by David Enrich
That didn’t mean he was having fun. Too anxious to sleep, he was pulling outrageously long hours; at times he felt himself coasting onto autopilot and had to remind himself that this was no moment to let down his guard. “Every time I relax, the next day something happens to screw me,” he lamented to his old RBS colleague Brent Davies. (The normally easygoing Davies was stressed, too. He had much of his life savings on deposit at the fast-unraveling RBS. He told Hayes that every day he withdrew £500 from the bank and kept the cash at home.)
It was an inopportune time for Tighe’s parents to come to Tokyo to stay with the couple. But their trip from England had been scheduled far in advance, and there was no getting around it. Hayes didn’t adjust his schedule, and more than once he remained at the office until 3 a.m. Wiped out by the time he staggered home, he would sit in a trancelike state, glaring at his phone and watching CNBC. He hardly spoke to Tighe’s parents. “He’s always a zombie,” Karen told her daughter. “All he ever does is look at his BlackBerry.” Hayes was irritated by her parents’ lack of appreciation of the depth of the financial crisis.
Tighe had taken it upon herself to try to improve her partner’s woeful skills in situations like these. Before going out together, she would walk Hayes through a lengthy list of dos and don’ts: Do make polite small talk. Do comment on how you like the host’s apartment and enjoy the meal they prepared. Do ask open-ended questions about how work is going. Don’t ask people how much money they earn. Don’t interrogate them about their views on politics or economic events. Don’t comment on their weight. Don’t remark on someone being drunk or having eaten a lot. They would agree to a certain signal—a cough or a gentle nudge—that Tighe would use to indicate to Hayes when someone was getting bored with one of his rants about soccer, financial markets, or the deleterious impact of divorce on families.
It was an uphill battle. In November, the couple went to an American friend’s home for Thanksgiving dinner. A number of UBS colleagues were there, including Alykulov. He brought his latest girlfriend, who was seated across from Hayes. He learned that she worked in L’Oréal’s haircare division. As everyone ate turkey, Hayes delved into a detailed and loud explanation about his chronic dandruff problem. (Afterward, the girlfriend sent Alykulov to work with two bottles of L’Oréal antidandruff shampoo to present to Hayes.)
For Read, the crisis was both good and bad. The chaos reinforced his decision to retire. By October, he was excitedly counting down the remaining days. But that enthusiasm was tempered by the fact that his retirement savings, invested in the market, had been chopped in half. “Not a good time to walk out of a job!” he said. The same thought had occurred to Hayes, who entertained a brief moment of optimism that his indispensable ally wouldn’t be financially strong enough to quit. ICAP, too, tried to seize on Read’s financial problems. A senior manager, Frits Vogels, offered to set up a miniature brokerage floor in Read’s new, beachfront house in Tauranga, New Zealand, so that he could work from the comfort of home. Hayes loved that idea, even if it meant the broker’s home would be echoing with his client’s shouting. “Better sound-proof it!” he said. But Read wasn’t interested. If he really needed the cash, he told Hayes, maybe he’d get a job as a bus driver.
* * *
One of the many things the financial crisis upended was Terry Farr’s livelihood. At least from Hayes’s perspective, the RP Martin broker had come to play a vital role helping him get Libor where he needed it. (In reality, even when he didn’t have much to do with it, Farr sometimes was taking credit for banks moving their Libor submissions in favorable directions.) But when Lehman collapsed, the volume of trades Farr was handling for clients plummeted, even though Hayes was still doing a brisk business. That inflicted a direct hit upon the commissions Farr was receiving.
Four days after Lehman’s bankruptcy, Hayes and Farr came up with a strategy to solve the broker’s problem. It involved a squirrelly type of transaction called a “switch trade.” Two traders at different banks would execute a pair of mirror-image trades. For example, Trader A would sell 100 shares of Company X to Trader B, and then Trader A would buy 100 shares of Company X from Trader B. The rapid-fire transactions neutralized each other, but they still had value, at least to someone. Standing in the middle was the broker, who would collect a commission on both transactions from one or both of the traders’ banks. It was a way of thanking the broker for a big night out or for anything else of value.
Now, Hayes and Farr figured, was the perfect time to deploy switch trades. Move Libor lower, Hayes told his broker, and “I will fucking do one humongous deal with you, alright? Like a 50,000-buck deal. I need you to keep it as low as possible, alright? If you do that, then . . . I’ll pay you, you know, $50,000, $100,000, whatever you want. . . . And I’m a man of my word.” Later that day, they hammered out the details of a planned switch trade. Farr could hardly contain his enthusiasm when Hayes outlined a deal so large that it would generate more than $30,000 of commissions. “That’s excellent,” Farr giggled.
But Hayes had been speaking literally when he threw out those very large numbers earlier. “That’s only $31,000, so we’ll have to do more than that,” he declared. He suggested doubling the transaction’s size.
Farr laughed again. “We’ll see what we can do then, fucking hell!” he said.
The next step was to find traders at other banks to take the opposite side of the switch. After all, a trade needed two parties, and Hayes could only be one of them. Hayes and Farr started canvassing their contacts. Farr approached Stenfors. “I don’t know if I can do that,” Stenfors responded.
“If it’s a bit dodgy that’s fair enough,” Farr said.
Stenfors interjected: “Yeah, it is actually.” Merrill was in the process of being acquired by Bank of America—a deal designed to save the Wall Street firm from bankruptcy—and its managers were trying to get their traders to dial back their risk-taking. This was not a good time to be experimenting with some big switch trades. Farr reported back to Hayes that Stenfors was a no-go. Merrill has to be “squeaky clean,” he said.
Hayes then approached Stuart Wiley at J.P. Morgan, asking if he’d take the opposite side of the trade. Hayes emphasized that it was a zero-risk, zero-cost transaction for J.P. Morgan, because only UBS would pay commissions to RP Martin. “What is the reason for it?” Wiley asked.
“I owe Terry a deal,” Hayes replied. “He has been letting me have good info.”
“Okay fine,” Wiley agreed. Farr then called Wiley to nail down the specifics. He proposed a mammoth 400 billion yen (roughly $3.6 billion) transaction—and promised that he’d take Wiley out one night as a reward. But that was way too big for Wiley. They settled on a 50-billion-yen deal instead—enough to generate roughly $10,000 of commissions from Hayes.
The goal was to do as many switches as possible—it was free money, after all! But to make the scheme work, Hayes needed more trading partners. Luckily, Farr’s colleague Lee “Village” Aaron had just the man for the job: a Royal Bank of Scotland trader named Neil Danziger. Born in South Africa in 1975, Danziger’s parents, opponents of the country’s apartheid government, bolted to England when he was young. Dark-haired, with a doughy face and ruddy complexion, he still maintained a trace of his South African accent. In London, Danziger was a member of RBS’s interest-rate derivatives team; his main job was executing trades on behalf of his prolific boss in Singapore. Rivals, including Hayes, viewed Danziger as lazy.
Out of the office, though, Danziger was a different man. The thirty-two-year-old was ubiquitous at bars and clubs around London. He had a few brokers on speed dial, including Aaron and Tullett Prebon’s Noel Cryan and Mark Jones. All of them loved the nightlife. And while Danziger himself wasn’t much of a trader, he was handling an envious amount of traffic that originated with his boss, so the brokers did what it took to impress him. RP Martin was spending roughly $800 a week entertaining him; other brokers took him to Spain and Romania, destinations that generally were popula
r for British bachelor parties. But there were few places in the world that Danziger liked more than the strip clubs and casinos of Las Vegas. One getaway cost Tullett roughly $20,000. (Such lavish spending caught the attention of a senior Tullett executive, Angus Wink, but when he learned how valuable Danziger was to the firm, Wink told Mark Jones to carry on.)
Danziger was wild, but he was also principled, at least in his own way. When his brokers shelled out for a wild night or weekend, Danziger could be counted on to return the favor, sending a big trade their way. Often, the commissions on that one trade would exceed the cost of whatever extravagant hijinks had occurred the night before. Everyone seemed to win: The brokers personally pocketed about a third of whatever they hauled in through commissions, and Danziger enjoyed the raucous entertainment. He never saw the relationship between the partying and the ensuing trade as a quid pro quo. It was just good manners.
So Danziger was an ideal candidate to participate in the lucrative switch trades. Aaron explained to him that he wouldn’t have to pay any fees on the transaction. But Danziger—apparently eager to rack up chits with his fun-loving brokers—surprised him.
“I’ll pay one side for you,” he offered.
“Sorry?” Aaron said, taken aback.
“I’ll pay you on one [side],” repeated Danziger, knowing full well that the gratuitous commission payments would find their way back to him in the form of entertainment.
“Will you?” the incredulous Aaron responded, not believing his good luck. “Fucking hell. He said he can pay us on one side of that,” he said to Farr, seated nearby. “Oh mate, that’s amazing, mate. Thanks very much.” RP Martin promised to send enough lunch over to feed Danziger and all his colleagues. When Aaron called back to finalize the deal, they settled on a 200-billion-yen ($1.8 billion) transaction. “You are beautiful, mate,” Aaron cooed. “I love you. Like your style, thank you very much.”
At 9:08 a.m. in London, RP Martin executed the first 200-billion-yen trade between UBS and RBS. Thirty seconds later, the brokerage processed another trade, the mirror image of the first. The trades entailed virtually no work by RP Martin. But they generated the tiny firm nearly $60,000 in commissions, most of it from UBS, plus another $10,000 from the transaction Hayes did with J.P. Morgan.
Farr and his colleagues exchanged high-fives. Caplin, the CEO, congratulated them. When told that Danziger voluntarily kicked in more than $16,000 in commissions, he lauded the RBS trader as “a good boy.” A bean counter in RP Martin’s back office, apparently the only one whose ethical antenna had picked up a signal of potential trouble, noticed the unusually large commissions and asked what had happened. “You really don’t want to know” was the response. The back-office guy didn’t inquire further.
Hayes walked over to Pieri’s desk. “Look, I’ve done a couple of trades with Terry in and out,” he told his boss. “I just need to pay him some brokerage. I just wanted to check is that alright.” Pieri said it was fine.*
* * *
One day in late 2008, Angus Wink summoned Noel Cryan for a meeting. Wink’s spikey brown hair and boyish face belied the fact that he’d been in the brokerage industry for more than twenty years. Unlike Tullett’s brokers, who worked in an open-plan trading floor, Wink enjoyed the privacy of his own office, albeit one with glass walls and nicknamed “The Box.” At the time, he ran Tullett’s squad of interest-rate brokers, but he was about to be promoted to run all of the brokerage’s business areas in Europe, the Middle East, and Africa. He had heard through the grapevine that RP Martin was tapping a gold mine via its relationship with Hayes. Specifically, Wink had picked up market chatter that the rival brokerage had pulled in roughly $160,000 in a single month through commissions on interest-rate derivatives trades. This was supposed to be Tullett’s area of expertise—it was certainly supposed to be Wink’s area—and yet they weren’t enjoying such riches. Meeting in the Box, Wink instructed Cryan to find out what was going on.
So Cryan asked Mark Jones. Jones asked Danziger. Danziger, of course, knew exactly how RP Martin was making so much money through Hayes, and he told Jones about the switch trades. Jones told Cryan, then Cryan told Wink. “We need to get involved in this,” Wink said.*
And so Tullett did. One pair of switch trades in September generated a quick $48,000 for Tullett, all of it courtesy of RBS. Cryan wanted Hayes to show some love, too. One Monday afternoon in February 2009, after a round of banter about Cryan’s hapless Millwall soccer team, Hayes asked the broker to get his colleagues to help push three-month Libor lower. “I will look after you off the back of it,” he promised. “I do that for RP Martin, too.”
Cryan didn’t see much downside—and there was plenty of opportunity. Cryan said he’d help—and then did nothing. “Just spoke to them [his colleagues] and they are on the case,” he lied to Hayes a minute later.
“OK, mate, much appreciated,” Hayes said. “If we do this going forward, it will come back to you in spades.” Indeed, Hayes promptly agreed to pay Tullett commissions on a big trade at an inflated percentage rate.
The next time Hayes asked, Cryan protested that there wasn’t much Tullett could really do to help. Its brokers responsible for the Libor submitters weren’t very good. Hayes interpreted this as Cryan refusing to help. A loud argument ensued. Hayes, once again, threatened to stop doing business with Tullett. Cryan defused things by promising to do whatever he could to help. He got off the phone. Everyone in the vicinity had heard the explosive argument. “He wants me to fucking go and start talking to the cash lines and he wants Libors moved,” Cryan explained scornfully.
“Are you going to do anything?” a colleague asked.
“No, sod him, he’s never going to know,” Cryan said. He didn’t feel any guilt about tricking Hayes; this seemed like what Hayes deserved to pay for being so unpleasant.
The decoy worked: More switch trades soon started flowing in Tullett’s direction. Hayes and Danziger paired up on each transaction and both paid commissions to Tullett; some transactions generated more than $80,000 in fees—massive sums considering that Cryan’s team normally produced less than $10,000 a day in revenue.
To anyone paying attention to the team’s fortunes, the huge daily spikes were impossible to miss. On some occasions, Cryan told his bosses the jackpots were due to the trades with Hayes and Danziger. But he also knew to keep the information as fuzzy as possible. “Have you just done a 35-grand trade today or is that just gone in wrong?” Simon Rogers, who was Cryan and Jones’s manager, asked in February 2009.
“We did that, yeah,” Cryan responded in a near whisper.
“Holy shit!” Rogers said. He asked Cryan where it came from.
“You don’t want to know,” Cryan said.
“Oh, don’t I?” he said. “Alright, I get you. I don’t want to know.”
* * *
Over the next eleven months, UBS and RBS would route another seven switch trades through RP Martin, generating well over $400,000 in commission payments. Five similar transactions went through Tullett, resulting in more than $160,000 in commissions. The brokers—in exchange for attempting to manipulate Libor (or, at least, for tricking Hayes into thinking they were trying)—personally pocketed about 30 percent of the commissions they generated. Partly thanks to trades like this, Farr’s total compensation that year would roughly double to the equivalent of nearly $350,000, followed by about $400,000 the next year. Gilmour (whose bank had recently let him know that he had access to a total of less than $30 thanks to an overdrawn checking account) would see his annual income exceed $224,000. Each time one of the trades was booked, Farr ran around the brokerage floor laughing and whooping with delight. He occasionally pulled off a cartwheel. Management came by to congratulate the team. “You’ve had a great day, lads” was a common refrain. Bottles of champagne were sent around. “This yen desk is going fucking crazy,” Aaron gleefully told Danziger after one of the trades. After work, the team—Farr, Aaron, Gilmour, Cliff King—headed down to the pub for ce
lebratory beers.
By paying commissions on meaningless trades, in exchange for receiving help manipulating Libor, Hayes and the brokers were engaging in what most people would regard as fraud for hire. To be sure, there were no specific company policies against the practice nor laws that explicitly forbade using switch trades to compensate for Libor manipulation. But even if the word fraud didn’t cross their minds, the participants should have been under no illusion that the switches were kosher. Hayes justified the deals to himself by the fact that he had received Pieri’s permission, but he sometimes lowered his voice to a whisper when discussing the arrangements with Farr. “Don’t fucking put it on chat,” he instructed on one occasion. “The point is, I’m not really supposed to do it, am I?”* Danziger took such pains to conceal the transactions that he insisted that Tullett vary their timing, sizes, and terms each time a deal was executed so that it didn’t look like a pattern. He asked Aaron to keep the trades out of the normal brokerage software program that would be visible to his RBS colleagues. And he requested that the trades be executed after his boss had left the office for the day.
Farr was deeply indebted to Hayes for the switch trades. In June 2009, Hayes asked him to get six-month Libor higher, going so far as to suggest that he cook up fake data to make it look like that was the direction that other banks were moving in—a signal that could persuade other banks to follow suit. It was a variation on the tactic that had so enraged Jeremy Martin, the Lehman trader, a year earlier, and it was a common if unsavory industry practice. But nobody had previously taken the approach to its logical extreme, and pushing the envelope to create a bogus trail of statistics was duplicity of a higher order. “I’ll make a special effort,” Farr pledged. Then he added: “Mate, you’re getting bloody good at this Libor game. Think of me when you’re on your yacht in Monaco, won’t you?” It was a joke—the idea of the pasty-skinned, scrubby Hayes on, much less owning, a yacht in Monaco was laughable—but it spoke to a deeper truth: Hayes seemed to have it made. What could possibly go wrong?