The Spider Network

by David Enrich

  Cecere, meanwhile, received some good news: Citigroup’s application to join the Tibor panel had been accepted by the Japanese Bankers Association. Citigroup would join the committee in April. It “makes us more relevant,” Cecere boasted to Morton and Mccappin.

  “Just remember all the issues involved,” Morton responded. Citigroup, after all, had been fielding increasingly frequent government inquiries about Libor.

  Cecere and Morton were tight, two Americans sharing the swashbuckling Lehman ethos. They looked down on some of their new colleagues. Once, after going to dinner with Citigroup’s top executive in Asia, Stephen Bird, Cecere described the meal to Morton. Bird, a Scotsman, was gunning to become Citigroup’s overall CEO, and Cecere noted that he didn’t seem interested in getting his hands dirty with nitty-gritty operational details.

  “I find it very hard to take seriously someone with that much of a Scottish accent,” Morton remarked.

  “It’s very difficult,” Cecere agreed.

  “It’s like, you know, you expect him to be a paperboy or something like that,” Morton chuckled. “Come on now, lose the fucking Scottish accent to take him seriously.”

  Cecere heeded Morton’s be-careful message about Libor. Ten days later, he sent a note to Stantley Tan saying they needed to figure out how they were going to coordinate their rate submissions with London. “No need for any e-mails on this, but I think we should speak in person,” he wrote. A couple of months later, he asked Tan to work with London to keep Libor steady, noting that his team had a lot of money riding on the outcome. Then he added: “But I mean if you can’t, you can’t, so please don’t feel pressure from me.”

  * * *

  Hayes started trading in February. Right off the bat, his temper flared. His first day, infuriated by things not going his way, he informed first one broker, then another, that he was severing his relationships with them—a temporary move known as “pulling his line”—as punishment for their perceived ineptitude. Within hours, he’d pulled his lines with ICAP, RP Martin, and Tullett Prebon. He reinstated one of the lines that afternoon, only to revoke it later that day. (The episode would go down in brokerage industry lore as one of the era’s epic tantrums.)

  Notwithstanding his fierce mood, Hayes’s return came none too soon for his brokers. He was such a big player in Tokyo that traders expected him to inject new life into what recently had been moribund markets. That, of course, was good news for brokers whose profits were directly linked to the amount of business traders were doing.

  Farr was among those happiest to have Hayes back, but he wasn’t having much luck fulfilling his client’s Libor requests. When he called Luke Madden, an HSBC trader, in February, Farr got a discouraging response. “He fucking said to me not to ask him again,” the broker recounted to Hayes. “They’ve all got right fucking funny on it recently.” Here was one more sign that the Libor-skewing game was nearing its end.

  Read, too, was dying to get back to work. His do-it-yourself home renovation had turned into a nightmare. “Think of a number, double it, and then add a bit more,” he said of the spiraling costs. Adding to his stress, his mother had been staying with him and Joanna the past three weeks. Dealing with Hayes promised to cause more heartburn—indeed, it didn’t take long before a perceived screwup prompted Hayes to threaten to sever Citigroup’s entire relationship with ICAP—but Cecere had negotiated a fixed-fee arrangement, similar to the one with UBS. It made a certain amount of abuse worthwhile.

  Hayes now had two reliable contacts at ICAP. Brent Davies was getting accustomed to his new career as a broker. It was less lucrative than being a trader, but that wasn’t the end of the world. “I’ve always been poor and content, like a Buddhist monk,” he told Hayes.

  “I know the more money I have seems to make me no happier,” Hayes replied—a confounding sentiment for someone who’d long complained about his compensation and had finally become a millionaire.

  In early March, it was crunch time for one of Hayes’s first big batches of trades at Citigroup, and he badly needed Libor lower. He enlisted Farr, Read, and Davies, the latter with the express intent of working over their former RBS colleague, a Libor submitter named Paul White, to get the bank to knock down its submission. “Can I pick your brain?” Davies messaged White a little while later. “We have a mutual friend who’d love to see [Libor] go down.”

  “Haha TH by chance,” White replied.

  “Shhh.”

  “Hehehe, mine should remain flat, always suits me if anything to go lower.”

  “Gotcha, thanks, and, if you could see your way to a small drop there might be a steak in it for ya, haha,” Davies coaxed.

  “Noted ;-)” White confirmed.

  And so it went, next verse, same as the first. Hayes’s Citigroup colleagues also lent a hand. Hoshino was dispatched to Celtik’s desk, and Hayes and Cecere regularly gathered in a conference room with the Tibor submitters and badgered them to move the bank’s data to suit their trading positions. Occasionally, when the cash desk colleagues in Tokyo were being stubborn, Mccappin pitched in with a phone call or a meeting; as CEO, he was well situated to push them to comply with Hayes and Cecere’s Tibor wishes. Sometimes, Mccappin placed the call with Hayes standing in his corner office, admiring its splendid views of Tokyo’s Imperial Palace and its surrounding gardens, just so the trader would know the CEO really was doing his part.*

  As always, no one seemed concerned about the effects of skewing the rate on people outside the bank. But even the normally oblivious Hayes was growing nervous about how this might look. “Make sure not to put it in writing,” he noted to Hoshino after asking him to push the London guys to get Libor lower.*

  Citigroup’s submission declined. On a conference call with Porter the next day, Hayes thanked him for his help. “No worries,” Porter responded.

  “I might occasionally ask Hoshino to pop over” with more requests, Hayes said.

  “We won’t look at individual positions or anything like that,” Porter answered carefully, “but, you know, often it’s just a case of drawing our attention to a trend in the market that might not have moved, and we’ll look at it and if it feels appropriate, then obviously we’ll reflect it in the market.”

  In other words, Hayes interpreted, don’t be too blatant. “That’s perfect, that’s really great,” he said. “I appreciate that.”

  “No worries,” Porter repeated.

  * * *

  In his nine-year career as a trader, Hayes had earned several million dollars for himself and several hundred million dollars for his employers. Now 2010 was off to a great start. By early April, after two months of trading, he had hauled in about $50 million for Citigroup. He was thirty years old, engaged to a woman he loved, living in a spacious three-bedroom, three-bathroom apartment with a large balcony overlooking the fancy Roppongi neighborhood. (Citigroup paid the monthly rent of roughly $7,500.) With his huge signing bonus, Hayes was officially a high roller—not that you could usually tell. He still preferred hanging out at the Windsor or at home. Orange juice and hot chocolate remained his beverages of choice. If he needed to drink beer for some reason, he diluted it with a sugary soft drink. When Tighe went on a work trip early that year, Hayes’s idea of a big night was inviting Nigel Delmar over to watch American Idol.

  Hayes was happier than he’d ever been.

  * * *

  A month later, he and Tighe headed off on a vacation to Langkawi, a Malaysian archipelago. By then, Hayes was up $40 million for the year—in other words, he’d lost $10 million over the past month. And world events didn’t cooperate with their holiday plans. Greece was buckling under a heavy load of debts, and nasty rumors—of the country ditching the common European currency or of the eurozone unraveling altogether—were ricocheting around Wall Street. Because of the euro’s role as a benchmark against other currencies, the fears and fluctuations wrought havoc with Hayes’s portfolios. He spent his first days in Malaysia glued to his BlackBerry, tortured that he w
as away from the office, trying to keep up with how his trades were weathering the turmoil. The answer: not well. But plenty of other people also were losing money. It wasn’t cause for particular alarm.

  Then, around two thirty in the afternoon of May 6 in New York, stock markets started nosediving. The Dow Jones Industrial Average plunged nearly 1,000 points within a few minutes, one of the largest drops ever. At first, market watchers stared at their screens, thinking they were witnessing the onset of another global stock market collapse. Then, just as quickly, the markets recovered most of their losses. The momentary event was soon dubbed the “flash crash.”* Despite the rebound, markets remained volatile; Hayes’s trading book yo-yoed up and down as much as $15 million a day.

  The couple remained in Malaysia, but any hopes for a relaxing vacation were dashed. When Hayes had to pee, he insisted that Tighe sit in front of the TV and shout if anything happened in the markets while he was relieving himself. One night, they went out to dinner. At the restaurant, Hayes hardly spoke to Tighe—he was cemented to his phone, checking the market and repeatedly calling Cecere in Tokyo. Afterward, they retreated to their luxurious room at the Four Seasons, where Hayes flipped on CNBC for his nighttime markets vigil. The next morning, he asked her why they hadn’t gone out to dinner the previous night. He had completely forgotten.

  * * *

  By the time the vacation was over, Hayes’s portfolio had gone from being up $40 million for the year to being $20 million in the red. He returned to Tokyo in a nasty mood. He had always taken losses personally, and this was pure carnage, the worst he’d ever suffered. He struggled to hold back tears as he explained the losses to his bosses, first Mccappin, then Cecere, then Morton. None of them were worried. “Win some and lose some,” Cecere said.

  More losses loomed. Two of Hayes’s Citigroup colleagues soon quit for jobs at Deutsche Bank. Their defections would have been unremarkable, except that early in the morning before they handed in their resignations, while their colleagues slept, the two traders came into the office, accessed a shared computer drive, and printed out reams of data about Hayes’s trading portfolio. They didn’t much like Hayes, whose arrival at Citigroup had marginalized them. Because his positions were so big, there was no way that a single trader or even a single bank could move the markets against him. But if a bunch of banks joined forces, it was different—and that, it appeared, was what the two traders had in mind.

  Hayes soon noticed that Deutsche Bank established five trading positions that seemed specifically tailored to go against five of his own biggest gambles. It would have been a very odd coincidence, and he alerted Cecere. Citigroup examined internal surveillance videos and logs of activity on its printers, which confirmed Hayes’s suspicions. The two traders remained on the bank’s payroll during their gardening leave, and when confronted they insisted they had shredded the documents just after printing them. The explanation didn’t make sense—why had they printed the materials in the first place? Before long, Hayes’s trading positions became common knowledge across Tokyo. Rival banks started to attack.

  This was hardly an unprecedented phenomenon—and it made Hayes’s willingness to talk openly to rivals and brokers about his trading positions especially tough to comprehend. Back in the late 1990s, Long-Term Capital Management, at the time the world’s largest hedge fund, unraveled in the space of six late-summer weeks partly because Wall Street banks like Goldman Sachs had gleaned valuable information about what assets it was holding. (Hayes was familiar with this tale, having read When Genius Failed, the definitive account of the fund’s collapse.) Banks had a number of potential reasons to try to undermine a rival trader’s wagers. One was simply malice: Long-Term Capital, like Hayes, had rubbed a lot of people the wrong way through its arrogance when it was swimming in money, and schadenfreude is a powerful force on Wall Street. But there was a more practical motivation as well: Struggling traders were likely to have to dump their positions in a hurry, leading the prices of whatever assets they were selling to tumble. Hence, it was common for traders to amass positions that would gain value as those bets unraveled—a strategy that tended to accelerate the selloff, worsening the troubled trader’s woes.

  This was the position Hayes now found himself in. And as his losses grew, he dug himself into a deeper hole. For the past month, he had been in a bizarre dance with Alykulov. They were no longer colleagues, but they remained pals. At least that’s how Hayes saw it. He’d always been a tough boss to Alykulov—and not a very good one, by his own estimation—but he respected and liked his former underling. Now he wanted to explore hiring Alykulov at Citigroup. (He also was interested in working with him to make sure Libor moved in mutually beneficial directions.) One day in late April, he invited Alykulov out for a beer. Alykulov already had plans that night but suggested Sunday or Monday evenings instead. But that wouldn’t work for Hayes. “Sunday night I get sex,” he explained. “I only get it once a week so reluctant to go out that night.” He was serious.

  “Haha,” Alykulov responded. “That’s sacred then.” They settled on a weekday lunch instead and had a long chat—all about Libor and Hayes’s trading strategies. Alykulov the next day was departing for a vacation in Bolivia, but he didn’t even mention the plans to Hayes, who refused to talk about anything other than interest rates.

  Afterward, Hayes suffered a bout of anxiety. He checked with Alykulov to confirm that their talk was secret and that he wouldn’t tell his UBS colleagues what Hayes was up to in the market. The material “is for you only,” he said. Alykulov agreed.

  But Alykulov didn’t see Hayes as a friend; this was all business. And business meant their interests diverged. After Hayes had defected, Pieri and others at UBS became terrified that Hayes would use his inside knowledge of UBS against the bank. That was what gardening leave was supposed to protect against, but Hayes’s former colleagues rightly surmised that he was unlikely to adhere to the strictest interpretation of the three-month cooling-off period. By the time Hayes started racking up profits at Citigroup, Pieri and his colleagues were obsessing about their former star. Pieri’s fears turned out to be unfounded—Hayes stuck to his word not to attack the positions he’d amassed at UBS—but in the industry’s no-honor-among-thieves culture, it’s easy to see why Pieri was nervous. He urged Alykulov to try to pry information out of Hayes. If nothing else, that would allow UBS to piggyback on his trades, position its own portfolio against his, or simply get out of his way.

  On May 14, Hayes invited Alykulov out again. Alykulov balked, partly because he already had dinner plans. “Look,” Hayes began, “I spent a long time training you. I hope that I was OK to you. . . . I think that we either take the view that we work together like I do with Deutsche, or we go our separate ways. Together I think it benefits you and me. But I need to trust you and vice versa. I will leave it up to you.”

  “I do look up to you since you trained me,” Alykulov said, and grudgingly agreed to stop by the Windsor after his dinner.

  Hayes said he’d be there around 9 p.m. “You need to decide whether you want us to stay in touch like I do with Gollum at Deutsche,” he reiterated. “Or we just shake hands and go separate ways.” After twelve minutes, and no response from Alykulov, Hayes was nervous. Had he pressed too hard? Come on too strong? “Is that ok? Are we meeting later?” Nine more minutes passed. No response. “Yes/no?” Hayes pleaded, like an anxious teenager waiting to see if a crush will return his phone call. Almost an hour later, Alykulov put Hayes out of his misery. He confirmed he would come to the Windsor. Hayes breathed a sigh of relief. He shouldn’t have.

  A week later, Pieri, Yugo Matsumoto, and Naomichi Tamura were once again fretting about Hayes, trying to figure out his positions in the turbulent market. The three managers exchanged their theories. Then Alykulov chimed in: Hayes has a position that profits if U.S. dollar Libor rises.

  “Oh really?” Tamura asked.

  “Wow,” Pieri said, impressed with the youngster’s scoop. They all scrambled t
o assess what that meant for their portfolios and the broader market. Then Pieri asked how Alykulov knew.

  “He told me,” Alykulov explained. Hayes had indeed trained Alykulov well: It was every man for himself. Hayes wouldn’t learn of the betrayal for years.

  * * *

  Buckling under heavy losses, Hayes redoubled his efforts to get Libor moved in helpful directions—sometimes in a manner that bordered on recklessness, deluging his contacts with requests, even when they’d already indicated that they couldn’t help. It was hard to tell if Hayes simply couldn’t take a clue or didn’t care what they said; in any case, the barrage continued, to his Citigroup colleagues, to his brokers, to his competitors.

  All the e-mail traffic was making Cecere squirm. He told Hayes and Hoshino to stop communicating in writing—in the future, he instructed, talk about Libor via cell phones, “so nothing is lost in translation over e-mail.” (Citigroup didn’t record cell phone calls.) Hoshino interpreted that order, coming from a manager, to be as good as condoning the Libor-moving requests.

  One day in June, Mccappin and Andrew Morton had a phone call about some of the problems they were having in the trading business—problems that, in no small part, were caused by Hayes’s struggles. Morton mentioned that various government authorities were delving into Libor; subpoenas had started to fly. It was the first Mccappin had heard of the investigations, and he was alarmed, especially because he had noticed that the pace and intensity of requests from Hayes and Cecere seemed to have been increasing of late. He informed Cecere about the government scrutiny and told him that he and Hayes should no longer communicate directly with Stantley Tan and his cash desk colleagues. Instead, the requests should be routed through Mccappin.