The Spider Network

by David Enrich

  On the morning of September 11, 2001, Obie was at work on the thirty-seventh floor of the North Tower when a plane smashed into the skyscraper. He felt the floor buckle; it was like riding a wave. He and his colleagues scrambled down the stairs and escaped, shocked but unhurt.

  The brush with death prompted Obie to again reevaluate his professional life. He wanted to go after bigger fish. That fall, he volunteered for a federal task force investigating Enron. The experience proved formative. The CFTC and Justice Department worked closely together, and Obie realized the power that Justice brought to the table. People readily lied to the CFTC—but it was much different when an FBI agent was in the room. And the psychological impact of staging a “perp walk,” parading a handcuffed suspect in front of the TV cameras, was not to be underestimated. The CFTC didn’t own any handcuffs.

  Obie was tall, beefy, and at times sported a crew cut. He looked a bit like a cop. Once, when he accompanied a CFTC commissioner to a speech near the United Nations in midtown Manhattan, passersby mistook him for a Secret Service agent. In April 2008, Obie had just been promoted to become the agency’s acting enforcement director. He wasn’t shocked by the Journal’s first story. Some pension funds had been grumbling to the agency for months about apparent problems with Libor; the funds felt they weren’t getting the money they deserved on some of their derivatives contracts as a result of Libor’s inaccuracy. But the complaints hadn’t prompted the CFTC to do anything.

  McGonagle and Lowe told Obie the Libor case looked like it had the potential to be big. Two days later, a Friday, the CFTC commissioners held their weekly closed-door meeting to discuss enforcement matters. The meetings were not known for being exciting. If there were nothing major going on, the commissioners might spend time ruminating about the effects of something like an African civil war on coffee prices, before devoting fifteen minutes to running through a checklist of open investigations. The general rule of thumb was that the enforcement staff would seek approval from—or at least give a heads-up to—the five commissioners before they devoted more than twenty man-hours to an investigation. Obie gave that heads-up. He told them he wanted to open an investigation into Libor. “We don’t know much about it, but we’re going to take a look,” he said. Nobody objected.

  * * *

  A few weeks after Geithner chatted with Mervyn King in Switzerland, his staff produced a six-point plan to address Libor’s shortcomings. The ideas were predicated on the notion that not only was Libor inaccurate, but also that banks were deliberately skewing their data. At the time, that was a radical accusation: The BBA was still insisting that the rate was sacrosanct; the notion that banks were intentionally distorting it could be interpreted as heresy. Geithner’s solutions, e-mailed to King on June 1, mainly involved modest tweaks to make it feasible for someone in an oversight role to double-check Libor’s accuracy and, if problems were discovered, to rectify them, either through rewarding accuracy or punishing inaccuracy. Two days later, King’s assistant replied on behalf of the governor, notifying his American counterpart that the Bank of England would pass on the suggestions to the BBA.

  From late May to early June, dozens of e-mails and phone calls crisscrossed the Atlantic between top officials at the Fed, BBA, Bank of England, and, to a lesser extent, FSA, in an attempt to forge a consensus about what to do with Libor. The process at times was slowed down by King’s refusal to use e-mail. He preferred to have his private secretary, Chris Salmon—the same Chris Salmon who years earlier had done a stint at the International Monetary Fund in Washington and helped stoke his nephew Tom Hayes’s interest in finance—print out the e-mails, and then King would scrawl his barely legible comments on the top of the pages. The BBA incorporated some of the suggestions into a report it was working on about ways to improve Libor; it wanted to cite the central banks’ input, but they wouldn’t let their names be included. In any case, despite the increasing concerns about Libor, the Bank of England continued to rely on it. When it unveiled a new emergency lending program for British banks, it used Libor to determine the interest rates and fees banks would pay to participate. There was nothing the Americans could do—which is just how Hayes, his fellow traders, and the BBA liked it.

  * * *

  That summer, Lowe assigned a few employees to the investigation—a significant investment of manpower, considering the enforcement unit’s entire staff, including secretaries and other low-level employees, barely numbered a hundred. Progress was glacial. By September, five months after the Journal’s initial story, the investigators hadn’t collected a shred of outside information. They hadn’t conducted any interviews. This was still nothing more than a hunch. When Obie asked McGonagle about the status, he was alarmed to hear that things had stalled, in part because one of the only staffers on the case had gone on maternity leave. The CFTC, Obie concluded, needed to either do something or move on.

  It was clear that they needed outside help; there just wasn’t much information available to the public. A natural starting place was the BBA. McGonagle and Lowe drafted an informal letter to the group, figuring it would be just as concerned as they were about the prospect of Libor being manipulated. As a courtesy, Obie got in touch with his counterpart at the FSA in London, a prim former white-collar defense lawyer named Margaret Cole. The two had enjoyed a solid working relationship, dating back to their collaboration on some of the energy-price-manipulation cases earlier in the decade. But to Obie’s surprise, Cole didn’t seem all that interested in Libor. She hadn’t heard anything to suggest there were problems with the rate. Her only request was that the CFTC keep her agency in the loop.

  On September 10, less than a week before Lehman Brothers went bankrupt, the BBA received a letter from the CFTC stating that the agency was conducting an investigation into the U.S. dollar version of Libor. The letter asked the BBA to hand over documents and other information. Similar letters went to a half-dozen big banks.

  Ewan got to work figuring out how to derail, or at least stall, the investigators. He sent a memo to Knight explaining that it was not clear that the CFTC even had jurisdiction to make such a request about the London interbank offered rate. He suggested enlisting the FSA to help fend off the Americans. The BBA’s lawyers, from the law firm Clifford Chance, gave similar advice. That sounded good to Knight. Her impression, after talking to the FSA, was that the agency was at best lukewarm about the investigation; on a recent conference call about Libor, all of the agency’s top officials had hung up, leaving a lone junior employee representing the agency. So the BBA replied to the CFTC that it would be happy to cooperate, but all requests needed to be routed through the FSA; for now, it wouldn’t be answering any of the CFTC’s questions. With the BBA’s hometown regulator in its corner, Ewan and his colleagues breathed a sigh of relief.

  * * *

  A month later, on October 10, Ewan and Miles Storey at Barclays got on the phone. Markets were closed for Columbus Day in the United States. “That just gives us more time for more banks to fail,” Storey joked.

  Ewan wasn’t as jovial. A few days earlier, someone had called him to complain about the inaccuracy of the Libor submissions made by a German bank, WestLB—the same company that employed Darrell Read’s buddy as a Libor submitter. Ewan phoned the bank and relayed the complaint. The next day, WestLB boosted its submission. “Between us, I was horrified at the ease with which I did shift the Libors,” he told Storey. “You can see exactly when it happened.” Was this a sign of just how arbitrary banks’ submissions really were and how easy it would be for someone to call in a favor and get a bank to change its data?

  Later that month, the BBA held a meeting with representatives from some of the world’s biggest banks to discuss the CFTC investigation. Executives at the American giants—Citigroup, Bank of America, and J.P. Morgan—grumbled about the CFTC’s vague requests for reams of detailed information. They were reminded that the CFTC had limited powers to tell banks what to do. Some of the banks, though, remained antsy. Barclays had
a policy of generally destroying audio recordings of phone calls involving bank employees after a year or so, but it hadn’t adhered to its own policy. Its army of compliance officials and lawyers soon discovered that tens of thousands of the audio files still existed—worrisome, indeed.

  A week later, the FSA finally got around to asking the BBA to provide the CFTC with some rudimentary information. There was no deadline.

  * * *

  On the evening of November 4, a senior official at the Bank of England, Paul Fisher, shot off a personal note to Ewan. It had been a long day at the central bank, with a global crisis raging. Fisher’s job included keeping tabs on the foreign-exchange market, which, thanks to the violent financial turbulence, had suddenly become a full-time occupation. But Fisher was preoccupied with an unrelated problem. He had read a Goldman Sachs research note earlier that day about Libor. Fisher was no expert on the benchmark, but he knew its definition: It was the rate at which banks thought they could borrow money from each other. The Goldman report had gotten the definition wrong, describing Libor as the rate at which banks loaned money to each other. When Fisher noticed the error, it got him thinking: How widespread was the confusion? Libor was an integral part of the world’s financial plumbing, so how could the great Goldman Sachs misunderstand what the rate was supposed to be measuring? Fisher tried to find the definition of Libor on the BBA’s website. When he finally tracked it down, he told Ewan, the definition seemed to be “ambiguous to say the least.” Out of curiosity, he checked Wikipedia’s description of Libor; it included the same mistake that Goldman had made.

  “If Goldmans can get it wrong, maybe there’s a complete lack of public understanding?” Fisher wrote to Ewan. “If so, I would start by putting the official definition in pride of place on the BBA website. And then get someone’s son or daughter to edit Wikipedia.” A week later, someone corrected Wikipedia’s definition. It was perhaps the only time that the BBA actually addressed a grievance about Libor.

  Chapter 10

  Entre Nous

  Hayes was back in Las Vegas, this time with Tighe. It was December 31, 2008. The couple had flown in from Los Angeles, where they’d spent a few days touristing around Beverly Hills and Hollywood after Christmas. (One of the first things Hayes did was track down Rod Stewart’s bronze star on Hollywood Boulevard’s “Walk of Fame.”) They had stayed at the Beverly Wilshire, one of Los Angeles’s finest hotels. One day, Hayes wanted to check out Venice Beach, the bohemian boardwalk neighborhood crowded with body builders and peddlers of drug paraphernalia. He asked the hotel concierge where to catch a bus to get there. The stiffly dressed concierge looked at him like he was crazy. Perhaps he’d be more comfortable taking advantage of the complimentary car service that the hotel offered for its customers’ pleasure? So Hayes and Tighe were chauffeured to the dingy beach in a silver Rolls-Royce.

  In Vegas, they stayed at the Four Seasons. They had New Year’s Eve plans to meet some friends for dinner and drinks at a swanky club overlooking the Strip, but that afternoon Hayes began behaving weirdly, even for him. He was rude to the hotel staff. He shouted at Tighe. Miffed, she went out for drinks without him. They reconnected at the club, packed with revelers in sequined dresses and party hats. Hayes was still agitated, alternating between sulking to himself, snapping at waiters, and being gruff with their friends. Tighe was familiar with this mood; she had dubbed it his “grumpy zombie” state. She and one of her friends went off on their own for a while so that she could vent about Hayes. When she returned, she gave him an ultimatum: “If you don’t start behaving, you’ll be spending New Year’s Eve alone.” Hayes pulled himself together, but Tighe could tell he remained anxious.

  As midnight approached, Hayes, sweaty and shifting from foot to foot, shoved a glass of champagne into Tighe’s hand. He took her by the arm and half-dragged her to a large window with a panoramic view of the Strip. Fireworks exploded, and suddenly the night sky was just as colorful as the boulevard below, illuminated with blinking lights from casinos and electronic billboards. Hayes pulled an engagement ring out of his pocket and thrust it into Tighe’s palm. It was platinum with a massive, round-cut diamond. There was no speech, no taking a knee. “Will you marry me?” he asked. Tighe cried and said yes. Relieved, Hayes apologized for his bad behavior all evening. “I was so nervous,” he explained. She embraced him. The year was only a few minutes old, but already 2009 was off to a promising start.

  * * *

  The end of 2008 hadn’t been bad, either. Hayes had stitched together an impressive string of winning trades. Some of them—Hayes estimated they accounted for perhaps $2 million to $5 million of his profits that year—stemmed from the Libor-moving efforts he deployed with his colleagues, rivals, and brokers. Hayes wasn’t the only one playing with the rate, but the relentless pressure he applied—and the leverage he enjoyed with the brokers and fellow traders as a giant market maker—made him a standout. As always, Hayes didn’t spend much time thinking about whether what he was doing was right or wrong. Those weren’t values he assigned to his job. His sole criterion was whether what he was doing was making money.

  And he was doing that in spades. His final tally for the year: about $89 million in profits for UBS, a home run even in calm markets. If normal investment banking pay standards applied, Hayes was headed for a multimillion-dollar bonus early in 2009, especially when coupled with the prior year’s promotion and promised payout of $2.5 million.

  While Hayes was soaring, Read was finally stepping aside. “Adios, mate,” he e-mailed Goodman on December 10. “Thanks for giving me a job and a start on the road to a life of no sleep and too much alcohol.” He apologized for constantly interrupting Goodman’s early-morning train rides with Libor requests. As a postscript, he told Goodman where Hayes wanted Libor to move over the next few weeks: “Nudge nudge!”

  Hayes bought Read a walking stick as a sarcastic retirement gift; Read thanked him, saying it would come in handy as he strolled the beaches of the Bay of Plenty. The broker expressed his affection for the trader he’d spent every day over the past several years talking to. Hayes replied with uncharacteristic warmth. “Words cannot adequately express how much I have enjoyed working with you over the years, you have seen me grow from a trainee to a grumpy old git, but as the market evolved I feel we have both learnt together and that always gave us a real edge in the market as we thought along the same lines,” he wrote. “This year has been the pinnacle of my career and you played a huge part in it. In short you are irreplaceable and I am gutted that you are going.”

  Read was not quite done, though. Despite having retired days earlier, he texted Goodman on December 29 to ask about the direction of interest rates.

  Goodman responded a few minutes later: “Request from M’lord: Get a life.”

  “Understood,” Read texted. “Over and out!”

  * * *

  Hayes’s banner year was well known in Tokyo, and it didn’t take long in 2009 for the job offers to start arriving. Deutsche Bank and Morgan Stanley put out feelers in February, then Barclays joined the fray. Even Goldman, which Hayes had spurned the prior year, was back to wooing him. Hayes didn’t rebuff the offers. UBS, like many other large, risk-loving investment banks, was suffering gargantuan losses that had necessitated a $54 billion government bailout. In late February, after the bank lost another $9 billion, its CEO, Marcel Rohner, was removed. His replacement was a forty-year banking veteran named Oswald Grübel, who previously had run crosstown rival Credit Suisse. One of his first moves was to dock just about everyone’s pay. Large bonuses were off the table. Pieri summoned Hayes into his office and delivered the bad news: Rather than the award of at least $2.5 million that he’d been expecting, UBS would only be paying him $250,000. “UBS shafted me,” he told a friend.

  So as he had the prior year, Hayes told Pieri, who in turn told his bosses, about the suitors. A few days later, Carsten Kengeter—the co-head of UBS’s large investment banking division, a tall, well-built German with a p
assion for extreme skiing and yoga—called Hayes and tried to extinguish his interest in the other banks. He promised that UBS would look out for Hayes and that he would check the feasibility of making another ironclad bonus guarantee. Hayes and Pieri asked Kengeter to speak to Tighe, who was pushing hard for Hayes to test the waters with other banks. “I think getting his fiancée around is key,” Pieri said. Kengeter never called her. Tighe remained convinced that Hayes should be entertaining the rival offers.

  The wooing lasted all spring. Hayes wasn’t especially keen on working for any of these other banks, but he knew it was in his interest to keep flirting. Pieri and Kengeter engaged in a full-court press to prevent him from defecting, with Kengeter placing regular reassuring phone calls. It was unusual for an executive of Kengeter’s seniority—only a rung or two below the CEO of the entire company—to be so involved in retaining a midlevel trader, but it reflected Hayes’s importance to UBS. And that importance only seemed to be growing. Hayes was off to a smoking start in 2009.

  * * *

  Day after day, week after week, Farr and his colleagues planted Hayes’s Libor-moving requests with a small cluster of interest-rate traders around London. It wasn’t hard; all Farr had to do was drop it into conversations he was supposed to be having anyway. In fact, it was a good way to force himself to be in regular communication with traders at big banks.