The Spider Network

by David Enrich

  “‘Suggested’ and ‘predicted,’ don’t you think it’s the same word?” Read said.

  “No.”

  “You don’t? . . . ‘I suggest these are the Libors,’ ‘I predict these are the Libors.’ It’s the same thing, isn’t it?”

  “No.”

  “We’ll agree to disagree,” Read announced.

  “I think in common English understanding, the word ‘suggest’ and the word ‘predict’ are actually quite different,” Meaney said.

  “Well,” Read concluded, “I think you’re being very pedantic.”

  A couple of hours later, Read tried to explain why there seemed to be so much evidence indicating that he and Hayes were working together to try to influence Goodman’s run-throughs. “We’ll take credit for things we don’t do. Of course, it’s just a broker’s way,” Read told the investigators. “If he says, you know, ‘I like these high,’ and they go up, then of course I mention it: ‘Oh, it’s probably down to us, I would imagine, Tom.’ You drip-feed these things into people’s psyches.” Read argued that it was virtually impossible that ICAP had any sway over banks’ Libor submissions. “We can’t influence that. What we can do is try and take the credit for stuff.”

  “Does that seem a little bit dishonest to you?” an FSA investigator, Harsh Trivedi, asked at another point.

  “No, it’s not dishonest,” Read said. “Why is it dishonest?”

  “You’re telling Tom you’re doing something that now you’re saying you didn’t do,” Trivedi explained. Meaney chimed in: “Wasn’t it also highly risky? In the sense that Tom Hayes was your only client and so you couldn’t afford to lose Tom Hayes as a client and so, if you had been essentially misleading him over a long period of time . . . and he had found that out, what would his reaction have been?”

  “Well, it’s, you know, there’s no way he can find out if we’re doing something or we’re not doing something,” Read replied. “I’m not that fussed, to be honest. I didn’t go to New Zealand to work, and it wouldn’t bother me one way or the other.”

  “Do you routinely mislead your clients?” Meaney asked.

  “No.”

  Would Hayes “be surprised to learn that you were passing him misinformation over all this time?” a CFTC official asked.

  “How am I passing misinformation?” Read asked, tying himself in a knot.

  Why didn’t Read alert his compliance department to what Hayes was seeking? “Well, why should I?” Read responded. “I think banks do things that are inappropriate every day. . . . Why should I pick up on them? It’s not up to me. I’m not a regulator.”

  “No,” Trivedi snapped, “you’re not a regulator. And if inappropriate activity is brought to you, you don’t have an obligation to escalate it, is your proposition?”

  Precisely, Read agreed. “I think if brokers brought everything to you then the brokers would end up having no clients . . . and therefore there’d be no broker jobs.” With that, one of Read’s lawyers suggested that perhaps it was time for a short break.

  * * *

  Six days later, it was Wilkinson’s turn. He’d been preparing for weeks for this interview, sifting through the documents that had been handed over to regulators, who shared them with Wilkinson’s lawyers so their client could familiarize himself. When the day came, he and three lawyers were met by four FSA agents and a CFTC investigator.

  Wilkinson’s hope, encouraged by his lawyers, was that a can-do, cooperative attitude would score him points. When Wilkinson started referring to his colleagues by their nicknames, his lawyer, Matthew Frankland, politely interrupted. “I’m conscious that it’s second nature to you, but bearing in mind the FSA may not know who Junior, Lord Bailiff, Clumpy, Rodders, Hair, Lurch, and Noggin the Nog are.”

  “We know who most of those are,” Meaney said.

  “Because we can probably give you a crib sheet if it’s helpful,” Frankland offered.

  “Yep, I’m here to help,” Wilkinson seconded. At times, he seemed to be introducing new elements of complexity, just so he could help the FSA interviewers wade through them. Acronyms tumbled out of his mouth. What did his clients trade? Not just instruments linked to Libor and Tibor. There was Z-Tibor. There were JGBs, which trade on TSE. There are BLAHs. What are those? Well, Wilkinson explained, “a BLAH is an IMM Z-Tibor forward rate agreement on a single period swap against an IMM overnight index swap for the same period.”

  “Yeah,” said Trivedi.

  There was more. “There’s also JLOs,” which were similar to BLAHs. “What else did we trade? Butterflies, we do Butterflies in swaps. Do you understand what Butterflies are?”

  “No.”

  Butterflies are a complex type of derivative, three swaps bundled into one, Wilkinson explained, unleashing a tsunami of numbers and other details. “They’re quite lively,” he added.

  To avoid getting the investigators’ hopes up too much, Wilkinson let them know early on that he had “a dreadful memory. I go home at night, and the next day I forget what I was doing the day before.” It was a convenient flaw when being asked to recall potentially illegal things he’d participated in. But one thing Wilkinson had no trouble remembering was that Hayes was a nightmare. Here, the broker said, was a guy who deserved to be punished. He trotted out the notorious story about the shepherd’s pie; the FSA eagerly lapped it up, with one official noting earnestly that the fresh-out-of-the-oven pie must have been dangerously hot.

  “Yeah, so that’s the guy we’re dealing with really,” Wilkinson agreed. He went on to regale the investigators with tales—possibly exaggerated—about Hayes’s unparalleled clout in the markets, how he was “a force of nature” not to be reckoned with, how he seemed imbued with nearly magical powers.

  Wilkinson had a harder time pinning everything on Hayes when he was confronted with evidence pertaining to Read and Goodman. But Wilkinson insisted it was all an act, including those times when Wilkinson himself asked Goodman to comply with Hayes’s wishes. And even if Goodman was sending out skewed data, why would any bank listen to him? “We’re a lowly broker. We just shout a price and buy them a beer. In the hierarchy of things, why would they listen to Colin?” But, of course, some banks did use the run-throughs to set their own Libor submissions, and Goodman did occasionally change his run-throughs in accordance with Hayes’s requests.

  Confronted with e-mail traffic in which he told Read that he would “bully” a colleague into changing the run-throughs, Wilkinson insisted that he didn’t remember the incident and that in any case, he certainly didn’t bully anyone. Then why had he told Read that he had? “I often spun stuff, exaggerated stuff with him,” Wilkinson said.

  “Are you putting a spin on us?” Trivedi asked.

  “No. It’s a bit different spinning a colleague than spinning, you know, a compelled interview in front of the FSA and the CFTC. If I was to spin or blag a client to get a trade done or to appease a colleague, it’s a hell of a lot different than sitting here telling you guys a load of bollocks.” That day’s interview ended after about six and a half hours. The FSA thanked Wilkinson for his time. “My pleasure,” he said.

  * * *

  That spring, Goodman was hanging out in a pub. He’d had quite a bit to drink and found himself talking to a fellow broker. His name was Spencer—Goodman didn’t catch his last name—and he worked at RP Martin. Goodman mentioned that he was “on extended holiday.”

  “Oh, why is that?” Spencer asked.

  “I’m just on extended holiday,” Goodman answered.

  The cryptic response was enough of a clue for Spencer to figure out who he was. “Okay, you’re involved in that, are you?” Spencer, it turned out, had some familiarity with the Libor investigation. He mentioned that RP Martin possessed an audio recording of Hayes shouting at Farr to get Libor down. Even in pubs, it turned out, Goodman couldn’t escape the scandal.*

  A couple of months later, he was ushered into an FSA interview room crowded with FSA and CFTC investigators, as well
as four of Goodman’s own lawyers. Goodman remained emotionally frail. His psychiatrist had warned him about the perils of undergoing intense questioning; he was liable to make mistakes or just fall apart. They took lots of breaks, generally at the broker’s request, but even lunch—which the FSA had wheeled into the meeting room—was eaten under watchful eyes.

  That morning, the FSA handed Goodman a small stack of spreadsheets and charts. Investigators had examined his daily “Suggested Libors” in 2007, 2008, and 2009 and compared them to what various banks actually submitted. It was clear that a number of banks had repeatedly mimicked his suggestions up to four decimal places. Goodman said he had occasionally suspected as much. “I just looked at certain banks when I’d think, ‘Oh, maybe . . .’” But he said he didn’t realize how many banks were frequently doing it.

  Instead of suggesting that Goodman was being dishonest, as the investigators sometimes did with Read and Wilkinson, Meaney took a softer approach. “At this point, I would remind you how important it is in this interview to be full and frank in your answers,” he said before asking Goodman for the real reason he was getting an extra monthly payment on behalf of UBS. Goodman acknowledged that it was partly for his help with Libor—but he denied that it was anything improper. “If Darrell asked me to do something, I did what I thought the market was going to do and I generally ignored him,” he said. (“I can see it looks ridiculous,” he acknowledged.) Even on occasions when Goodman had seemed to engage, he claimed that it was all a ruse to get Read off his back. “Unfortunately, I avoid confrontation,” Goodman confessed. “I tend to put my head in the sand.”

  The interview adjourned around 5 p.m. That night, Goodman’s mother-in-law fell down the stairs. She broke two ribs and her arm, and her body was covered in pitch-black bruises. Blood clots formed in her broken arm. The doctors thought they might need to amputate it, but she was too weak. They put her chances at survival at one in ten. Goodman’s wife was already trying to be strong for her beleaguered husband—and now this. Goodman told the FSA the next morning that he wanted to get the interview done with. “Do you feel that you’re capable of giving evidence today, notwithstanding all the other personal issues?” an investigator asked.

  “Yeah, yeah, fine,” Goodman said.

  The questioning didn’t get too aggressive, and the interview broke for lunch at 12:33 p.m. Shortly thereafter, Goodman got a phone call. His mother-in-law was dead.

  * * *

  Gary Gensler knew this would be a big day. It was a pleasant early-summer morning in Washington, and he had arrived at work early. Around 8:15 a.m., he phoned the Treasury Department, trying to reach Tim Geithner. The Treasury secretary—who in a different job four years earlier had pestered the Bank of England’s Mervyn King about the problems with Libor—wasn’t around, so Gensler spoke to one of his deputies. He wanted to give Treasury advance notice: In approximately fifteen minutes, the CFTC would be issuing a press release that had the potential to rattle investors and move markets. He thought Geithner should know beforehand.

  The CFTC’s June 27 announcement was indeed a doozy. Barclays had agreed to settle charges—not just with the CFTC but also with the Justice Department and the FSA—that it had tried to manipulate Libor. The bank’s lawyers and executives had figured they’d derive an advantage from being the first institution to resolve the accusations. They were braced for a media and public lashing, but they figured it would quickly subside. Surely, the public would realize that it reflected Barclays’s extraordinary cooperation with the authorities.

  As part of the settlement, in which Barclays agreed to pay about $450 million in penalties, it admitted that its employees and executives had engaged in a long-running scheme to skew Libor for the bank’s own benefit. Each regulator released dozens of pages of documents detailing the bank’s misdeeds, including quotes from the damning phone calls and chat transcripts that had mesmerized investigators for the past two years. Now, for the first time, the public was given a taste of what the Libor scandal entailed. Lowballing—the practice of banks understating their true borrowing costs in an effort to appear healthier than they really were—was indeed widespread, and the settlement documents contained a tantalizing nugget: Unnamed members of Barclays’s “senior management” were directly involved in the efforts.* Soon the race was on among journalists to identify those executives.

  Just as Gensler and his colleagues had hoped, the settlement hit all the right notes: bankers behaving badly, a mysterious but powerful interest rate, the obligatory champagne references, a whiff of executive suite complicity. The settlement dominated newspaper headlines and TV news shows. Even the comedian Jon Stewart weighed in, gleefully informing his late-night viewers that Libor was a “mythical half wild boar, half lion.” In Britain’s House of Commons, David Cameron, the Conservative prime minister and longtime friend of ICAP’s Michael Spencer, denounced the “probably illegal activity.” Hayes angrily watched on TV as the Labour Party leader Ed Miliband—a family acquaintance thanks to his mother’s years of work for Gordon Brown—denounced Cameron for not taking a harder line against Libor manipulators. “Whenever these scandals happen, he has failed to act and he stands up for the wrong sorts of people,” Miliband declared. A few days later, another Labour leader, Ed Balls, said: “The reason why people are so angry is they think when people avoid their taxes or cheat on benefits they get sentences in jail. But when bankers do massive multimillion- or billion-pound frauds, there aren’t criminal prosecutions.”

  The uproar grew even louder when it became clear that the “senior management” that had ordered the lowballing was none other than the bank’s CEO, Bob Diamond, and his top deputy, Jerry del Missier. Within days, Mervyn King demanded that Barclays remove Diamond, whose brash American tendencies had long offended the central bank governor’s sense of propriety. King soon got his way; del Missier also resigned. But instead of defusing the scandal, the departures fueled it. For the first time in years, senior bank executives had paid a personal price for misconduct that occurred on their watch. Suddenly Libor seemed to be the vehicle with which authorities could exact vengeance on an industry that for too long had acted with impunity.

  Parliament convened hearings and set up a committee to investigate misconduct in the banking industry and what could be done about it. One of the things, it was quickly decided, was to pass a law that officially made it illegal to manipulate benchmarks like Libor. Up until now, the rates hadn’t been subject to any regulation or legal or government oversight; clearly, if lawmakers wanted to shout about the criminal actions of bankers, it would help for the actions to formally be classified as crimes.

  A few days later, bowing to political pressure, the Serious Fraud Office issued a one-line press release: Its new director, David Green, “has today decided formally to accept the Libor matter for investigation.”

  Angela Knight canceled the summer parties the BBA had planned to throw for bankers and members of Parliament. She apologized for the short notice, but noted, “this is not the time for such an event to take place.”

  * * *

  Beyond lowballing, there was another element of the scandal that, until the Barclays settlement, hadn’t been on many people’s radar: the massaging of Libor to benefit banks’ trading portfolios. And as the days passed, people started paying more attention to this new flavor of manipulation.

  Hayes had carefully read the Barclays documents. He came away feeling reassured. “Thankfully my name seems to have been forgotten!” he e-mailed his stepfather. “I may escape by virtue of the fact that my stuff all took place in Japan with Yen interest rates, luckily I don’t trade dollars. If mum is worried please reassure her as the press are sensationalising it all as usual!”

  That month, a confident Hayes decided the time was right to launch a new company. Some of his university friends were looking for money to launch a software programming business in their native Bulgaria. Hayes agreed to provide about £150,000, enough to hire about a dozen people t
emporarily, and to file the legal paperwork himself. The launch of the company, Title X Technology, seemed like a big step toward rebooting his life.

  * * *

  A jowly former prosecutor with an unsettling penchant for, mid-conversation, snapping photos of whomever he was talking to, the new SFO director, David Green, was hanging his credibility on the success of the Libor investigation. The Treasury had agreed to provide an extra £3 million to bankroll the case, and the SFO had assigned a couple dozen people to it.

  But Green remained cognizant of his agency’s limited resources, and he was nervous about getting outgunned by the Americans. The SFO team was led by Damian Holling, who had joined the SFO in 2009 after years working as a Hong Kong police officer focused on financial crime. Tall, slim, and with receding black hair, Holling had immediately focused the agency’s investigation on what had been going on in UBS’s Tokyo office—after all, practically everyone in the legal community knew that the Swiss bank was, under its own ground rules regarding the flow of information, willing to help anyone who asked. The SFO quickly sent out notices to Hayes’s former employers, as well as RP Martin and ICAP, demanding that they hand over relevant documentation. That same month, the United States formally requested permission, which it needed to seek under a treaty between the two countries, to interview a number of British suspects in the Libor case. At the SFO’s behest, the United Kingdom stalled on approving the application.

  Hayes’s lawyers, meanwhile, started prepping their client for what to expect. Unlike in the United States, where an arrest is often an immediate precursor to being charged, British authorities arrest suspects as part of the evidence-gathering process, often at an early stage of the investigation. Hayes’s lawyers said it was most likely that the SFO would just call to schedule an interview, but they couldn’t rule out Hayes’s house being raided and him being hauled off to jail for the day.