by David Enrich
“Understood.” When Hayes kept repeating himself, Adolph drew a line: “OK enough.” Hayes still didn’t stop. Six minutes later, he was still hammering in the same message. “Enough enough,” Adolph demanded.
A few hours later, Hayes figured it would be prudent to provide Adolph a final reminder. “Please make sure you put the six-month up for me,” he said.
“Oof,” Adolph responded, as if he’d been punched in the gut. “Enough enough.”
“I’ll shut up now,” Hayes said.
Hayes’s agreement with Adolph marked the start of what would be his most frenzied effort to get Libor to swing in favorable directions. Over the next few weeks, he bounced from broker to broker, and via them from bank to bank—HSBC, Société Générale, Deutsche Bank—until he ultimately got most of what he wanted. Libor climbed higher, then declined, partly due to luck and partly due to banks honoring his requests.
* * *
Read showed up in Tokyo for one of his periodic visits to see his lone client. Night after night, he and Hayes went out, accompanied by a local broker named Anthony Hayes. He was nicknamed “Abbo,” derogatory slang for “Aboriginal.” (The moniker was the result of an incident when the young Australian broker, working at the time in ICAP’s Sydney offices, didn’t show up for work. It turned out he had decided, without bothering to inform his colleagues, to try his hand at cattle ranching. Not long after his “walkabout,” Abbo returned to work at ICAP as if nothing had happened.) Abbo was hulking and while his head was bald, his body was covered with a thick layer of dark hair—no secret to anyone in Tokyo given his tendency to strip naked when drunk. The trio feasted on ribs at Tony Roma’s, watched cricket, and hung out at Hayes’s local pub. Hayes was comfortable at the Windsor, but it wasn’t very exciting for his friends, so one night the three went out looking for something more rambunctious. After several hours of preliminary boozing, around midnight they ended up at Magumbos, the same bar where Tighe and her sister had bumped into Darin a few months earlier. They were drunk, one of them in particular. “Abbo was off his nut,” Read recounted. The bar was crowded, and when Abbo vomited, he soaked numerous customers.
When Hayes shared his plans to work with Deutsche Bank and HSBC to massage Libor, Read warned that the three banks shouldn’t move their data all at once. “It will look very fishy,” he said. “I’d be very careful how you play it” or risk “people questioning you. . . . Don’t want you getting into shit.”
Hayes was nonchalant. “Don’t worry, will stagger the drops . . . us, then Deutsche, then HSBC, then us, then Deutsche, then HSBC,” he explained.
Read gave a thumbs-up: “Great, the plan is hatched and sounds sensible.”
Read met Alykulov for the first time on the Tokyo trip. The pair had chatted occasionally over the years, but never face-to-face. Now Read happily dispensed detailed advice to the young trader. “You should do just fine,” Read said, impressed with his aptitude.
“Yes, unless Tomster makes veins pop up in my head,” Alykulov said, before dubbing him “Tomster the Ripper.” Alykulov had come to wonder if the volatile Hayes perhaps suffered from some sort of dual-personality disorder.
“Has he left you alone today?” Read asked.
“Mate.”
“I take it no then :-)”
Just that morning, Alykulov explained, he had run a trading idea past Hayes, who “told me it was a stupid idea and I should go and die.”
“Glad it’s not just us he’s like that with,” Read said. “Tell him to fuck off now and then, usually does the trick.”
One warm day in early August, Read and Alykulov were bantering back and forth. Markets were drowsy. Their conversation meandered, turning philosophical. Have you seen the movie Troy? Alykulov asked. Read said he had watched the Brad Pitt epic a couple of times. “In one scene,” Alykulov said, “young Paris tells his brother that gods must have blessed them with good winds. Remember what Hector replies?” Read couldn’t recall the specific scene.
Alykulov paraphrased the line: “Gods of the sea can bless you in the morning and curse you in the afternoon.”
“Too true, mate,” Read agreed.
* * *
Hayes was on a globe-hopping work trip, hitting Hong Kong and Singapore before heading to London. Such was his renown in the market that the visit to London triggered gossip among traders that he had returned for good. His next stop was Zurich, to be followed by a vacation in the Avignon region of France with his family, then back to London for a few days before finally returning to Tokyo. His three-week visit to Zurich was mainly to talk to UBS’s computer programmers about improving the bank’s trading models; the Excel spreadsheets he had built in Tokyo had worked as advertised and now UBS wanted to spread them throughout the organization. But Hayes had another reason for wanting to go to Zurich: He had continued to talk with Cecere and the Citigroup guys. Still on the fence, he hoped that visiting the UBS mother ship might help him make up his mind.
Before he arrived, Hayes was included on an e-mail chain that should have worried him. UBS executives wanted to hold a meeting about their Libor and Tibor settings in Tokyo. “There is increased scrutiny of how fixings are being done,” a bank executive, Yugo Matsumoto, wrote to Hayes, Pieri, and others. “As a result we need to be sure internally that our fixing process is robust and explainable . . . [and that] we are above reproach.” Hayes wrote back saying he was confused about the purpose of the meeting. Matsumoto told him not to worry—just explain how the process works and everything would be fine. Hayes accepted that, and moved on.
Later, ensconced at UBS’s offices in the pastureland outside Zurich, Hayes shot off a casual e-mail to Pieri about his efforts to get Libor moved. The plan was nothing unusual, but in Tokyo, Hayes and Pieri communicated in person, not over e-mail. Hayes was outside getting some fresh air when his cell phone rang. Pieri asked if Hayes was in the office; Hayes said no. “Don’t ever send me an e-mail like that again,” Pieri snarled. “I could lose my job over that.” Stunned, Hayes promised not to put it in writing again.*
Hayes had never before been to UBS’s Zurich offices, and he was shocked by the different culture there. It wasn’t just the pastoral setting. Hayes ate in a luxurious corporate dining room where waiters served three-course lunches paired with wine. It was a throwback to a bygone era, one in which well-appointed, sit-down meals, often enjoyed in private clubs and always featuring generous servings of wine and brandy, were deeply embedded in the fabric of banking. The custom struck Hayes—accustomed to wolfing down lunch at his desk, if he ate at all—as over-the-top, especially for a bank struggling to stay afloat in the aftermath of a financial crisis. (The opulence was especially aggravating because UBS at the time was trying to phase out his housing allowance in Tokyo.) More personally, some of the Zurich traders treated him like an outcast, presumably a product of his frosty relationship with Ducrot and Darin’s team. Back in Tokyo in late August, he told Tighe he’d felt like a leper, not a star, and for days he ranted about how UBS wasn’t looking out for him, even though he was devoting his life to the firm.
As if sensing the shifting dynamics, Citigroup delivered a sweetened offer. To Tighe, the decision seemed easy: Go to Citigroup. But Hayes agonized. He kept waking his fiancée in the middle of the night to tell her about nightmares he was having about betraying Pieri. At lunchtime one day, he showed up unannounced at Tighe’s law firm. As they walked in circles around the building’s small internal courtyard, Hayes proclaimed, “I don’t think I can do it.”
“That doesn’t make any sense,” Tighe said, exasperated. “You’re supposed to be the logical one!” Finally she gave him an order: Either accept Citigroup’s offer or stop whining about how UBS was mistreating him.
That did it. Hayes handed in his resignation to UBS on September 3. Pieri refused to accept it and sent him home for the next two days. Then he trudged over to Alykulov, put his hands on the youngster’s shoulders, and instructed him to stop building up positions in any trad
es that involved Hayes; Alykulov quickly figured out what had happened. (Brokers were told Hayes was out sick.) The Swiss bank made a last-ditch effort to keep him. UBS executives noted that Hayes had raked in another $20 million since the $500,000 retention payment in June—bringing his total earnings for the bank to about $280 million over a three-year period. But it was too late—Hayes had already signed a contract with Citigroup, giving him an annual salary of 23.9 million yen (about $240,000) and an up-front cash signing bonus of 292 million yen ($2.9 million), plus a guaranteed 188 million yen ($1.9 million) to compensate for future payments he was forfeiting by leaving UBS.
Hayes left with plenty of trepidation. Some of his interactions with brokers made him nervous, especially those involving switch trades. And then there was the collusive arrangement with Adolph. Now his phone, e-mail, and instant-message records were sitting at a bank that presumably was furious with him for defecting. Hayes wondered whether that could come back to bite him.
As Hayes left, UBS shifted responsibility for handling Libor submissions away from traders and clarified that such submissions should no longer be based on factors like trading positions or brokers. In fact, some at UBS doubted whether it made sense for the bank to even remain involved with Libor. Recent public scrutiny “leads to a higher regulatory risk and reputation risk and we believe it would be worth for senior management to consider the ongoing benefit of being a Libor contributor bank,” read an internal memo written two weeks before Hayes left. The qualms would prove prescient, but they went unheeded.
Word of Hayes’s defection quickly spread. “This will be a hit to morale and we run a risk that other members of the team may be vulnerable,” a morose Pieri warned colleagues. Another UBS executive informed colleagues that they would need to rein in their expectations for the performance of Hayes’s former rates trading team. “Previously we would be trying to make $125m+ with Tom in the seat,” the executive wrote. The new forecast was for roughly $60 million.
To comply with the terms of his contract at UBS, Hayes had to take a few months off before he was allowed to start at Citigroup. Such mandatory breaks were known in the industry as “gardening leave,” because they gave transitioning employees time to putter around in their gardens. Hayes wasn’t much of a gardener. But he had plenty of other business to attend to.
Chapter 12
In the Flag Room
In March 2009, six months before Hayes signed his contract with Citigroup, a letter postmarked Washington arrived at the bank’s Canary Wharf skyscraper in London. The letter was from the CFTC, and it posed a series of rudimentary questions: How did Libor work? How did banks figure out the data they submitted every day? Who exactly came up with the estimates? Could someone please explain the whole process? It was a remarkable series of questions for an agency whose investigators had spent much of the past year looking into the benchmark. Somehow, the CFTC still lacked a basic understanding of how banks set Libor.
Citigroup was inclined to be helpful. After all, having doled out $45 billion in taxpayer aid, the U.S. government controlled 36 percent of the company. And the CFTC, for years an afterthought among Washington’s regulatory apparatus, seemed destined for more power with a Democrat, Barack Obama, now in the White House.
The CFTC’s request for information wound its way through Citigroup’s byzantine organization before finally landing on the desk of Andrew Thursfield—the very man who had repeatedly insisted that Libor was as robust as could be. The Brit had spent his entire career working in the bowels of Citigroup, which he joined as a trainee in 1988. His job at the moment was running the bank’s treasury desk in London. His team, squished into a corner of a vast trading floor on the second floor of the Canary Wharf tower, was responsible for figuring out how money should be most efficiently allocated and transmitted among the bank’s appendages in more than one hundred countries, arranging for one Citigroup unit to transfer money to another. In essence, it acted as a bank within the bank. Thursfield also continued to manage the bank’s Libor submissions, and as Citigroup’s representative on the FXMMC that oversaw the rate, he was well situated to help the CFTC with its queries.
In retrospect, the manipulation at the heart of the Libor scandal was hard to miss. But, at least to outsiders, it wasn’t so obvious at the time. The organizations closest to Libor, namely the BBA and the banks, had done everything in their power to hide the rate’s deep problems. The daily moves in Libor were not so massive as to suggest tampering. They also were not consistently in one direction; some days traders yanked it higher, other days they shoved it lower. The definition of Libor, and the way that definition was interpreted, was fuzzy—not to mention the fact that banks didn’t have rules about how their employees should set the rate and no regulator was responsible for overseeing it. And recognizing the bogus switch trades was nearly impossible to outsiders, given the tens of thousands of transactions taking place every day. Deliberately or not, Hayes and others had taken advantage of those circumstances and, absent ironclad evidence of wrongdoing, they were a bit like athletes whose performance notably improves even as they age. Are their skills the result of harder work, greater luck, or something illicit? And unlike athletes, traders’ feats didn’t take place on a field and weren’t televised. They were hidden deep inside vast financial institutions.
Thursfield was supposed to help the CFTC explore those inner recesses. He crafted an eighteen-page PowerPoint slide show, defining Libor and detailing the legitimate sources of information banks looked to as they came up with their Libor estimates each day. One section walked the CFTC officials through “a typical day” for an interest-rate trader, the type of person who not only was involved in the Libor-setting process but also tended to have lots to gain or lose based on the outcome.
In another slide, Thursfield took a computer screenshot that showed where several brokerage firms—ICAP, Tullett Prebon, and Tradition—were estimating, or “suggesting,” Libor would land on a random day. He noted in the presentation that such broker run-throughs were a source of “market color” that Citigroup sometimes relied on to decide on its Libor submissions.
That was an understatement. One of the bank’s Libor submitters, Laurence Porter, often called a buddy at ICAP and asked him where yen Libor was likely to end up; he then used that figure as the basis for Citigroup’s submission. The forty-three-year-old Porter had been involved with Libor since the 1990s, and he was still in charge when he met Burak Celtik, a graduate trainee cycling through various departments. Porter took Celtik under his wing. By 2008 he had handed over many of his Libor-submitting duties, including the yen version, to his mentee. One of his first instructions was for Celtik to get signed up for Colin Goodman’s run-throughs. The inexperienced Celtik—whose name was pronounced CHEL-tick, even though everyone in London insisted on pronouncing it like the Boston basketball team—promptly started copying the run-throughs verbatim, errors and all. To anyone paying attention—and not many people were—it was an unequivocal sign of Libor’s malleability.
There was another feature of the Libor-submitting process that Thursfield didn’t mention to the CFTC: Banks were taking into account their trading positions when deciding where to pin Libor. Thursfield knew this was happening. For example, in September 2007, he had multiple conversations with a Citigroup manager named Scott Bere, who asked Thursfield to push Libor lower. The e-mails made clear that the bank’s trading positions were one of the factors they used to determine their data. Thursfield promised Bere that he’d pressure brokers accordingly.* Now, two years later, Thursfield didn’t see a need to trouble the CFTC with such technicalities.
* * *
Short and skinny with a long, pointy nose, Gary Gensler grew up in a working-class neighborhood in Baltimore. His father, Sam, was the son of Eastern European immigrants and founded a company that supplied cigarette dispensers and pinball machines to Baltimore’s plentiful bars. Sometimes Gensler and his identical twin, Robert, accompanied their father on sales and mainten
ance calls. They also tagged along when Sam, a steadfast Democrat, drove up to Annapolis to lobby state legislators about regulations related to the vending machine industry. It was Gensler’s first taste of politics, and he liked it.
The Gensler twins were determined to escape the blue-collar world. They were both math whizzes and attended the University of Pennsylvania together. Gary was the coxswain on the crew team, a role that required him to get his weight down to a rail-thin 112 pounds—which he did, quickly, a sign of the almost reckless intensity and commitment that would mark his career to come. After graduating, he joined Goldman Sachs at age twenty-one and shot up through the ranks. At thirty, he became the firm’s youngest-ever partner. A Goldman partnership was one of the most coveted distinctions on all of Wall Street—something that people typically spent decades striving for and often failing to achieve—not to mention the ticket to vast riches. Gensler had managed it without seeming to break a sweat. His brother followed a similar path to wealth, becoming a portfolio manager at T. Rowe Price, the giant mutual fund company headquartered in Baltimore. Soon he emerged as a star stock-picker, someone who seemed to have an innate knack for buying shares before they gained value and dumping them before they cratered. He became a frequent talking head on business news channels. Sometimes when Robert appeared on CNBC, his twin’s colleagues would wonder what on earth Gary was doing on TV blabbing about the shares of some random company.
After eighteen years at Goldman, Gensler was set for life, with a reported net worth of about $60 million. He left to pursue a career in public service—a proud if arguably self-serving tradition among partners at the Wall Street firm. Another Goldman executive, Robert Rubin, had been tapped by Bill Clinton to become the U.S. Treasury secretary, and Gensler moved to Washington to work for him as an undersecretary. Rubin presided over an unprecedented period of economic growth—and, with the White House’s support, the dismantling of much of the bank-regulatory apparatus that had been erected to prevent a repeat of the Great Depression. Gensler was an enthusiastic advocate of loosening what the Clinton Democrats—along with much of the Republican Party—argued was an antiquated, counterproductive system of overseeing things like derivatives and the energy markets. Those who interfered with their antiregulatory campaign—such as Brooksley Born, the CFTC chairman who thought her regulatory agency should actually do some regulating—were sidelined or forced out. When Republicans took over Washington in the 2000s, Gensler found ways to keep his public profile alive, writing a book about the danger of falling for the allure of star mutual fund managers. (He and Robert appeared on public television to debate the topic.) In his spare time, Gensler climbed mountains and ran several marathons, as well as a fifty-miler when he turned fifty.