The Spider Network

by David Enrich

  Still, Hayes was a bit surprised when ICAP actually seemed to succeed in altering banks’ Libor submissions. A pattern soon emerged: Read would take a request from Hayes based on his trading positions, then relay it to Goodman via e-mail. Often the messages had subject lines like “Libors!!” (One of the enduring mysteries of the British finance lexicon is its tendency to pluralize random proper names. Goldman becomes Goldmans. Lehman becomes Lehmans. Libor becomes Libors.)

  Read told Goodman that he’d get lunch in exchange for his efforts. Read had lost his credit card during a recent drunken night out bowling; once he retrieved it, he promised, he would be “supplying you with copious amounts of curry” as a thank-you—Indian food being the preferred takeout option among London’s traders and brokers. After fielding three days of similar requests, and still not having received his promised curry, Goodman raised the stakes. How about taking him to K10, a popular Japanese restaurant, for a nice lunch, presumably one with wine? “Or,” Goodman joked, “cash would be preferable.”

  Sometimes Goodman seemed to comply with Read’s requests; other times, apparently feeling that they were too far outside the realm of reality, he balked. Read marveled to colleagues about the strategy’s success. “Tom needed them high so our boys sent them out high and it seems people copied them,” he boasted.

  * * *

  Roger Darin was a thirty-four-year-old trader in UBS’s Singapore office. A Swiss native and a fan of Italian opera, in particular the tenor Luciano Pavarotti, Darin had a reputation in the industry for being aggressive and at times nasty—hardly an unusual personality type on a bank trading floor. Bald and bearded, he suffered from a disorder that had left half of his face looking slack, one of his eyes lazy. (Despite the defect, he still cycled through a number of girlfriends among his UBS colleagues.) One of Darin’s duties in Singapore was to handle the daily submissions of the bank’s yen Libor data. It was a dull part of his job, but because Darin was himself a trader who specialized in interest-rate derivatives, it imbued him with a certain power. And it would make him indispensable to Hayes.

  Hayes at first didn’t know who was in charge of UBS’s yen Libor submissions. Neither did Pieri, who suggested that Hayes get in touch with Darin to see if he knew.

  “Hi Roger, who sets our Libors?” Hayes asked, eschewing any social niceties, one day in November 2006.

  “Me,” Darin replied. Well, that was easy! Hayes asked if Darin could do him a favor and lift UBS’s yen Libor submission as high as possible that day. No problem, Darin responded. “Will get it an extra notch today.” He hiked UBS’s submission to 0.6 from 0.55 the day before—a big, five-basis-point boost. That helped push the overall yen Libor average up sharply to 0.57938 from 0.545. Traders like Hayes calculated their potential profits based on Libor swinging by a basis point or even less. This was a move of more than three basis points.

  Two days later, Hayes again asked Darin to push Libor higher. This time, Darin said he couldn’t help—he told Hayes he had his own trades that would benefit from Libor declining. Hayes proposed a solution: He would buy Darin’s trading positions so that increasing Libor would be profitable—or at least not detrimental—for both of them. Darin’s positions were small enough that Hayes could afford to purchase them without sacrificing the profits he stood to collect if Libor rose. Darin agreed. The following day, Hayes suggested a repeat. “We can try to do what we did yesterday which worked out well for both of us!”

  “It did work indeed,” Darin agreed.

  Over the next two years, Hayes—or Alykulov, who had eagerly accepted a job as Hayes’s deputy, hoping some of his brilliance would rub off on him—would ping Darin on hundreds of occasions asking him to move UBS’s Libor data in helpful ways. Darin often complied. Neither he nor Alykulov thought much of the requests, partly because it was so clearly common practice on the bank’s trading floors. Darin knew that his colleagues in other parts of the world routinely took into account their colleagues’ trading positions when deciding where to place their Libor submissions. Plus, Darin had received the same marching orders as Andrew Smith had: Holger Seger had instructed them to cooperate as much as possible with their fellow traders. Darin, like Smith, interpreted this as meaning that they were generally supposed to play ball when it came to Libor-nudging requests.

  That’s not to say that Darin always acceded to Hayes’s entreaties. On occasion, he rejected them as outlandish. “I don’t mind helping on your fixings, but I’m not setting Libor seven basis points [0.07 percentage points] away from the truth,” Darin responded on one occasion in early 2007. “I’ll get UBS banned if I do that, no interest in that.”

  “Okay, obviously no interest in that happening either,” Hayes agreed. “Not asking for it to be seven basis points from reality.”

  The exchange reflected an important dynamic: There were limits to the extent that traders would tinker with Libor. You could move Libor within a certain plausible band to help yourself, but straying outside that range was at best unwise. Did that principle stem from a sense of propriety, a notion that while the definition of Libor was a bit amorphous, the submissions needed to have at least some integrity? Or was it simply that traders wanted to avoid detection as they rigged a vital interest rate? Years later, that question would be hotly contested.

  In any case, the constructive relationship between Hayes and Darin was doomed. Even before that first friendly trade, Pieri had informed Darin that he and Hayes planned to start making markets in a product called overnight index swaps. These were another flavor of interest-rate derivatives, the rare one that wasn’t linked to Libor. Until then, those swaps had been Darin’s turf, but Hayes’s move to grab this area had received the blessings of UBS executives who wanted to take advantage of their new hotshot trader in Tokyo. “Obviously, it was not well received,” Pieri told a colleague. Darin’s crew “believe they own the product.” Before long, a bitter Darin would start trashing Hayes to anyone who would listen.

  * * *

  Every day when Hayes arrived at UBS’s building in Tokyo, he was greeted with several sets of turnstiles. He had to choose which one to walk through. Most people wouldn’t give the choice any thought; to Hayes, the decision and its effect on his daily routine were of great consequence. One morning in early 2007, he entered through the right turnstile on the cluster of turnstiles farthest to the right. That day, his trades were like gold. He made money everywhere he looked. Superstitious by nature, Hayes decided that his choice of turnstile must have had something to do with his great day. “The lucky turnstile chose me,” he would say. From that day on, he used the same gate every single time he entered the building. It wasn’t just the turnstile. Hayes also had a lucky pair of black Hugo Boss pants and a preferred pair of yellow Ralph Lauren bumblebee socks given to him by a Hong Kong broker named Danny Brand. He wore the trousers so often that holes started to appear in the crotch area.

  Hayes’s life revolved around his job. He typically arrived at work around 8 a.m. and stayed till at least 7 p.m. He came in when he was sick. He rarely ate lunch. An assistant fetched him afternoon tea. He only grudgingly went to the bathroom during trading hours. By evening, he was exhausted but didn’t want to go home. Instead, he often sat at his computer playing Pac-Man. When his father visited, Nick overheard his son on the phone at odd hours chattering about Libor. The term was familiar to Nick—who by now had reinvented himself as a day trader—but he didn’t grasp the extent to which his son’s job hinged on interest-rate determinations. When Nick tried to start a conversation about the Queens Park Rangers, Hayes wouldn’t engage, preferring instead to remain glued to his BlackBerry. Nick found his son’s stoniness, his lack of animation, unsettling.

  Though Hayes was obsessed, he was hardly miserable. For the first time in his life, he was popular with women. The fact that he was a well-paid rising star probably didn’t hurt. But he also felt more relaxed talking to Japanese women (those who spoke English, that is) than he did Western ones because he didn’t
find the former to be physically attractive. Japanese women took an immediate liking to him, apparently because he seemed nonpredatory and sweet compared to some of his peers.* One woman at UBS found his quirky personality adorable and bought him a pair of panda dolls. Propped up on his desk, they became his lucky pandas.

  Panda influenced or not, Hayes’s good fortune continued. Hitting his stride, he often earned millions of dollars a week for UBS, establishing a reputation as one of Tokyo’s elite traders. This success had little to do with his nascent Libor-massaging efforts; he was just making smart wagers.

  To Hayes’s surprise, some of his higher-ups started pushing him to step on the gas. It was part of UBS’s spectacularly ill-timed strategy to get bigger in risky markets, on the eve of a once-in-a-century financial crisis. One of those bosses was a London-based executive named Sascha Prinz. Prinz had a reputation inside UBS for being loud and combative, known for sometimes ripping people to shreds when he was unhappy with them. Constantly chugging cans of Red Bull, he was an avid risk-taker; some colleagues regarded him as a reckless cowboy. On one visit to Tokyo, Prinz asked Hayes how much risk he had on—in other words, the total amount he stood to gain or lose depending on the outcome of all his bets. Hayes told him the dollar figure. It was a large number, but without missing a beat, or seeming to think it through very carefully, Prinz told him to double it. “Christ, Sascha, you’re mental,” Hayes thought to himself. “It’s a big risk already.” But far be it from him to defy an order. He happily doubled down.

  Adding to his growing confidence, Hayes came to realize that he didn’t need to rely solely on Darin and the ICAP brokers for help with Libor. Thanks to his time in London’s tight-knit community of derivatives traders, Hayes had a few contacts at companies other than UBS. And it soon occurred to him that they could help him get his way.

  The traders whom Hayes knew at other banks were an unremarkable bunch. Sure, the group was studded with the occasional party animal, but it was not a standout crowd. These were the proletariats of banking, young infantry toiling away for the benefits of their institutions and, in many cases, their institutions’ lavishly paid senior executives. Hayes’s cohort was hardly poor—he and his peers were pulling in mid-six-figure salaries and bonuses—but by investment-banking standards they weren’t worth a second glance. For the most part, they weren’t even making creative or otherwise exceptional trades. They were simply marching along a well-trodden path, except for one important wrinkle: Without fully realizing it, they were entering into a partnership that would, a few years hence, be construed as a criminal enterprise that embodied greed, recklessness, and hubris—in essence, everything that made Wall Street evil. At the time, it seemed like business as usual.

  Chapter 6

  The Sycophants

  One day in February 2007, Hayes was chatting with a J.P. Morgan trader named Stuart Wiley. The American bank had a thriving trading business in London, an operation so big that it was spread across multiple buildings: one in Canary Wharf, one near the ancient London Wall, and another in an ornate stone building on the north bank of the Thames that sat above one of London’s biggest vaults of gold bullion.

  Wiley and Hayes had gotten to know each other through brokers back when Hayes worked in London. Though mere acquaintances, Hayes, not the best at grasping social boundaries, thought it appropriate to see if Wiley could lean on whoever handled J.P. Morgan’s Libor data to nudge it down slightly. The answer was no, but Wiley hardly faulted Hayes for asking. “Unfortunately,” he said, J.P. Morgan’s submitters “have gone all ‘we need to be independent’ on us. So unfortunately nothing much I can do for a while.”

  “No worries,” Hayes said. “My guys are reasonable, so just let me know when you need something.” As it happened, Wiley did need something: He was looking for six-month yen Libor to remain low for the following week. Hayes said he’d see what he could do to help.*

  Brent Davies, who had mentored Hayes when he joined RBS straight out of college, was still working at the Scottish bank. In 2007, Hayes started pinging him with requests to get RBS’s submissions up or down. Davies was skeptical that Hayes’s requests would have any effect, but he dutifully passed them on.

  There were a few other traders Hayes could turn to. Otherwise, he viewed most competitors as enemies. “You’re in a war,” he would explain later. “At the end of the day, this is a sort of zero-sum game and you’re up against people who are fighting for the same customers, you’re up against people who you’re trading with on a competitive basis, and there’s a winner and a loser. And so, you know, there isn’t a lot of time for friendships.” What about golfing with rival traders? Did that sound like fun? “Unless you’re going to hit them with the club, no.”

  * * *

  While the ICAP crew seemed to be able to sway Libor by passing slightly skewed data along to banks, Hayes figured that he could amplify the effect by enlisting another trusted broker. He had just the man: Terry Farr. Lots of traders approached him for guidance on where Libor was heading. And the charismatic, happy-go-lucky broker was an expert at fostering goodwill and then calling in favors. That was what Hayes wanted him to do now: call in favors. If Hayes needed Libor lower, he would ask Farr to reach out to traders or rate submitters at a few banks. The maneuver required a subtle, deft touch. A bank wouldn’t just adhere to a random request, especially one passed on behalf of a trader at a rival bank—unless, that is, it had good reason to do so. But in the backscratching, quid-pro-quo world of traders and brokers, there often were plenty of reasons. Doing a favor on a Libor submission was really no different than doing a favor by taking someone out to a boozy night at the club.

  Farr tackled the task with gusto, enlisting his fellow RP Martin brokers to phone their contacts, too. Sometimes Hayes drew up specific suggestions about which traders and banks Farr should target. One thing that made this tricky, Farr told Hayes, was that the Libor submitters at banks like Deutsche Bank and Dutch lender Rabobank were taking instructions from their own interest-rate traders. Why would they field requests from Hayes if someone who worked at their own bank was making a contradictory request? They wouldn’t. That was frustrating news for Hayes. But it contributed to his impression about the widespread nature of banks goosing Libor. Everyone seemed to be doing it.

  What was less common was the extra mile that Hayes was taking it, enlisting brokers and rival traders in his efforts to influence the Libor submissions of other banks. It’s not clear that Hayes, twenty-seven years old at the time, detected that distinction—blurry boundaries, like nonverbal cues, often were invisible to him. In any case, Hayes was a pioneer of these aggressive new tactics. He viewed his job as pushing things to the max to make money for his bank. That’s what good traders did—they ruthlessly hunted for tiny inefficiencies and loopholes they could exploit to gain a leg up on rivals or the broader market. Nobody ever told him it was inappropriate—legally, ethically, or otherwise—to lobby outsiders for help on Libor. What kept him up at night wasn’t that what he was doing was wrong. It was that he wasn’t doing it well enough.

  Hayes was so open about, and preoccupied with, his strategy that he would change the status on his Facebook page to reflect his daily desires for Libor to move up or down, a self-deprecating poke at his nerdy fixation. At night, he dreamed of the rate. When it didn’t move in a favorable direction, Hayes often lost his composure, ranting to Alykulov that he didn’t understand why rival traders didn’t accede to his and his brokers’ requests.

  While pushing Libor around only took up a few minutes of his frenetic days, his obsession was overpowering. And so Hayes decided to get his younger stepbrother, Peter O’Leary, involved. O’Leary had come into Hayes’s life when Hayes was eleven years old and his mother remarried. O’Leary and his brother, Ben, moved in with Hayes and his younger brother, Robin. Hayes liked his new stepfather, Tim, and got along well with Peter and Ben. Now Peter was looking to follow in Hayes’s professional footsteps. He landed an entry-level trading g
ig in the New York office of the British bank HSBC. After six months there, he reluctantly moved back to London with HSBC. As Hayes knew from his own experience several years earlier, traders like O’Leary on a training scheme were just a rung or two above janitors in the pecking order at big international banks. They were there to run errands and, if they were lucky, learn a thing or two through osmosis. The last thing they should do is bother their senior colleagues.

  One day in April 2007, after Hayes had wrapped up his trading and played a little Pac-Man, he called O’Leary. After catching up about whether his stepbrother missed New York—he did, badly—Hayes started explaining how his Libor-dependent trading strategy worked. O’Leary eagerly listened, lapping up the knowledge. “I’ve got a mate at RBS who set it down at 0.64 for me,” Hayes said. He noted that a contact at Bank of America had seemingly disregarded his requests. “Can’t stand B of A,” Hayes said.

  “B of A, boooooo,” O’Leary parroted.

  Then Hayes cut to the chase: Did O’Leary know his HSBC colleague who was in charge of the bank’s yen Libor submissions? Yes, kind of. His name was Chris Porter, called “Darcy” because he seemed posh. O’Leary and Darcy had run into each other a few times.

  “If you can, have a word with those guys,” Hayes started. “Just say, ‘if you can set a low yen three-month Libor, you’d really help my brother out.’” O’Leary laughed, but Hayes wasn’t joking. “Seriously, man,” he continued. “I’ve got several million-buck fixes.” In other words, Hayes explained, for every basis point that Libor declined, UBS stood to nab a roughly $1 million profit. O’Leary was stunned. He had no idea Hayes was rolling the dice so aggressively. Hayes seemed pleased to have an admiring youngster to whom he could trumpet the magnitude of his trades. “The notional is massive,” he said, referring to the underlying size of the trade.* “I’m talking about trillions of yen.”