The Spider Network

by David Enrich

  Hayes was among those still crowded into the tent. He was wearing his new, casual getup of sneakers and a ratty sweater. As the party raged around him, the twenty-four-year-old sat in a corner by himself. He found loud music disorienting. Instead of socializing, he was immersed in a novel, We Need to Talk About Kevin, a disturbing psychological thriller about a damaged, detached mother trying to come to terms with her son’s unspeakable crime. Hayes couldn’t put the book down.

  * * *

  As 2004 got under way, Hayes was beginning to look like the full package as a trader. His math and computer savvy allowed him to craft sophisticated pricing models that gave him an edge over rivals, helping him eke out at least small profits on most of his trades as a market maker. He possessed an intuitive grasp of markets and finance, which helped him, more often than not, position his portfolio to take advantage of future changes in the price of the assets he was trading. And—a fringe benefit of not having much of a social life—he was an exceptionally hard worker who enjoyed poring through dense statistical databases and research reports, hunting for clues about the future direction of markets. Many traders had at least one of those skill sets; some had two; few had all three. Hayes’s success bred confidence, which in turn encouraged him to take greater risks, which ultimately, notwithstanding the occasional money-losing trade, produced even more profits.

  Rival banks were starting to get wind of RBS’s hot young thing. One such competitor was the Royal Bank of Canada. (Its name, like RBS’s, derived from its roots as a royally chartered bank.) A manager there named Andy Scott had heard about Hayes through a broker. Scott put out feelers to see if Hayes would be interested in joining the Canadian bank’s London office. Hayes told his bosses at RBS about the approach, and they responded by kicking Hayes’s pay into the six figures, to £105,000. He said no to the Canadians.

  Ainsworth had by then become a saleswoman specializing in derivatives. She and Hayes lived together in a rented house in London’s Limehouse neighborhood, an up-and-coming area on the north bank of the River Thames. The district’s old warehouses and tenements, which for centuries swarmed with sailors and dockworkers, had been converted into single-family homes, apartment buildings, and art galleries. A recently introduced elevated light-rail line and proximity to the gleaming Canary Wharf financial district meant Limehouse was increasingly filled with the Mercedes and fancy sports cars belonging to the rising banking caste.

  The couple squabbled—a lot. Among the issues: Ainsworth didn’t think Hayes went on enough vacations. She wanted them to spend some of their hard-earned money on weekend getaways, but Hayes didn’t like the distraction from his job. Plus, he told her, the ratio of travel time to leisure time would be suboptimal and the unit cost of a short vacation would be much higher than a longer break where the costs of airfare could be amortized over a greater number of days, and . . . Yet he had no misgivings about attending every home and away Queens Park Rangers game, which under a similar “cost-benefit” analysis would suggest the best course of action was to make sure the TV remote was working. But Hayes saw things only from where he stood; he had little ability to empathize. He knew what he felt, and everything else was erratic and unreliable. Ainsworth found Hayes’s brand of logic to be exhausting and hypocritical. On a couple of occasions she stormed out, saying she was dumping Hayes, only to return hours later.

  One night, Hayes went home after work and decided he would cook dinner for them. Ainsworth, stuck at work on a conference call, was running late. When she finally got home, dinner was nearly ready, but Ainsworth was wiped out and declared that she wanted to decompress in a bath. “Give me ten minutes,” she said. After a while, Hayes went upstairs to the bathroom to see what was taking so long. Ainsworth was still soaking in the tub. Hayes was hungry. He’d prepared a shepherd’s pie, a casserole-style combination of ground beef, mashed potatoes, and peas, and he wanted to eat it before it got cold. Ainsworth asked for a few more minutes. Ten minutes passed. Hayes marched back upstairs and dumped the pie into the water. Ainsworth, stunned, sat in the bath, peas bobbing around her.

  At work the next day, Davies asked Hayes how his night had been. Hayes took the casual question literally, and without reserve or the slightest sense of faux pas told Davies what had happened. Within days, the pie-in-the-bath story had bounced all over the City’s trading and brokerage floors. It would continue to circulate for more than a decade.

  * * *

  In 2004, Bank of America expressed interest in hiring Hayes. Scott tried again, too; the Royal Bank of Canada offered him a modest raise—and, more important, the fascinating challenge of overhauling its antiquated trading systems so that they could handle the type of derivatives that Hayes was starting to develop a specialty in. This wasn’t the province of an IT department; whoever designed the systems needed an intimate knowledge of how derivatives were structured and how financial markets worked. Scott argued that this was Hayes’s chance to make a real name for himself. He also told Hayes that the Canadian company was a kinder, gentler bank, where his “career will be nurtured and looked after.”

  Indeed, Hayes had started feeling distinctly unloved at RBS. That summer, a batch of his trades had gone wrong. He had been up about £600,000 for the year. Suddenly, he was down £100,000. The £700,000 swing was a pittance for a bank of RBS’s size, but it meant that managers needed to be informed. That turned out to be a problem: Hayes had started trading a new type of instrument without getting the proper authorization inside the bank. It hadn’t seemed like a big deal, but now that he had lost money, that decision was going to get someone in trouble. Hayes’s boss didn’t intend for that person to be him. He instructed Hayes to write an e-mail to a manager a couple of rungs higher, acknowledging that he had been trading when he wasn’t supposed to. Within a few months, Hayes was told to fall on his sword and hand in his resignation. With an offer from the Royal Bank of Canada in his pocket, Hayes followed orders. The voluntary resignation didn’t leave any blemish on his records and was undetectable for future employers. Indeed, when the Canadian bank asked the investigative firm Kroll to perform a standard background check on Hayes before his contract was signed, RBS informed Kroll that “we have no reason to doubt the individual’s honesty and integrity.”

  * * *

  Hayes joined the Royal Bank of Canada (RBC) in November 2004, after a month of mandatory downtime that he used to score brownie points with Ainsworth, taking her on a vacation to the sunshine-and-shopping destination of Dubai. For his first year, RBC had agreed to pay him £80,000, plus a guaranteed £40,000 bonus (a total of about $216,000). The bank didn’t have formal training programs in place. In fact, Hayes, despite being the junior man, was the one expected to provide training to his new colleagues about how to trade derivatives. Aside from being in a new part of the City—RBC occupied a squat building alongside a busy London thoroughfare, a mile or so from Hayes’s previous office—the work environment was more or less the same: row after row of desks, personal space only demarcated by computer monitors and phone lines. Hayes got to work digging into the bank’s interest-rate and currencies trading systems. Once again, he had to figure out how to price the different derivatives. He wrote the models and consulted with an American software company, SunGard, to develop constantly updating risk management systems. Pleased with the outcome, Hayes’s managers recommended he be made a full member of staff after his six-month probation ended in May 2005.

  By early 2006, Hayes was already elevating RBC’s stature among competing institutions. Using some of the same panache for gambling that he’d showcased when gaming pub slot machines and his classmates’ need for short-term lunchtime loans, he studied the odds closely, compiling huge caches of historical market data to identify patterns and to isolate variables that could affect the odds, even at the margins. He devoured financial figures and reports—and then he bet big. Trying to win his burgeoning trading business, ICAP brokers wooed him with a ski weekend in Chamonix, but it was too boozy for Hayes�
�s taste. When the brokerage invited him and a couple dozen other leading interest-rate traders to a golf tournament, he said no.

  * * *

  Even for an elite trader, luck plays a big role in determining success. Something with a 90 percent probability of happening will go the other way one out of every ten times, and in those cases, just because the trade went wrong, it doesn’t mean it was a bad idea. Hayes, despite his mastery of statistics, didn’t seem to grasp that. A bad week of trading would put him in a surly, dark mood. Farr tended not to be very helpful. “It’s Monopoly money, don’t worry about it!” he counseled on one occasion. Read was better. He had a way of reassuring a struggling Hayes, who drew comfort because he knew that Read also was a market expert. He could feel his pain. “Keep positive, mate,” Read commiserated. “Your luck will turn.”

  Read was right. That spring, the Bank of Japan had raised interest rates to 0.25 percent, abandoning its long-standing zero-interest-rate policy. Virtually overnight, trading products linked to Japanese interest rates went from an obscure backwater to a major moneymaker—gambling on future volatility no longer looked like a fool’s errand. Hayes found himself at the center of that small, exciting world; he had dutifully learned everything there was to learn about the dull Japanese market. That made him a rare commodity at an aggressive Western investment bank. His only competitors were traders at stodgy Japanese banks who lacked the carnivorous instincts of a London-trained trader. By early summer, he was making millions of dollars for RBC.

  Other banks hustled to bulk up their teams in the area. Pretty quickly, rivals started knocking on Hayes’s door. J.P. Morgan considered hiring him, before being turned off by Hayes’s bizarre behavior, in particular his tendency to blab to anyone who would listen—including his competitors—about what positions he was holding. UBS also had its eyes on Hayes. In Tokyo, an Australian named Mike Pieri was looking to deepen his team’s expertise. He also was desperate to do something drastic about the bank’s dilapidated derivatives-pricing models, which thanks to the market turbulence were frequently getting overwhelmed and crashing. A headhunter working for UBS came upon Hayes. The bank’s pitch, in addition to added money and a loftier title, was that it would be good for Hayes’s career to work in Tokyo. Hayes, intrigued, was introduced to a UBS executive in London and then to Pieri. Pieri was impressed: Hayes seemed sharp and to be brimming with good trading ideas.

  UBS was practically salivating in anticipation of landing its former intern. The Bank of Japan’s rate hike meant the derivatives market “has come alive again,” executives wrote in an internal form to get authorization to make Hayes an offer. “We need someone to . . . focus on the opportunities that have been created due to the lack of experience of other traders in the market.” Hayes interviewed with a half-dozen UBS executives before receiving an offer of $138,000 per year of salary, plus a guaranteed first-year bonus of nearly $500,000 and free housing in Tokyo.* UBS executives told him he could expect his salary and bonus to balloon higher if he produced as expected.

  Hayes’s boss, Andy Scott, happened to go on vacation as the flirtations intensified. When he returned, Hayes told him that he was thinking of jumping to UBS, and Scott scrambled to retain his young prodigy. RBC offered more money. But Hayes wasn’t swayed—moving to Tokyo seemed like an adventure and, more important, UBS enjoyed much greater stature and career opportunities than a Canadian bank.

  On June 6, Hayes told Scott that he had made his final decision: He was resigning. He walked Scott through his outstanding trades. What Scott saw floored him. The portfolio was much, much larger than he had realized. RBC at the time had few internal checks to prevent unsupervised traders from essentially going wild. It turned out that while Scott was on vacation, Hayes had gone on a bit of a binge. Since it was now clear that during that stretch Hayes was already in talks with UBS, at least from Scott’s perspective the frenetic trading activity over those couple of weeks seemed designed to curry favor with brokers who were getting Hayes’s name out in the job market—not an unheard-of tactic among highly competitive traders, but nonetheless unsavory.

  That day, RBC marched Hayes out of the building.

  * * *

  RBC got to work untangling Hayes’s trades. (With him no longer around, it would be far riskier to hang on to his bets than to quickly exit the positions.) The process took several days, and it was ugly, as rival banks took advantage of RBC’s need to sell. The positions were so big that the losses piled up quickly. A few weeks later, adding insult to injury, RBC got the bills for about $500,000 from the brokers Hayes had used to execute his transactions over the past month. The total tab for cleaning up Hayes’s mess reached about $7 million.

  RBC opened an internal review to figure out what exactly had gone wrong. The first discovery was that Hayes had provided confidential information to an outside party. After he agreed to join UBS, but before he actually left RBC, the Swiss bank’s headhunter had requested data about his annual profits and losses, known as his P&L, which the headhunter assured him was routine. Hayes, without much thought, handed the data over. “The proprietary information contained material that Royal Bank of Canada considers to be confidential and sensitive,” the bank wrote in a report about the matter. Hayes’s actions “were in breach of his employment contract and RBC’s Code of Conduct.”

  The bigger problem, though, was what the bank found next. As RBC employees dug into Hayes’s trading positions, they realized that the computer models he’d built to price derivatives—and that his managers had praised as best-in-class—weren’t working as well as advertised. In fact, they were spitting out false numbers—and they were false in a way that exaggerated the profitability of Hayes’s trading. “This action misled the firm regarding the value of the trades and strategies employed,” the bank’s report said. That, and the huge payments to brokers, raised “questions regarding the integrity” of Hayes.

  The saga came at an awful time for Scott. His marriage was on the rocks, and dealing with the Hayes mess doubled the stress. He ended up keeping his job, but he would harbor resentments toward Hayes for most of the next decade. Despite his fury, though, he doubted that Hayes had actually done anything deliberately wrong; it looked to him to have been more likely a case of sloppiness and bad luck.

  Scott’s managers weren’t so sure. The bank reported its discoveries to its regulators at the Financial Services Authority. An RBC compliance official also phoned UBS to warn them about what it had uncovered. The alert quickly went up UBS’s chain of command.

  Soon after arriving in Tokyo, Hayes received an e-mail from an RBC employee back in London who wanted to arrange an “exit interview.” Hayes was confused. Why were they doing this now, a month after he left RBC? He nonetheless agreed to talk by phone a couple of nights later. As Hayes paced the small living room of his apartment in Tokyo’s Roppongi neighborhood, the RBC officials told him that they had reviewed his trading patterns and Excel models and found a number of anomalies. They suspected that he had misled the bank. It was important that Hayes come clean, now, if he had done anything untoward, they said. Hayes “appeared distracted and may not have been focusing clearly on the issues,” an RBC official later reported to a counterpart at UBS. Hayes responded that he had no clue what the RBC man was talking about.

  Given his resignation from his first employer, the Royal Bank of Scotland, this threatened to be the second time he left a bank under a cloud. Angry and stressed, he called Scott to ask what was happening. Scott lied that he had no idea. Hayes then turned to Read. “They want to talk to me about the trades I did before I left,” he told the broker. “But [I] can’t think of anything.” He told Read that RBC had decided to withhold its reference—an important step in the process of jumping from bank to bank, one that normally was the equivalent of a rubber stamp—until their review was complete. “Not sure whether they are going to try to imply I behaved badly. Am very nervous about it.”

  “The trades you did? That’s complete rubbish,”
Read said. “You did absolutely nothing wrong.”

  “They are looking to cover their backs internally by implying I was up to something, I reckon,” Hayes told Read. “I am nervous because I am in the dark.” Ainsworth also grew anxious.

  Read told them to chill. “You are both worriers, which is not the best combination in times like this,” he said.

  Once again, Read’s counsel turned out to be savvy. Having rung loud alarm bells, in a late-August phone call the Canadian bank’s head of compliance in London adopted a softer tone with his UBS counterpart. “I also had the clear impression that RBC . . . was, if not backtracking, at least playing down the severity of the seriousness of the issues,” a UBS employee wrote in a file note about the matter. The RBC man “confirmed that they would probably not have fired TH. One surmises that if UBS were to take significant action this may place RBC . . . in an uncomfortable position.” In other words, if UBS were to fire Hayes, RBC could end up with egg on its face. While Hayes hired a lawyer to represent him before the FSA, that turned out to be unnecessary: The regulator, living up to its light-touch reputation, took no action, opting to let the matter be handled internally by the banks.

  In a follow-up phone call a few weeks later with UBS, the RBC compliance executive concluded that Hayes “had not been openly underhand, but was in some respects perhaps young and naïve. RBC would have given him ‘a good bollocking’ and subjected him to enhanced supervision with the aim of making a better human being of him.” The RBC executive added that “they had no proof that this was down to deliberate dishonesty. It may have been that it was simply a poorly constructed model or even the result of inadvertent error.” RBC recommended that UBS subject Hayes to three to six months of enhanced oversight.