The Spider Network

by David Enrich

  O’Leary said he’d see what he could do; nothing happened. Hayes tried again in June. O’Leary said he’d drop his colleague a line. “Just keep it super-casual,” Hayes advised.

  The next day, Hayes sent O’Leary a reminder, referring to Darcy as O’Leary’s “mate.”

  “Will do,” O’Leary responded. “For the record he’s definitely not my ‘mate’!” O’Leary was feeling a bit sheepish about making the request. “Dunno if he’ll do anything on it seeing as he doesn’t really know me and is massively more senior than me,” he cautioned.

  “Well, no harm in asking!” Hayes typed.

  O’Leary banged out a quick instant message to his colleague. “high 6m yen libor owuld be gd according to my brother!” The reply came back: “WILL DO MY BEST.”

  A few hours passed. HSBC kept its Libor submission unchanged from the day before. O’Leary’s skepticism had been well founded.

  Hayes decided this was pointless. And he had a bout of remorse. He hadn’t viewed O’Leary’s efforts as likely to actually help, but, based on statistical probabilities, the more people he contacted for help, the greater his odds were of success; it was like buying an extra lottery ticket. Later that day, Hayes told Read that he was done asking O’Leary for favors: “I don’t want to get him in trouble.” He followed up with an apologetic phone call to O’Leary. “I don’t think I’m going to bother asking for your help on the Libors again, because he didn’t shift it at all,” he said. “But also I don’t want to put you in that position, I’ve decided. . . . In retrospect, he probably thinks ‘that cheeky young lad.’” Hayes followed up with an instant message, apologizing a second time. Then the two groused about work; O’Leary had to be in the office the following weekend. “Bit upsetting!” he groaned.

  “Sorry mate, welcome to banking,” Hayes said. “The bonuses will follow later! Usually about two years or so.”

  “Yeah, we’ll see!” his stepbrother replied.

  * * *

  All this might have seemed harmless—or at least only harmful to other major banks that were up to similar tricks—except that there were other people and institutions, far from Wall Street and Tokyo and the City of London, that were also dabbling in financial products linked to Libor and its brethren.

  Jeffrey Laydon was a computer geek turned salesman who, after attending a technical college in Milwaukee and spending five years as a consultant at Southwestern Bell, had moved to Florida in the mid-1980s. For the next two decades, he lived outside Orlando and worked at a series of computer and telecommunications companies, keeping mainframes online and helping address big clients’ computing needs. Balding, with ruddy cheeks, wire-rimmed glasses, and a sandy mustache, Laydon had a couple of hobbies. One was sailing; he loved taking a boat out on Lake Monroe, where he was a member of the local sailing association. Another passion was investing. From the comfort of his home, he traded stocks, options, and futures via an online brokerage account. He was doing well enough that he toyed with the idea of quitting his job and becoming a full-time day trader, someone who could even help educate other wannabe investors.

  By 2006, Laydon had discovered a new area to wager on: Japanese interest rates. He didn’t know much about Japan, but derivatives linked to the yen were becoming increasingly popular after the Bank of Japan’s rate hike, and he decided to give it a go. He spent thousands of dollars, a considerable gamble for a small-time trader, on futures contracts on the Merc that would pay out if Tibor declined. He had no way of knowing that, on the opposite side of the planet, a posse of traders was working to push Tibor in the opposite direction. By the time Laydon’s trades matured, his money had vaporized.

  Laydon wasn’t alone. In the years leading up to the financial crisis, public pension funds had been growing increasingly bold and creative in the gambles they made with their members’ money. Markets were booming, and it was hard to resist the temptation to leap for the double-digit annual returns that hedge funds and other professional money managers were attaining. So the Oklahoma Police Pension & Retirement System, a traditionally risk-averse fund, hired a bunch of asset managers to help it amp up its returns. Before long, the OPPRS—exactly the type of dumb-money clients that Hayes and his ilk battled for the right to do business with—was the proud owner of Japanese interest-rate derivatives. Sure enough, the bets soured—a result, the fund would later claim, of manipulation by Hayes and his pals. A similar scenario played out in California. CalSTRS, the giant fund handling the retirement savings of the state’s teachers, bought derivatives linked to Libor and Tibor. CalSTRS would realize years later that it had paid inflated prices for those instruments because someone had pushed the benchmarks artificially higher.

  Hayes had never heard of Laydon, probably couldn’t point to Oklahoma on a map, and most likely didn’t know what CalSTRS stood for (California State Teachers’ Retirement System). He viewed himself as operating within a closed system, facing off against other predatory professionals who were sufficiently sophisticated, and often avaricious, to deserve whatever they got. The perspective of the financial system as a playing field for these competitors, where amateurs were viewed as fair game if they were thought of at all, had been hammered into Hayes since he first set foot on a trading floor. It was a narrow, self-serving view, and its prevalence helped explain why the finance industry was heading for all sorts of trouble. But this was a game played hard, and if there were corners cut and envelopes pushed—well, that was just business.

  * * *

  Before long, Hayes’s tactics were becoming known in the marketplace. One day, a broker named Scott Harris was talking with Roger Darin, the UBS Libor submitter in Singapore. Harris had heard through the grapevine that Hayes had been leaning on Libor submitters. Darin pounced on the opportunity to bad-mouth his nemesis.

  “He’s been trying that for a while now,” Darin explained, neglecting to mention that he had agreed to move Libor on Hayes’s behalf at times in the past. “Very embarrassing.”

  “Hope he gets buried,” Harris said. “Mike [Pieri] may not think he’s such a ‘golden boy’ anymore.”

  “Doubt Mike will learn,” Darin lamented, almost sounding sad.

  Hayes wasn’t venturing out on a limb alone. Pieri knew what his trader was up to, or should have, thanks to Hayes’s repeated e-mails, instant messages, and in-person conversations. Every morning at 8:30 and 11:00, Hayes and Pieri gathered with more than a dozen colleagues in a conference room; Hayes tended to perch on a windowsill instead of crowding around the oval table. The participants discussed their plans to get Libor moved. It wasn’t a secret; when senior executives cycled through Tokyo for periodic visits, they usually sat in on the meetings, too. And when Libor moved in profitable ways, Hayes sometimes told Pieri that he owed Read and Farr beers for their valuable assistance.

  At one point in 2007, Hayes and Ainsworth were preparing to head off on a weeklong trip to Thailand. Hayes had delegated the task of picking the destination and hotel to Ainsworth, a nod to her persnickety standards and Hayes’s general lack of interest in vacations. She informed Hayes that they would be staying at the Trisara resort in Phuket, a tropical island off the west coast of the Thai peninsula. “Congratulate Sarah,” Read said when Hayes mentioned where they were heading. “Probably the most expensive hotel in Asia.”

  “Thank God it’s just one week,” Hayes replied, before adding that Ainsworth would be footing half the bill.

  “You have loads of money,” Read pointed out.

  “Which I should be saving for a house!”

  Hayes was so stressed about a big batch of trades that were nearing fruition that he nearly canceled the vacation. Instead, he e-mailed Pieri, Alykulov, and two other UBS colleagues to remind them to ping the ICAP and RP Martin brokers if they needed Libor “pushed one way or other.” Read, meanwhile, promised Hayes that he’d work hard to ensure that Goodman tweaked his run-throughs, and, sure enough, he repeatedly asked his London colleague to jack three- and six-month Libor higher. Goo
dman told Read that the figures didn’t reflect what he was seeing in the market—and then he did it anyway. Read, unsatisfied, asked him to send out a revised run-through with the figures higher still, noting that Hayes so far that month had paid ICAP £83,000 in commissions. Goodman grudgingly complied.*

  In Phuket, Hayes and Ainsworth stayed in a waterfront villa at the secluded five-star resort. Calm turquoise waters lapped at the private, white-sand beach. Ainsworth relaxed in the sun, sipping champagne and getting spa treatments. There on the beach, it dawned on Hayes that he could now afford this high-rolling lifestyle. The bill at the end of the week was massive. He and Ainsworth usually split the tab. This time, feeling lavish, Hayes picked up the whole thing.

  * * *

  By the standards of the brokerage industry, good old RP Martin was tiny. It had fewer than two hundred employees, in five countries, most of them in the firm’s headquarters in an unmarked building on a narrow street in the heart of the City of London. The firm’s roots traced back more than a century, and over time RP Martin’s specialty became helping banks trade currencies and other financial products that weren’t available on public exchanges. One of its niches was catering to traders who focused on products linked to Libor. What RP Martin lacked in size, it made up for in scrappy enthusiasm. The firm’s brokers were known for crashing parties thrown by rival companies in order to get face time with coveted clients. Some traders liked working with RP Martin because of its familial style and working-class culture, albeit one with six-figure salaries. The culture came straight from the top: David “Mustard” Caplin tried to set his shop apart from larger rivals like ICAP and Tullett Prebon by cultivating a down-home feel. “You’re joining part of a family,” he would tell new recruits. He incented his staff by giving them equity in the firm.

  To survive, RP Martin had to be aggressive, going the extra mile for clients. Until 2010, Mustard resisted even having a compliance department; the basic guiding principle governing employee conduct should be common sense, he thought, not a rigid set of rules. When he finally bowed to reality and created a compliance group, he did what he could to marginalize its employees. Warning the new department’s chief not to inadvertently “destabilize” things, Mustard told him not to introduce any initiatives that would affect the brokers. The last thing Mustard needed was an intrusive internal affairs bureau causing his stars to jump to competitors.

  That attitude trickled down. Cliff King had joined RP Martin in 1980. In 2006, Mustard tapped him to run a squad of brokers responsible for Japanese products, interest-rate derivatives, and the like. King spent the bulk of his time tending to his own clients, which included traders at some giant banks. The way he saw it, his posse—which included Terry Farr, Lee Aaron, and Jim Gilmour—didn’t require much supervision. They seemed to take care of themselves.

  It was a curious bunch. There was the motorcycle-crashing, flip-flop-wearing, ravioli-toting Farr. There was Aaron, whose nickname was short for “Village Idiot.” Gilmour, for his part, had been busted a few times as a teenager for minor offenses, left school at age sixteen, briefly trained to join the army, landed a job as a cabinetmaker, and ultimately became a broker in the late 1980s. Slim with slowly receding brown hair, Gilmour might once have passed for handsome, but when he was stressed or sleep deprived, he developed dark, puffy bags under his eyes. As the years went on, those bags became an almost permanent facial feature. Gilmour, whose salary was £75,000, was battling multiple scourges. His bank account was perpetually overdrawn. His colleagues annoyed him. And his wife, Lisa, with whom he had two daughters, seemed to derive great pleasure from calling him at work, either to update him on the squirrels and other mundane wildlife scurrying through their suburban backyard or to harangue him for screwing up their TV-recording device, interrupting her planned daytime viewing of Law & Order.

  * * *

  Farr didn’t have much history of success. Growing up, he was always the last one picked for soccer games—a mark of shame for someone coming up through the British school system. Year after year at RP Martin, his personnel files included paperwork explaining absences caused by an almost comical array of medical problems. In 2002, he was out with a viral infection, followed a few months later by what he described as “blood poisoning caused by an arm infection.” In early 2004, he fell victim to food poisoning. That was also the summer of his “severe allergic reaction” to a wasp sting, “causing large swelling and infection and nausea.” Later in 2004, he missed work due to “tooth extraction causing severe discomfort.” A few years later, he was out due to what he thought was swine flu. (It turned out to be a cold, but it got him to temporarily ditch his pack-a-day smoking habit.)

  But business had never been central to his sense of self. Indeed, what really animated Farr was his son Sam. When not riding motorcycles together, Farr enjoyed counseling the teenager on, among other topics, how to get women into bed. “Mate, look,” he told Sam on one occasion. “If you want to have a little rub with some bird, you need to lower your sights a bit, go for fat ones.”

  In the summer of 2007, however, Farr was finally coming into his own at work—thanks to having hitched himself to two successful traders. Hayes was emerging as a star, and the business he kept sending Farr’s way was generating buckets of commissions. But Hayes wasn’t Farr’s biggest client. That distinction belonged to a trader named Alexis Stenfors.

  Stenfors grew up in a small town in Finland near the Baltic Sea. Athletic, with high cheekbones, brown sideburns, and deep-set brown eyes, he was the unusual combination of a runner and smoker. As a young man, he thought about going into academia. Instead, he took an internship at a German bank, where he handled the paperwork for derivatives transactions that the bank’s traders executed. He became intrigued by the huge sums of money involved in transactions such as interest-rate swaps—often the “ticket” accompanying those trades would run well into the tens of millions of dollars. Another thing that caught his eye was the bizarre, rhyming acronyms that littered the terms of the transactions: names like Libor and Tibor and Fibor and Pibor. A few years later, in 1995, he became an interest-rate trader in a British bank’s Stockholm office. Soon he was the one executing big transactions pegged to Scandinavian benchmarks like Stibor, Nibor, Cibor, and Helibor. While trading, he managed to cowrite a paper about European currencies in a Finnish academic journal with a Swedish economics professor—hardly normal fare for his peer group.

  Stenfors cycled through some of the world’s biggest banks. In September 2001, he was working in London in the investment-banking division of Crédit Agricole when terrorists hijacked planes and crashed them into the World Trade Center in Manhattan. The French bank’s New York offices were on the ninety-second floor of the World Trade Center’s North Tower—just below where the first plane crashed. (Sixty-nine Crédit Agricole employees perished that day.) Early that afternoon in London, footage of the disaster was broadcast on the wall-mounted TVs around Crédit Agricole’s trading floor. Stenfors and his colleagues kept doing business as if nothing had happened. As weeks passed, Stenfors was increasingly chilled by his and his peers’ amoral, unemotional reactions—and he wasn’t alone. Traders at other banks, many of which had outposts in the twin towers, realized that their first instincts had not been to fret about their colleagues’ well-being or the geopolitical implications of the attack, but instead to hunt for profitable trading opportunities. Then again, didn’t money make the world go round? Their recollections were tinged with regret, but for most just barely.

  Stenfors certainly kept trucking along in his career, eventually landing in the London office of the Wall Street giant Merrill Lynch. In 2007, thirty-six years old, married and with two young daughters, Stenfors—trading currencies and interest-rate derivatives, including those pegged to the Japanese yen—was one of the savviest, most ambitious risk-takers in London’s booming markets. His prowess was reflected in the astronomical sum—about $120 million—that he earned for his bank in a single year. Stenfors didn’t
fully embrace the industry’s wild ethos—not a surprise, given his academic tendencies—and jokingly booked squash and tennis courts under the name Patrick Bateman, the fictional investment banker and serial killer in the book and film American Psycho. But when it came to earning money, he was as ruthless as anyone. There were no limits, at least none that Stenfors knew of, restricting how much risk he could take with the bank’s money. Year after year, the bank gave him “budgets”—industry lingo for the amount of revenue he was expected to generate—that stretched into nine digits.

  Stenfors and Farr were tight. Stenfors thought the broker was friendly and honest, and it felt nice to do business with an underdog firm and an up-from-his-bootstraps broker who was making a fraction of what someone at a rival firm would earn.

  The tandem rises of Hayes and Stenfors were excellent news for Farr—especially as his two clients got to know each other. In 2007, the pair happened to be seated next to each other at a Christmas party ICAP hosted for traders. The soiree featured treasures carted up from Michael Spencer’s wine cellar and a gaggle of beautiful women hired to act as “hostesses.” As they milled around the room, sitting on the traders’ laps and laughing at their jokes, an uncomfortable Hayes and Stenfors spent the entire evening immersed in an intense conversation about financial markets and trading minutiae. Obsessive and at the top of their games, each could tell that the other derived something approaching pure bliss from the subject. There weren’t very many people in the world who could carry on a discussion like this, with such fluency and at such a high level.

  After clicking at the ICAP party, Hayes and Stenfors started trading together more and more. Hayes soon became one of Stenfors’s biggest trading partners, and they tended to automatically route their transactions through Farr, who pocketed fat commission payments for almost no work.