The Spider Network

by David Enrich

  * * *

  Before officially joining Citigroup, Hayes paid a couple clandestine visits to the bank’s Tokyo offices in the Shin-Marunouchi Building—a newly constructed skyscraper that housed hundreds of shops and gourmet restaurants—to check out its technology and how traders’ desks were set up. He asked for several modifications to his eighth-floor workspace and to the computers that he’d be running. The bigger priority, though, was getting Citigroup to join the group of banks that helped set Tibor. Aside from the yen version of Libor, this was the most popular instrument for Japanese interest-rate derivatives to be linked to. The Tibor panel consisted of seventeen banks, and joining the group would provide Hayes and his new colleagues with a clearer understanding of the benchmark’s movements—and, more important, it would enable Citigroup to influence those movements. After talking to Hayes, Cecere e-mailed several colleagues, including Andrew Morton, to ask about the process for getting Citigroup on the panel. “For obvious reasons this is important to the bank and to trading,” he wrote. Morton and other executives authorized Cecere to apply to join. They wouldn’t learn for a couple of months whether the Japanese Bankers Association, which administered the benchmark, approved the application.

  On December 3, Hayes showed up for his first day of work. That morning, Citigroup wired £1,967,250 ($3.2 million) into his personal bank account.

  * * *

  As word spread of the slam-dunk Barclays evidence, more regulators jumped on the bandwagon, including the FSA, which overcame nearly two years of skepticism and launched its own investigation in the spring of 2010. The U.S. Securities and Exchange Commission also asked banks to hand over reams of data and internal documents. UBS had somewhat successfully stiff-armed the CFTC, and it tried to deflect the SEC to British and Swiss regulators. But the SEC investigators had less patience than Gensler’s crew, and, after meeting a bunch of UBS employees, they bluntly accused the bankers of being obstructive.* In the meantime, UBS assured the SEC that nothing seemed to be wrong with Libor.

  That spring, the CFTC demanded that UBS hire an outside law firm to accelerate its slow-moving internal review. The scope of the agency’s investigation remained limited; it was only looking at potential issues with the U.S. dollar version of Libor in 2007 and 2008. Yet UBS, even after grudgingly hiring the law firm of Allen & Overy, continued to drag its feet.

  A month or two later, an increasingly frustrated Obie was in London and decided to pay a surprise visit to Switzerland. Finma, as the Swiss regulator was known, had repeatedly cited local bank secrecy laws as a reason that, alas, UBS wouldn’t be able to hand over extensive documents or otherwise cooperate much with the Americans. The CFTC wouldn’t pay for a direct plane ticket to Bern, where Finma was based, so Obie flew to Munich, where he had a thirteen-hour layover before his short connecting flight. By the time he arrived a day later, he was exhausted and angry. He read his Finma counterparts the riot act. The Finma officials, speaking with thick Swiss-German accents, assured Obie that they would try to speed things up.

  Dealing with Citigroup proved easier. In March 2010, the SEC and CFTC sent a round of subpoenas to the bank and some employees. Peng, who by then had left for a job at Credit Suisse, also was asked to speak to the investigators. He spent a whole day at the SEC’s New York offices explaining how Libor worked and how he had stumbled onto the benchmark’s problems nearly two years earlier. “What should we be looking for?” an agent asked him—suggesting, to Peng’s dismay, that the regulators remained clueless.

  Another subpoena landed on Thursfield’s desk in London, nearly a year after he delivered his slide presentation, and Citigroup’s lawyers told the government they would do anything they could to help. Hayes by then had been working at the bank, albeit half a world away, for a few months.

  And then there was the BBA. On a Friday morning early in the summer of 2010, a half-dozen men in suits and with American accents showed up at the group’s headquarters. They were from the CFTC and the SEC, joined by a lone Brit from the FSA. Knight had taken the day off, not an uncommon occurrence for her on a summer Friday. “Is John Ewan here?” one visitor asked. Ewan stood up, looking frightened. The men ushered him into a meeting room, where they remained for more than five hours. On their way out late that afternoon, the investigators unplugged two of the BBA’s computers and lugged them to a car waiting outside.

  Chapter 13

  A Slap on the Wrist

  “Who manipulates yen Libor?” Guillaume Adolph asked Mirhat Alykulov one day in late September 2009, a few days after Hayes left UBS for the last time. “I have a bad feeling somebody is.” Coming from Adolph, it was a bizarre question, apparently intended to somehow manipulate or extract information from Alykulov. With Hayes’s departure, the Kazakh had been elevated a rung or two at UBS and now was interacting directly with more brokers and rival traders, such as Gollum.

  “Sometimes Citi and Chase are fucking around,” Alykulov said, playing dumb. “Can’t stand them moving it up and down.”

  “Bullshit,” the fiery Frenchman responded.

  “What’s bullshit?”

  “Tom was setting the Libors he wanted.”

  “Nah,” Alykulov said, “our guys in Zurich don’t even wanna talk to us on Libors.” The lies zipped back and forth between the two competitors.

  It wasn’t Alykulov’s only relationship built on a dishonest foundation. Read dished out advice to the newly mentor-less trader about what he could do to nudge Libor in helpful directions. “Mirhat, you realise that you have the ability to influence the three-month fix,” he pointed out on one occasion. Alykulov thanked him.

  Read, however, was running out of steam. He and Joanna had bought a dilapidated villa that they planned to renovate—a “hovel,” Read called it. The coming year, Read would collect roughly $1 million in salary and bonus, but to save money, he planned to do some of the home improvement work himself. When not with hammer and paintbrush, he hoped to spend time watching the local Wellington soccer team, which was suddenly winning games thanks to the import of an aging star from England. It was time to wash his hands of Alykulov.

  “You have been a pleasure to talk to for these past few months but the more I have thought about it, the more I think that you talking directly to [ICAP’s Japanese affiliate] will work out best for UBS,” Read e-mailed. “Tom will be under intense pressure to ‘produce’ early on and, as a result, he will be even more unreasonable than normal . . . lucky me!”

  Alykulov, however, wasn’t quite ready to let Read go. Over Christmas, he repeatedly complained to Read that his ICAP colleagues in London weren’t doing enough to knock six-month Libor lower. Read e-mailed Wilkinson about the earful he was getting. (Wilkinson, coming off his best year ever, was due to collect nearly $2 million in salary and bonus.) Alykulov and Hayes, Read explained, were both under the false impression that Goodman “talks individually to his banks and exerts his views in that way.” Read had spent years cultivating the illusion that Goodman was doing more than he really was; he didn’t want Wilkinson to shatter it with some offhand comment.

  * * *

  It didn’t take long for Hayes to figure out that Citigroup’s culture was different from UBS’s. Sure, on the face of it, there were some striking similarities. Over the years, through countless acquisitions orchestrated by hard-charging CEOs, both had been transformed into earth-spanning behemoths that, depending on your perspective, epitomized either the tremendous potential of the new era of financial globalization or the perils of the deregulatory fever that had swept the Western world. In the years before the crisis, both had gone on reckless benders, top executives at both banks seeming to possess uncannily bad timing, crowding into markets just before they imploded. Their respective CEOs, Charles Prince at Citigroup and Marcel Rohner at UBS, both had paid for the resulting calamities with their jobs. And, of course, both banks had received massive government bailouts and become international symbols of greed, mismanagement, and scandal.

  But there
were big differences, too. Every bank Hayes had worked for during his eight-year career was from a different nation—and only one, RBS, was from his home country. Now he was working with lots of loud, brash Americans. Hayes had been known for his intermittent outbursts, but Citigroup’s trading floor in Tokyo was of another volume altogether. Employees frequently used the “hoot and holler” system that allowed them to talk into their phone line and have their voice blasted out of every trader’s speaker system; that system had existed at UBS, too, but it was rarely used. Even the Brits at Citigroup, like Mccappin, were on the wild side. “I was in the office till 5 a.m.,” the CEO moaned to Hayes one morning. Hayes asked why. Mccappin clarified that the Office was the name of a Tokyo nightclub. It was a far cry from UBS’s relatively staid culture.

  Cecere was the brashest of the bunch. He loved going out, twisting his colleagues’ arms to have another drink and then another. He seemed to draw energy from social situations. Somehow all the partying didn’t come at the expense of him working hard. Within days of Hayes joining, Cecere was trying to figure out how to help his newest employee move Libor and Tibor. If Citigroup’s application to join the Tibor committee was accepted, the bank’s first submission could have a big impact, potentially influencing other banks. Hayes asked Cecere to identify the employees who’d be responsible for Tibor and to set up a meeting. Cecere did so, and he also asked a Tokyo teammate, a Malaysian named Stantley Tan, who was in charge of the cash desk in Japan, to figure out who Citigroup’s relevant Libor submitters were in London. Tan reported back that it was Thursfield’s group, which also included Laurence Porter and the green-behind-the-ears Burak Celtik.

  Cecere dispatched Tan to see how amenable Thursfield’s crew would be to helping. The initial signals seemed good, Tan reported. As a test, Cecere asked Tan to complain to London that its most recent yen Libor submission was too high. After Tan relayed the message via e-mail, Cecere forwarded the exchange to Andrew Morton. “I’ve taken over global coordination of doing this properly,” he wrote. The hand-in-glove collaboration between traders and Libor submitters would have been the envy of banks like UBS, which had spent years trying to foster such cooperation.

  Tan, though, had misread the mood in London. Porter was unsettled by his e-mail and mentioned it to Thursfield. It seemed to Thursfield, who had spent considerable time over the past year dealing with queries from regulators, that while such behavior might have been acceptable in the past, his Tokyo colleagues weren’t behaving as if a major government investigation was under way. This was the latest ill wind to blow from Japan, after Hayes’s disagreeable visit a couple of months earlier. So Thursfield typed out a long, carefully worded response, a polite but firm reminder that Citigroup’s Libor submissions were not subject to debate. “The rules surrounding rate setting are strict,” he wrote to Cecere and others. “Any recommendations or suggestions as to where rates should be set have to be disregarded.” Just to cover all his bases, Thursfield checked Citigroup’s Libor submissions and was relieved to see they hadn’t moved; Celtik apparently had disregarded Tan’s request. Nonetheless, he took Celtik and Porter aside and told them not to tolerate any interference from Tokyo. Then Thursfield forwarded the whole e-mail chain to one of the bank’s compliance officials.

  Cecere passed the exchange to Hayes, who hadn’t been included on Thursfield’s missive. If Hayes bothered to scroll through the long sequence of e-mails, it didn’t influence his behavior. A few days later, Hayes decided to visit London early in 2010 to attempt to build a personal relationship with Thursfield’s squad. “I think we need good dialogue with the cash desk, they can be invaluable to us,” he wrote to Cecere and a London-based colleague, Hayato Hoshino, who was assigned to work with Hayes. “If we know ahead of time [where Libor is going] we can position and scalp the market.” Hoshino had moved to London from Tokyo just a few months earlier, and spoke broken English. His shy, diminutive personality earned him the nickname “Little Hoshino,” and his relatively modest $91,000 salary made him all the more eager to impress Hayes and learn how to become a star. Hayes suggested that he and Hoshino try to curry favor with the cash guys by taking them out to a fancy dinner. Despite sitting nearby, Hoshino had never actually met Thursfield’s crew. He got to work planning a get-together.

  * * *

  One day in mid-December, Hayes was sitting at his desk, trying to get his Excel spreadsheets to interact properly with Citigroup’s computer systems, when an interesting e-mail landed in his inbox. A member of Citigroup’s financial research team in Tokyo recently had met with senior officials at the Bank of Japan. The central bankers had been surprisingly candid, and the researcher had gleaned valuable clues about the Bank of Japan’s thinking on the direction of interest rates and its plans for upcoming bond auctions. Given the central bank’s enormous power over rates, the exclusive information would be valuable to just about any trader with a stake in short-term fluctuations in rates or the yen’s value relative to other currencies. For that reason, the report was confidential and not supposed to be shared outside Citigroup.

  Hayes skimmed the document. There wasn’t much he could actually do with it. He wouldn’t be trading for nearly two months, and by then, the research would be obsolete. It would be a shame, though, to let such useful information go to waste, so, disregarding instructions, he decided to send the report to Adolph. After all, he still owed Gollum a favor for the precious advance notice he’d given on Deutsche Bank’s Libor plans earlier in the year. “Have some yen info you maybe interested in,” Hayes typed into a chat session that morning. “Will you promise not to forward, reproduce, etc.?”

  Adolph swore not to, “on my son head.” Hayes pasted the full report into the chat room. Then they discussed the possible implications of what the central bankers were saying. They agreed it was likely to push Libor and Tibor slightly lower. The report was one variable—an important one—for Adolph to consider as he tinkered with his derivatives portfolio that day.

  “Anyway that’s as a favor,” Hayes concluded.

  “Nobody apart from me will hear anything,” Adolph vowed.

  * * *

  In January, Hayes flew to London, the first stop on another of his world tours and his first as a Citigroup employee. He had meetings lined up with clients and a variety of bank personnel, but the most important item on his agenda was the meal with Thursfield’s team. Hoshino had tried to organize a dinner, but Porter suggested lunch instead, which he figured would be less formal and shorter. As it was, Thursfield was out of town, so it was just Porter and Celtik joining Hayes and Hoshino. That was fine with Hayes, who, despite being bad at reading people, could tell he hadn’t made a great impression on Thursfield back in October.

  Hoshino booked a table at Roka, a loud, trendy Japanese restaurant across the street from Citigroup’s skyscraper—exactly the kind of scene that Hayes hated. After ordering wine for the table, he got things started by casually explaining that from time to time he and Hoshino planned to ping Celtik with suggestions about where they thought yen Libor should be set, based on what they were seeing in the Tokyo market. Hayes characterized it as normal behavior, not a big deal—it was how things had worked during his days at UBS and other banks before that, he said. Porter emphasized that everything should be couched in the language of “market color,” as opposed to Hayes saying he wanted Libor up or down to suit his portfolio of derivatives, and he cautioned that his team was under clear orders to keep Citigroup’s Libor submissions in line with its competitors. Hoshino hardly spoke. At the end of the meal, Hayes picked up the tab and left with a good feeling.*

  His next stop was New York, where he visited the bank’s headquarters and sat down with some big clients, including the hedge fund run by the legendary investor George Soros. He also traveled to lower Manhattan to meet officials at the Federal Reserve Bank of New York—a meeting arranged by Citigroup and eagerly accepted by the Fed, which was always looking for insight into the inner workings of overseas financial mark
ets. The secretive central bank, based in a fortresslike stone compound just off Wall Street, was one of the primary guardians of the U.S. financial markets. (It was the Fed whose officials two years earlier had heard warnings from Barclays about traders manipulating Libor.) Hayes was thrilled to have the chance to compare notes about what he was seeing in Tokyo’s markets and to grill the officials about the direction of U.S. interest rates. The whole trip was exhilarating—but also exhausting. Hayes had to meet firms that specialized in Japanese trading and therefore operated during Asian market hours at night; once done, he would retreat to his Waldorf-Astoria hotel room to watch Seinfeld reruns.

  Back in Tokyo, one of Mccappin’s deputies received an unsettling phone call from an acquaintance at UBS who was no fan of Hayes. The UBS man told him that Hayes had a reputation for trying to skew Libor. Citigroup should watch out, he warned. The deputy informed Mccappin of the conversation. Mccappin—possibly suspicious of the UBS source’s motives, given Hayes’s controversial reputation inside his former employer—brushed off the concern. He wasn’t about to let some vague innuendo tarnish his new star—a man he had just lavished with praise during a raucous ski weekend in the mountains of Karuizawa.*