at UBS, they teamed up
with others in the market to target his weak spots. Pushing the market
against him, they cost the trader nearly $100 million.
At the tail
end of one of the worst months of his career, Hayes was getting
desperate. Sitting at his desk on June 25, with his profit and loss
ledger looking worse than ever, Hayes picked up his mobile phone and
dialed Hoshino’s mobile in London. Even though he’d been told repeatedly
that the rate setters weren’t happy talking about Libor, Hayes ordered
his subordinate to approach them again. He had a huge trade maturing at
the end of the month and needed the benchmark up.
In Hoshino,
Hayes had chosen a poor henchman. Shy and known as “Little Hoshino”
around the office, Hoshino had never actually approached the submitters
when Hayes had asked. With his faltering English, the young trader found
them too intimidating. This time, Hayes was more insistent than usual.
Just after lunch, Hoshino made the short walk across the trading floor
to the rate setter’s desk and passed on Hayes’s request. It was a fatal
misstep. The CFTC had just subpoenaed Citi and ordered it to probe
whether their derivatives traders were trying to rig the rate. Aware of
the heat on the bank, the submitter told Hoshino he was being
inappropriate and reported the approach to Thursfield, who immediately
called the bank’s compliance department.
In the months that
followed, Hayes was interviewed for more than 12 hours by Citi’s
lawyers. His bosses told Hayes he would be fine, that it was part of a
wider investigation. Then, on Sept. 6, as Hayes made his way into the
office, he was pulled into a nondescript meeting room. He saw the two
Citi executives who’d hired him less than a year earlier, Andrew Morton
and Brian McCappin, sitting at a conference table, looking solemn.
Citigroup’s general counsel and head of human resources in Japan were
also there. (Morton, McCappin, Thursfield, and Hoshino did not respond
to requests for comment sent through Citigroup.)
As Hayes sat,
McCappin said the bank had been investigating him for months and had
uncovered multiple episodes of his manipulating rates. Such conduct
violated the bank’s code of conduct, and he was being fired. Hayes was
floored. Only the previous week, he’d been trading as usual and
discussing strategies with McCappin in his corner office.
Characteristically,
Hayes recovered quickly from the shock. “Well, that’s sort of ironic
that you’re firing me, given that you were involved in it up to your
eyeballs,” Hayes later recalled telling McCappin.
“Oh, but he wasn’t,” the general counsel said quickly. “He didn’t have any trading positions.”
Hayes
disputed the point—as the head of Citi’s investment bank in Japan,
McCappin had ultimate responsibility for every trade—and then made a
remarkable counterattack. “How much are you going to pay me to go
quietly?” he asked. “Otherwise, I’m going to make a real fuss about
this.”
Citi hadn’t been expecting that. The executives asked Hayes
to leave the room while they discussed his contract. After calling him
back in, they told Hayes that he wouldn’t get any new money. But he
could keep his $3 million signing bonus.
In the months that followed,
Hayes did his best to rebuild his life. Days after his dismissal, he
returned to England and married Tighe in a lavish ceremony at the Four
Seasons hotel in rural Hampshire. In 2011, they had their first child,
Joshua, and bought the Old Rectory, a six-bedroom former vicarage in a
pretty village outside London. They paid the £1.2 million ($1.9 million)
price in cash, with no mortgage, according to land records. Hayes
signed up for a British MBA course, and Tighe kept up her work as a
lawyer. Together they began to remodel their hillside idyll, adding a
new wing and filing plans to build a six-foot electronic gate to keep
out intruders.
Meanwhile, U.S. investigators were grinding ahead
with their case. Hayes heard rumors, but had no way of knowing he was
one of the prime targets. He sent a Facebook message to Mirhat Alykulov,
a trader who’d sat next to him for years at UBS Tokyo, and one day
several weeks later, he got a call back. Hayes cut off any chitchat and
asked: Had the bank said anything about speaking to the Justice
Department? Unbeknownst to Hayes, Alykulov was calling from his criminal
lawyer’s office in Washington on a recorded line the FBI had set up to
appear as if it originated in Tokyo. As casually as he could manage,
Alykulov asked Hayes what he planned to do. Alykulov, who was facing
Libor fraud charges of his own, had cut a deal with the feds—they agreed
not to prosecute if he told them everything he knew and helped pin
Hayes. If Hayes suggested they lie to the government, he could be
charged with obstruction as well as fraud.
Tom Hayes and his wife Sarah arrive for trial at Southwark Crown Court in London on July 29.
Photographer: Matthew Lloyd/Bloomberg via Getty Images
Hayes
paused, as if somehow aware of the trap. “The U.S. Department of
Justice, mate, you know, they’re like the dudes who, you know, you know,
absolutely like, you know, you know—put people in jail,” Hayes said.
“Why the hell would you want to talk to them?” (Alykulov, through his
lawyer, declined to comment.)
Two weeks before Christmas in 2012,
at 7 a.m. on a Tuesday, Hayes heard a knock at the door. More than a
dozen police officers and Serious Fraud Office investigators swept
through the property, gathering computers and documents into boxes.
Hayes was arrested, taken to a London police station, and told he was
suspected of conspiracy to defraud.
Hayes declined to comment and
was released. Eight days later, he would later testify, Hayes was
watching TV when a bulletin cut to a press conference in Washington.
Before flashing cameras, U.S. Attorney General Eric Holder announced
that UBS had been fined $1.5 billion and had pleaded guilty to rigging
Libor at its Japanese arm. The DOJ was also criminally charging Hayes
and a former colleague, Roger Darin, and seeking to extradite them.
Hayes had had no idea.
Hayes considered the evidence against him.
Investigators on three continents had thousands of his incriminating
e-mails and audio recordings. The only way to avoid extradition to the
U.S. and its harsh sentencing laws, Hayes’s lawyers told him, was to
enter a “supergrass” (informer) deal in the U.K., confessing everything
and giving up everyone he’d collaborated with. The British were eager to
cut a deal. They’d been late to the investigation, but still wanted a
guilty plea at home.
So began a period of intense unburdening.
Over the next three months, Hayes’s life eased into a familiar routine.
At least once a week, he would make his way to the SFO, just off
Trafalgar Square. After signing in under a false name—usually some
former legend from his beloved Queens Park Rangers soccer team—he took
the elevator to the fourth floor, walked past the vending machines, and
stepped into his confessional: a stark white room with a desk, a
projector, his lawyer, and two investigators in suits. They barely had
to prod to get him to talk.
“The first thing you think,” Hayes
said early on, “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 gray
area, push the edge of the envelope.” He finally paused for breath. “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.”
The shorter, stockier
investigator began: “At the time that the conduct took place, do you
think you knew at that point, that what you …”
“Well look, I mean
it’s a dishonest scheme, isn’t it?” Hayes interrupted. “And I was part
of the dishonest scheme, so obviously I was being dishonest.” Hunched
over a desk in the cramped interrogation room, he stared vacantly ahead
as he launched into another cathartic torrent.
Hayes seemed to
relish reliving moments from his past, his voice speeding up when he
described heady days piling into positions, squeezing the best prices
from brokers, and playing traders against each other. “Trading a large
derivatives book,” he said during one exchange, “is like looking after a
big, living organism. After trading for years and years you get an
innate feeling for how everything relates.”
In June, after 82
hours of interviews, Hayes was formally charged. He had identified more
than 20 people as co-conspirators, including his own stepbrother.
(O’Leary is not facing charges, nor Pieri, Hoshino, and McCappin.) The
list included traders at JPMorgan, RBS, Deutsche Bank, and HSBC, as well
as brokers at the two biggest interdealer brokerage firms. For Hayes,
betraying the men was rational. Knowing that he would serve a likely
shorter sentence in the U.K. and not the U.S. prison system, Hayes said,
made him feel like a man who’d been diagnosed with cancer and then
given the all-clear.
As the scope of the Libor scandal grew that
summer, making headlines around the world, Hayes’s relief was corroded
by anger. Over the course of his confession, investigators had shown him
pieces of evidence that he couldn’t forget. As much as they illustrated
the strength of the case against him, he thought they also proved the
unfairness of it all. Hayes spent the summer at a desk inside his house
poring over documents that fueled his indignation: e-mails from senior
managers condoning his efforts; transcripts that showed manipulation
predating his hiring; even what he believed were internal bank
guidelines on cheating the system. A rage built inside him.
Libor-rigging was an industrywide practice. Why should he take the fall?
On
Oct. 9, as the SFO was finalizing its case against Hayes and his
co-conspirators, a white envelope arrived. It was from Hayes’s lawyers.
“As a matter of courtesy we are now in a position to advise that Mr.
Hayes will plead Not Guilty to all Counts,” the letter said.
“Accordingly he now formally withdraws from the process.” Having avoided
extradition, the natural born trader was taking the biggest risk of his
life, reneging on the deal and entrusting his fate to random jurors in a
London courtroom.
“I’d rather put my fate in the hands of 12
people than plead guilty to a politically driven process,” Hayes later
said. “I may not agree with what they decide in the end, but I will
accept it.”
On May 26, 2015, seven years
after investigations began, the first individual to face trial for
rigging Libor walked nervously past a packed gallery and took his seat
in Court Two of Southwark Crown Court, an austere brown-brick cube on
the bank of the River Thames. Dressed in chinos, a black sweater, and
wearing no tie, his blond hair atypically neat, Hayes looked meek—and
not at all like the aggressive bully the prosecution wanted to portray.
His mother looked on from a reserved seat among the press pack.
The
jury, seven men and five women, was told about Hayes’s Asperger’s
diagnosis early in the proceedings. The disorder didn’t affect his
ability to distinguish between honest and dishonest acts, the judge
said, but might help explain the brusque nature of his answers. Because
of his condition, Hayes was allowed to sit behind a desk with his legal
team rather than alone in the dock, an enclosed glass box in the center
of the courtroom. Next to him throughout the trial was an intermediary
whose role was to monitor Hayes for signs of stress and who would mouth
“calm down” when he became irate, which often included shaking his head
wildly and scribbling notes to his lawyers.
The SFO’s chief
prosecutor, Mukul Chawla, an amiable bear of a man in a black robe, with
a mane of silver hair and an e-cigarette he chugged on during breaks,
presented the case against Hayes in measured tones. “You may think,
having heard the evidence, that here the motive was a simple one,”
Chawla said during his opening. “It was greed. Mr. Hayes’s desire was to
earn and to make as much money as he could. The more that he earned for
his employers, the more they would value his services and inevitably,
he hoped, the more that they would pay him.”
There was no
disputing what Hayes had done, but to get convictions, Chawla needed to
demonstrate that he knew what he was doing was dishonest. The
prosecutor’s greatest weapons were the trader’s own words.
“I knew
that, you know, I probably shouldn’t do it,” Hayes said in one 2013
interview with the SFO, played at high enough volume through the court’s
speakers that they started to distort. “But, like I said, I was
participating in an industrywide practice that predated my arrival at
UBS and postdated my departure.”
Tom Hayes arrives for his trial at Southwark Crown Court in London on July 31.
Photographer: Matthew Lloyd/Bloomberg
When
it was Hayes’s turn on the stand, he disavowed the SFO interviews,
claiming he’d exaggerated his culpability to make sure he would be
charged in the U.K. During two weeks of testimony, Hayes argued that he
wasn’t dishonest because the practice of trying to influence Libor was
so common across the industry he had no idea it was wrong. His counsel
backed up his claims with documents showing managers at UBS encouraging
his behavior, and the BBA sanctioning lowballing during the crisis.
At
one point Hayes broke down in tears. “I don’t think I’ve done
anything,” he said, looking to his wife in the gallery, her blonde hair
tied neatly back and her hands clasped in her lap. She nodded back in
support.
When the prosecution played audio clips of Hayes joking
around with his contacts in the market, he looked down and smiled to
himself, caught up in the memories. “It could be the worst job in the
world,” Hayes testified. “It could make you want to jump off a bridge
and it can make you feel physically sick every time you went into work.”
Still, one of the hardest things about his current situation, he said,
was that he was no longer allowed to trade. “I was, and to a lesser
degree now, still obsessed with the markets, the financial markets, and
very, very, very much miss my old job,” he said. “I very much miss my
old career. It was a big, big part of my identity, that job and that
career for me.”
By the end of Hayes’s first week on the stand,
what had begun as an open-and-shut-case was slipping away from Chawla.
The young man came across as straightforward, affable, naïve—as much a
victim of the system as the perpetrator of a crime.
But any hope
for Hayes drained dramatically upon cross-examination. Asked to confirm
basic facts, such as what instruments he traded, the trader turned
evasive and combative. Physically, he tensed up, clenching his jaw and
narrowing his eyes. When Chawla probed Hayes on the evidence against
him, Hayes changed the subject, decrying the investigation as lacking
any rigorous analysis and claiming he was a victim of a struggle for
supremacy between the U.K. and U.S. authorities—a “fugitive from
American justice.” At one point, the judge intervened, telling Hayes to
answer the questions and refrain from speeches. A member of the defense
team moaned to a reporter during a break: “Two years of my life over in
two minutes.”
Ten weeks after the trial began, the jury was sent
away to deliberate. After five days, they returned a unanimous verdict:
guilty on all counts.
Half an hour later, Hayes walked back into
the packed, hushed courtroom for the final time. On this occasion he
couldn’t avoid the dock. Before entering, he asked a uniformed guard if
he could kiss his wife goodbye. Dressed in a blue shirt and light blue
sweater and carrying an overnight bag, he was led into the glass cell
and the door locked behind him.
Hayes barely reacted when the
judge announced he would be imprisoned for 14 years, a sentence at the
very highest end of the spectrum for white-collar criminals in the U.K.
His wife shook her head, bent forward toward her lap, and grasped the
arm of Hayes’s mother, who stared straight ahead, silently shaking.
“What
you did, with others, was dishonest, as you well appreciated at the
time,” the judge said in his closing remarks. “What this case has shown
is the absence of that integrity which ought to characterize banking.”
Hayes is now incarcerated at
Her Majesty’s Prison Wandsworth, a Victorian fortress south of the
Thames known for its poor conditions and violent residents. In October,
the six brokers accused of using their sway over the banks to help Hayes
push around Libor will follow his path up the steps of Southwark Crown
Court for their own trials. The SFO says privately it plans to charge
further co-conspirators in the months ahead.
The investigations
into Libor kick-started by McGonagle and his colleagues at the CFTC have
resulted in close to a dozen firms being fined a combined $10 billion.
More than 100 traders and brokers have been dismissed, or have left the
industry. For those who remain in banking, the trading floor in the
post-Hayes era looks like a very different, more chastened place.
Emboldened by their success on Libor, regulators have successfully
settled manipulation probes in foreign exchange, precious metals, and
derivatives markets. Banks have built up their compliance staffs. Gone
are the firm-funded trips to Val d’Isere and the $1,000 meals at Le
Gavroche. Traders today describe living in a state of paranoia that
their past conversations will be raked over and used against them. The
draining of excess from banking in recent years is commonly attributed
to the financial crisis. But as the public well knows, nobody who ranked
on Wall Street went to jail over subprime mortgages. With Hayes behind
bars, and others set to follow him to the dock, Libor and the related
collusion cases have an equal if not greater claim to the new, subdued
reality.
Adapted from The Fix: How Bankers Lied, Cheated and Colluded to Rig the World’s Most Important Number, by Liam Vaughan and Gavin Finch (Wiley, 2016).