The Spider Network

by David Enrich

  The bigger challenge for Farr—who happened to be in physical therapy after the latest in a series of recent motorcycle crashes—and his colleagues was figuring out how to execute the sham switch trades that Hayes continued to deliver as thanks. Finding Hayes a trading partner was key, and that task was getting harder. Multiple traders rebuffed the RP Martin brokers, including J.P. Morgan’s Stuart Wiley, who now told Farr that “we can’t do switches anymore.”

  So it fell to Danziger, who was increasingly disgusted with the situation at RBS. The bank, recently nationalized by the British government, wasn’t paying anyone bonuses. “I don’t give a fuck around here at the moment, so whenever you want to do it, I’ll always do it,” he told Aaron. Danziger figured the switch trades were a good way to make up for some of the lost largesse—this way at least the brokers would lavish him with meals, booze, and weekend getaways.

  Hayes left the details of these trades to a London colleague named Simon Oddie, who had a specific way he wanted the transactions structured. It was no secret that they were happening, but, all the same, it was in everyone’s best interest not to be too blatant about them. After all, even though UBS was getting what it paid for in the form of help with Libor, the only purpose of the trades was to pay fees to RP Martin. The trick, Oddie told Farr, was to make sure the two trades were separated by at least a half hour or so. “I thought it would raise less questions than if I did them at the same time,” Oddie explained. “It’s just a case so it doesn’t flag up anything.”

  “I understand fully, mate,” Farr confirmed.

  A couple of weeks later, on Valentine’s Day, the broker crashed his motorcycle yet again. This time his beloved Ducati got mangled. Farr was shaken up and bruised. “You should stop riding those death traps,” Hayes suggested. It was the rare request from Hayes that Farr wasn’t inclined to honor.

  * * *

  In February 2009, Alexis Stenfors set out on a vacation with his wife, Maria, daughters and in-laws to India—his first break from work in nearly eighteen months. He was coming off an awesome year, having raked in about $120 million in profits for Merrill Lynch—largely a reflection of placing bets that anticipated the financial crisis. But Stenfors knew his career as a trader was nearing an end. Part of it was the relentless stress of day after day of high-stakes trading. He had developed a painful infection in his chest that his doctors attributed to stress. His right forearm and wrist, severely strained from his constant use of a keyboard and phone, had to be wrapped in an elaborate brace. Stenfors spent most of his waking hours in pain. And his year was off to a bad start: The financial industry was rebounding from the depths of the crisis, and Stenfors’s bearish bets were no longer looking so wise.

  But there was something else, and it was far from a minor concern. On the more-than-eight-hour flight to India, Stenfors was finally honest with himself: He had been engaged in an elaborate scam at Merrill Lynch. Every day, he had to attach values to his massive portfolio of investments and lately he’d been assigning bogus numbers that made it look like he was enjoying considerably more success than he really was. At first, he’d regarded this as a temporary fix—it only had to keep his managers off his back until his fortunes improved. But his fortunes hadn’t improved; his losses only deepened. By the time he boarded the plane, his little fib had grown into a nine-figure monstrosity. The anxiety was gnawing at him. Still, he did nothing. On his second morning in India, though, Stenfors called a colleague back in London to check on his portfolio. The response was alarming: Merrill Lynch officials were digging through his books, apparently alerted to anomalies. Stenfors spent a day weighing his options. He decided that he had no choice. He told Maria that he’d been “mismarking” his books. She didn’t know what that meant, so he explained that it was the equivalent of hiding a big loss in a drawer. Then he phoned his boss, who was skiing in Switzerland. “I have something I need to tell you,” Stenfors began. Then he admitted everything.

  Stenfors had hoped that the act of confessing would feel like a weight lifting off his shoulders. It didn’t. He just felt guilty. After a few days of further reflection, and an eerie silence from the folks in London, Stenfors thought maybe he should get a lawyer. He got in touch with one through a mutual acquaintance; the lawyer instructed him to immediately return to London. It was starting to dawn on Stenfors that this might be more serious than he’d initially assumed. So he said goodbye to his family, which was about to visit the Taj Mahal, and flew to London.

  After a couple days of legal meetings, there didn’t seem to be anything more to do. He figured he might as well rejoin his family, so back he went to India. Meanwhile, his Merrill Lynch managers scrambled to assess the damage. It was considerable—he was sitting on more than $400 million in losses. Notified by Merrill, the FSA opened an investigation.

  Shortly after Stenfors and his family returned from their vacation, Merrill suspended him; he’d be fired a few months later. Merrill publicly described the problem as “an irregularity.”

  The muffled description didn’t stop Stenfors becoming an instant pariah. A Finnish newspaper attacked its native son for helping cause the global financial crisis—a considerable exaggeration. Photographers gathered outside the family’s home. His landlord refused to refund the security deposit on his apartment, arguing that his wife had suffered severe emotional distress due to their tenant’s newfound notoriety. (The landlord eventually agreed to refund half the deposit.)

  Farr broke the news to Hayes. “Got any jobs going?? Cause I’ll need one. Fucking Alexis has been sacked,” he said. “The guy is a lovely bloke and doesn’t deserve the sh-- he is getting,” Farr continued, for once censoring his language. “I don’t believe for a minute that he is doing anything illegal.”

  “He is a scapegoat,” Hayes agreed. Then he and Farr got back to plotting how to push Libor higher.

  * * *

  Hayes received a steady stream of visitors that spring. One was the Citigroup researcher Scott Peng, who had heard of a prolific, brilliant trader in Tokyo and wanted to meet him. The two sat down at a sushi restaurant—obviously not Hayes’s choice—and chatted about the markets. The subject of Libor manipulation didn’t come up.

  Amid a mid-March heat wave in Tokyo, Farr arrived. Hayes volunteered Alykulov to serve as his tour guide, taking him on a boat ride and to Tokyo’s biggest video game arcade. “Got yourself a good one there, mate,” Farr told Hayes after meeting Tighe for the first time, “a top bird.”

  Tighe thought Farr seemed like a genuine guy—it would be hard to fake his sloppy attire and casual demeanor—but in general her fiancé’s brokers struck her as an insincere, cloying bunch. Once, when she went out to one of Tokyo’s many expat bars, a bunch of brokers lined up to talk to her, literally standing in a queue, patiently awaiting the chance to buy her a drink and pay their respects. She felt like the wife of a Mafia don.

  That was awkward, but it was nothing compared to the embarrassment that Hayes sometimes caused. Once, Tighe’s boss, a partner at Herbert Smith, hosted a barbecue for his team at his Tokyo apartment. Tighe and Hayes showed up toting two bottles of expensive wine as a gift. Hayes looked forward to drinking them, but when he handed the bottles to the host, they were placed on his already-ample wine rack. He and Tighe were directed to a small bar area where some other wine bottles were already uncorked. Hayes, who was learning all he could about wine in preparation for his wedding, could tell that the open bottles were considerably cheaper than the two he had brought. Within earshot of the host, he declared that he thought it was inappropriate to accept expensive bottles of wine and then to serve a cheap alternative. Mortified, Tighe told her fiancé to shut his mouth. Later, Hayes wandered outside to the patio, impressed by this rare luxury in a Tokyo apartment. Tighe’s boss, now manning the grill, mentioned that he was really enjoying the barbecue. Hayes responded that he could understand that sentiment: The low cost of the wine and food that he was serving, compared to the benefits that the party would have in terms
of motivating his team, meant the event was a good investment. Tighe, standing nearby, groaned.

  A few weeks after Farr left, Tighe’s sister, Emma, arrived for an eight-day visit. Emma, who taught chemistry and biology to high school students, thought Hayes was awfully odd. She noticed that he sometimes went up to objects and sniffed them like an animal. One evening, the sisters stopped by a small bar called Magumbos, a popular spot for the city’s rowdy Western brokers and traders, featuring a bell that customers could ring when they bought cheap shots of liquor for the other customers. It was around 10 p.m. on a weeknight, so Hayes had long since retired. A man seated next to Emma and Sarah seemed to be listening in on their conversation, conspicuous partly because he was drunk and partly because half his face appeared slack, like he had some sort of muscular problem. It was Roger Darin. He and Tighe had never met, but he somehow had discerned that this was his nemesis’s fiancée. Interrupting, Darin told Tighe that he hated Hayes, and, checking out Emma, he added: “It looks like he’s gone for the wrong sister.”

  * * *

  Read had spent the past few months living in a small house across the street from the beach in Tauranga. Notwithstanding a problematic neighbor, the setup seemed idyllic. But his boys didn’t like it there, and Joanna felt even more isolated than she already had. Read eventually caved, and as long as he was moving back to Wellington, he figured he might as well work. He’d been missing the buzz of the markets, and opportunity beckoned. Executives at a variety of brokerages were begging Read to return to the industry; ICAP in particular thought it was sacrificing huge amounts of potential revenue by not having a broker in place with a good relationship with Hayes. In late March, Read had exploratory conversations with ICAP, Tullett Prebon, and BGC. He only had one client, but it was a client that everyone was itching to land. Eventually, lured by a doubled pay package, Read decided to come back to the ICAP family.

  If Read’s unretirement wasn’t enough to lift Hayes’s spirits, the trader’s performance in the first four months of 2009 should have done the trick. By May he was up $105 million—and only a small fraction, perhaps 5 percent, was due to his Libor-massaging efforts. This was the kind of torrid showing that could have a real impact on UBS’s overall financial results. Hayes endured bad days, even a couple of bad weeks, but the good times far outnumbered the bad ones. Sitting all day in front of his towering bank of computer screens, his back and eyes and arms aching, Hayes had become perhaps the biggest player in the Tokyo market. He had honed his computer models so well that on the vast majority of transactions he executed, he notched a small profit. And with the tens of thousands of trades he was doing, those small profits quickly piled up.

  * * *

  Guillaume Adolph grew up in the Bordeaux region of France. He was short, chubby, and pale-skinned and frequently ducked out of the office for cigarette breaks. He had been a successful trader in London for Italy’s UniCredit Bank, but that was the minor leagues of investment banking. In 2006, Merrill Lynch poached him. For a couple of years, Adolph worked near Stenfors in Merrill’s London offices. The two didn’t get along well. Adolph was prickly and ill-tempered. His already thick French accent seemed to grow thicker on the frequent occasions when he was angry or agitated. Shortly before his wedding in April 2008, after losing tens of millions of dollars in a matter of a week or two, Adolph was fired. In a vivid illustration of how Wall Street traders rolled the dice with other people’s money, rarely facing personal consequences when their gambles went awry, Adolph was hired as a trader in Deutsche Bank’s huge London office barely two months later. In addition to trading Japanese interest-rate derivatives, he was promptly put in charge of the bank’s yen Libor submissions. His boss was David Nicholls, the manager who had insisted to John Ewan that Libor was impossible to manipulate.

  A couple of years earlier, at the ICAP Christmas dinner, Stenfors had pointed Adolph out to Hayes from across the crowded room, but the two had never met. Still, a relationship developed. It started off casually, with Hayes and Adolph chatting electronically via their computer terminals. (Hayes struggled to pronounce or spell the Frenchman’s name, so he decided to call him “Gollum,” a nod to the famous Tolkien character.) At the time, Adolph was a big interest-rate derivatives trader, not as big as Hayes, but big enough that it was inevitable that the two regularly were on the opposing sides of trades. That meant it could be mutually beneficial to know each other, if for no other reason than to make sure the brokers who served as middlemen weren’t pulling the wool over either of their eyes. And, of course, Gollum was responsible for Deutsche Bank’s yen Libor submissions. He often told Hayes that he was setting Libor based in part on where he needed the benchmark to move to benefit his trades—the kind of power Hayes, who had to rely on Darin, could only dream of.

  By August 2008, Hayes and Adolph were doing enough business together that Hayes thought it was time to take the relationship to the next level. “Look, I appreciate the business and the calls,” he said. “We should try to share info where possible. Also let me know if you need fixes one way or the other.”

  “Sure,” Adolph said.

  The partnership—an “alliance,” Hayes called it—meant that the two traders would cooperate when possible on the levels and directions of their banks’ Libor submissions. Striking such a deal with a competitor was uncharacteristic of Hayes. Of course, he lodged plenty of requests for favors from rivals, but those weren’t part of long-term agreements. Indeed, he tended to view his rivals as enemies, worthy of clobbering with golf clubs. And Hayes knew that teaming up with a rival trader to share information and nudge Libor in helpful directions bordered on collusion. But when he mentioned the arrangement to Pieri, his boss seemed unbothered.

  The relationship soon proved lucrative. At 10 a.m. on May 13, 2009, in London, Adolph sent Hayes a heads-up message that his Deutsche Bank colleague planned to lower the bank’s U.S. dollar Libor submission by twenty basis points in about an hour. That was a massive move—usually, a shift of a single basis point would be considered significant—and it promised to knock the overall Libor average lower. “Entre nous,” the Frenchman whispered.

  Hayes rushed to Pieri’s office, interrupted a meeting, and told his boss what he’d just learned. Pieri asked what he thought they should do. Hayes suggested loading up on a derivative that would gain value if U.S. dollar Libor plunged. Pieri agreed, and Hayes executed the trade. When the BBA published the daily Libor figures ninety minutes later, the average had indeed dipped. Hayes’s trade scored an instant $1.25 million profit for UBS. Pieri congratulated him on his latest coup—never mind its questionable provenance.

  So big was Deutsche Bank’s move that it caught the attention of the normally somnambulant BBA. Ewan asked Thomson Reuters, which collected the data on the BBA’s behalf, to phone Deutsche Bank to make sure the data hadn’t been entered incorrectly. Maybe the bank meant to reduce its submission by two basis points, not twenty? Nope. “That’s what we want to put in,” Deutsche Bank’s submitter confirmed.

  Then Ewan’s phone started ringing with complaints from other banks. The huge cut had left Deutsche Bank’s Libor data lower than those of its peers. The matter was discussed at the next meeting of the Libor oversight panel. The FXMMC instructed Ewan to pay Deutsche Bank a visit, so he did, marching over to its tan, brick building. In a meeting room decorated with what looked like expensive modern artwork, a Deutsche Bank employee insisted that the submission reflected the bank’s true borrowing costs. Ewan reported back to the FXMMC, which decided that nothing improper had occurred. That was the end of the matter. It would prove to be the only time the oversight committee ever investigated a bank’s Libor submission.

  Chapter 11

  Gods of the Sea

  By the summer of 2009, the financial system had bounced back from its near-death experience. The recovery created a puzzling situation. Many of the world’s leading banks were now partly owned by taxpayers, owing to massive government bailouts. The economies of much of th
e Western world remained mired in deep recessions, thanks in no small part to their banks’ misadventures. Corporate chieftains were paying lip service, if nothing else, to the idea of humility and remorse, and indeed some banks had become more conservative. (In June 2009, for example, Royal Bank of Scotland emptied out big parts of its investment bank. Among the casualties was Hayes’s mentor Brent Davies, who was let go after a two-decade career there. The large, charismatic Davies—who years earlier had warned Hayes to “never trust a broker”—quickly landed a job as a broker at ICAP, where his responsibilities included winning business from his former colleagues and rivals.)

  At the same time, though, markets were surging, powered by the release of pent-up demand among companies and rich individuals. That was translating into fat profits for Wall Street banks and their traders. So, despite all the rhetoric about the financial crisis meaning “the end of Wall Street,” Wall Street was on a tear, and many traders had regained their swagger. Deepening the paradox, it was actually in the best interests of the banks’ new government owners for their wards to return to profitability, since that would enable the governments to sell their stakes in the banks at a profit, helping quiet public fury over the unpopular bailouts. And the best way to get the banks back to their normal profitable ways, at least according to the bankers themselves, was to unleash the creative, aggressive, risk-taking genius of their traders and investment bankers.

  Hayes had just returned from a weeklong vacation in Thailand. He’d been there once before, with Ainsworth. This time he took Tighe to a different tropical island, Koh Samui. They stayed at the Four Seasons, which had become the only hotel chain that the obsession-prone Hayes was willing to spend money on. Once again, Hayes had refused to wear sunscreen, and this time his burns were so severe that he became ill. The rest of the vacation was spent with Tighe nursing him back to health while he fretted about turbulence in the markets.