The Spider Network Read online

  Dedication

  For Kirsten, Henry, and Jasper

  Contents

  Cover

  Title Page

  Dedication

  Cast of Characters

  Prologue

  Part I: The Scam Chapter 1: Watching the Coronation

  Chapter 2: The Hall of Mirrors

  Chapter 3: Classy People

  Chapter 4: Peak Performance

  Chapter 5: The Lucky Turnstile

  Chapter 6: The Sycophants

  Chapter 7: Your Name in Print

  Chapter 8: A Yacht in Monaco

  Part II: Ascendance Chapter 9: What’s a Cabal?

  Chapter 10: Entre Nous

  Chapter 11: Gods of the Sea

  Chapter 12: In the Flag Room

  Chapter 13: A Slap on the Wrist

  Part III: The Second Scam Chapter 14: He’s the One

  Chapter 15: Spiders

  Chapter 16: A Crook of the First Order

  Chapter 17: The Unit Cost of Steak

  Chapter 18: Charades

  Part IV: Victory Chapter 19: Within the Ark

  A Note on Sources

  Acknowledgments

  Notes

  Index

  About the Author

  Copyright

  About the Publisher

  Cast of Characters

  The Family

  Tom Hayes. Photograph used with permission from Andrew Cowie/AFP/Getty Images.

  Tom Hayes: Star trader at a succession of banks

  Nick: Hayes’s father

  Sandy: Hayes’s mother

  Robin: Hayes’s younger brother

  Peter and Ben O’Leary: Hayes’s stepbrothers

  Sarah Tighe: Lawyer who eventually marries Hayes

  The Traders and Bankers

  Royal Bank of Scotland (RBS)

  Brent Davies: Hayes’s mentor, later an ICAP broker

  Paul White: Libor submitter

  Neil Danziger: Party-loving trader

  Sarah Ainsworth: Trader; Hayes’s girlfriend; later, Crédit Agricole trader

  UBS

  Mike Pieri: Trader and manager who hires Hayes in Tokyo

  Mirhat Alykulov: Junior trader, nicknamed “Derka Derka”

  Roger Darin: Trader and Libor submitter who becomes Hayes’s nemesis

  Yvan Ducrot: Executive aligned with Darin

  Naomichi Tamura: Trader and manager

  Sascha Prinz: Risk-loving trader and executive

  Carsten Kengeter: Co-head of investment banking division

  Alex Wilmot-Sitwell: Co-head of investment banking division

  Panagiotis Koutsogiannis: Trader known as “Pete the Greek”

  Holger Seger: Manager

  Andrew Smith: Trader and Libor submitter

  Citigroup

  Chris Cecere: Trader, Hayes’s boss

  Brian Mccappin: Karaoke-loving CEO of Japanese investment bank

  Hayato Hoshino: Trader in London tasked with helping Hayes

  Andrew Morton: Senior investment banking executive

  Andrew Thursfield: Libor submitter and manager in London

  Laurence Porter: Libor submitter, Thursfield’s underling

  Burak Celtik: Libor submitter, Porter’s underling

  Deutsche Bank

  Guillaume Adolph: Trader, nicknamed “Gollum”

  David Nicholls: Trading manager

  Mark Lewis: Executive who talks with Hayes about possible job

  Other Banks

  Alexis Stenfors: Hotshot trader at Bank of America Merrill Lynch

  Paul Robson: Rabobank trader and Libor submitter, nicknamed “Pooks”

  Stuart Wiley: J.P. Morgan trader

  Luke Madden: HSBC trader

  Miles Storey: Barclays Libor official

  Paul Ellis: Credit Suisse trader

  The Brokers

  Darrell Read, Noel Cryan, Colin Goodman, Terry Farr, Danny Wilkinson, and Jim Gilmour. Photograph used with permission from BBC Motion Gallery/Getty Images.

  ICAP

  Darrell Read: Broker renowned for his university degree and large nose

  Colin Goodman: Broker who sends out influential Libor “run-throughs”

  Danny Wilkinson: Red-faced broker and manager

  Frits Vogels: Manager in London

  Michael Spencer: Founder and CEO

  David Casterton: Spencer’s right-hand man, nicknamed “Clumpy”

  Anthony Hayes: Broker at Tokyo affiliate, nicknamed “Abbo”

  RP Martin

  Terry Farr: Happy-go-lucky, motorcycle-crashing broker

  Jim Gilmour: Down-on-his-luck broker

  Lee Aaron: Broker, nicknamed “Village”

  Cliff King: The three brokers’ manager

  David Caplin: CEO, nicknamed “Mustard”

  Tullett Prebon

  Noel Cryan: Amateur boxer, broker

  Mark Jones: Party animal, broker

  Nigel Delmar: Broker, Hayes’s best friend in Tokyo

  Danny Brand: Broker in Hong Kong

  Angus Wink: Senior executive

  The Authorities

  Bank of England

  Mervyn King: Governor

  Chris Salmon: Senior official

  British Bankers’ Association (BBA)

  Angela Knight: CEO

  John Ewan: Official in charge of Libor

  U.S. Commodity Futures Trading Commission (CFTC)

  Gary Gensler: Chairman

  David Meister: Head of enforcement division

  Stephen Obie: Enforcement official

  Vincent McGonagle: Enforcement official

  Gretchen Lowe: McGonagle’s deputy

  U.S. Justice Department

  Denis McInerney: Head of fraud division

  Robertson Park: Lawyer in fraud division

  William Stellmach: Lawyer in fraud division

  Scott Hammond: Lawyer in antitrust division

  U.K. Financial Services Authority (FSA)

  Margaret Cole: Head of enforcement

  Patrick Meaney: Investigator

  U.K. Serious Fraud Office (SFO)

  David Green: Director

  Matt Ball: Investigator

  The Lawyers

  Lydia Jonson: Hayes’s lawyer, from Fulcrum Chambers

  Ivan Pearce: Hayes’s lawyer, from Fulcrum Chambers

  Steven Tyrrell: Hayes’s U.S. lawyer (previously at Justice Department)

  George Carter-Stephenson: Hayes’s barrister before his trial

  Neil Hawes: Hayes’s barrister during his trial

  Mukul Chawla: Barrister representing the SFO

  Jeremy Cooke: Judge presiding over Hayes’s trial

  Gregory Mocek: Barclays lawyer (previously at CFTC)

  Gary Spratling: UBS lawyer (previously at Justice Department)

  Prologue

  The small ski resort town, nestled in the mountains outside the city of Karuizawa, was a popular destination for day trips for Japanese families. Bustling during the day, it was mostly quiet this Saturday night. Clouds cloaked the moon.

  A chartered bus pulled up outside a bar, its windows aglow. A light snow was falling. Out into the peaceful evening stumbled dozens of rowdy bankers, some toting tall cans of Asahi and Kirin. Most of them were drunk. They quickly took over the small bar.

  The drinkers were employees of the American bank Citigroup, one of the world’s largest and most troubled financial institutions. A year earlier, at the beginning of 2009, American taxpayers had finished pumping a staggering $45 billion into Citigroup to bail out the collapsing behemoth. Now the transfused recipient was treating dozens of its investment banking employees to a weekend getaway. The bankers were housed nearby in a sprawling luxury hotel, each employee’s room designed in Japa
n’s typical spare style.

  These festivities weren’t so spartan. The point was to foster camaraderie, and that was happening in spades. The party had begun on the hundred-mile ride on the bullet train out from Tokyo. After a day of hitting the slopes, Citigroup ferried the bankers to a bowling alley, where they drank and bowled and drank some more. Their bus had then deposited the intoxicated crew at this bar, before leaving the partiers behind to fend for themselves.

  One of the fiesta’s ringleaders was a wiry, curly-haired American named Chris Cecere. You wouldn’t know it from his behavior now, but he was one of the sharpest people in Tokyo’s cutthroat financial markets. A foul-mouthed veteran of the doomed Wall Street firm Lehman Brothers, Cecere (pronounced CHECK-er-ay) had only worked in Japan for a year or so, but he had quickly assembled a team of rock-star traders. His mandate was to push the already risk-hungry Citigroup into brave new financial frontiers.

  That wasn’t all Cecere was pushing. This snowy night, he was practically pouring shots down the throat of his subordinate, a disheveled British thirty-year-old named Tom Hayes. Slim and nearly six feet tall, Hayes was a brilliant mathematician, one of the most prolific, aggressive traders in Tokyo, if not the world. As with Cecere, he didn’t look or act the part. Bespoke suits and expensive shoes were found nowhere in his wardrobe. Specks of dandruff dusted his shoulders. He was far happier with a glass of orange juice or a mug of hot chocolate than a pint of beer, a preference that once earned him the nickname “Tommy Chocolate.”

  Hayes found social situations uncomfortable to the point of painful—this one included. Before departing for the ski weekend, he had grumbled to his fiancée that he didn’t want to go. She told him he didn’t have a choice. Hayes’s life revolved around work, and Citigroup was his new family. He had only started there a couple of months earlier, and it was important that he make a good impression on his colleagues. So far, he was off to a promising start in that regard. His new bosses bathed him in praise, introducing him around Citigroup’s global organization as their newest trophy asset. Only hours before they showed up at the bar, a top Citigroup executive, Brian Mccappin, had described Hayes as “a star” who represented the future of the firm’s enormous business in Tokyo. Mccappin proclaimed that their division would further shift its trading approach to take advantage of their new hire’s extraordinary talent. Hayes was certainly being paid like a star. After years of feeling like he was getting stiffed by six-figure payouts at his former employer, the Swiss bank UBS, he had pocketed a roughly $3 million cash signing bonus when he joined Citigroup.

  Mccappin, the CEO of Citigroup’s investment bank in Japan, came along to the bar that night, along with Cecere and Hayes. A native of the gritty English city of Birmingham, Mccappin was tall, with a chubby, dimpled face. A talented singer at thirteen, he and a friend had formed a band called Deadline that sometimes performed at a pub frequented by workers, including Mccappin’s father, emptying out of a nearby Rolls-Royce plant. After Deadline split, some of its members went on, years later, to form Ocean Colour Scene, which briefly rose to fame touring with Oasis. By then Mccappin had moved on to other things, but that didn’t stop him from occasionally claiming that he’d been a founding member of the infinitely more familiar band.

  At the time Hayes arrived at Citigroup, the main outlet for Mccappin’s stymied musical ambitions was karaoke, and he was a frequent and enthusiastic practitioner. As Mccappin belted out tunes this night, Hayes grudgingly accepted shot after shot of Jägermeister from Cecere. He struggled to swallow the sweet herbal concoction, fighting an increasingly powerful gag reflex. But he kept throwing the shots back, unwilling or unable to withstand Cecere’s schoolboy pressure. Hayes didn’t want to disappoint his boss. The earlier part of the day had been easier: Hayes was an expert skier, who embraced risk as eagerly on a black-diamond trail as he did on a frenzied trading floor, and he thrived in the deep powder of the Karuizawa resort. Now, though, beads of sweat started tingling on his scalp. The room began to spin. Hayes staggered to the bathroom and vomited. Then he rejoined the party.

  * * *

  Three years later, in January 2013, I was sitting on a sofa in my cramped apartment in London’s Clerkenwell neighborhood. Centuries earlier, the area had been the stomping ground of knights who were about to embark on crusades to the Holy Land. In a nod to that history, the narrow alleyway that my wife and I shared with a Belgian beer hall was named Jerusalem Passage. The neighborhood had been repopulated by trendy design studios, sushi bars, and art galleries.

  It was just after 8 p.m. when my iPhone buzzed with a text message from a number I didn’t recognize. “I’ll meet you tomorrow but I need to be certain I can trust you,” the text read. “This goes much much higher than me and a lot of what I know even the DOJ [Justice Department] is in the dark.”

  The message was from a terrified, and very sober, Tom Hayes.

  * * *

  Less than two months before Hayes contacted me, the attorney general of the United States had stood at a lectern in Washington, D.C., and announced criminal fraud charges against Hayes, branding him as a greedy, deceitful trader who had ripped off countless innocent victims in order to enrich himself. Here, the planet’s most powerful cop declared, was the mastermind of a sprawling, multibillion-dollar scam.

  Spread out across time zones and continents, a group of bankers, brokers, and traders had tried to skew interest rates that served not only as the foundation of trillions of dollars of loans, but also as an essential vertebra of the financial system itself. It all boiled down to something called Libor: an acronym for the London interbank offered rate, it’s often known as the world’s most important number. Financial instruments all over the globe—a volume so awesome, well into the tens of trillions of dollars, that it is hard to accurately quantify—hinge on tiny movements in Libor. In the United States, the interest rates on most variable-rate mortgages are based on Libor. So are many auto loans, student loans, credit card loans, and on and on—almost anything that doesn’t have a fixed interest rate. The amounts that big companies pay on multibillion-dollar loans are often determined by Libor. Trillions of dollars of exotic-sounding instruments called derivatives are linked to the ubiquitous rate, and they have the ability to touch virtually everyone: Pension funds, university endowments, cities and towns, small businesses and giant companies all use them to speculate on or protect themselves against swings in interest rates. If you bought this book with a credit card, you quite possibly brought Libor into it. So, too, if you drove to the bookstore in a car not yet paid off—or if you’re carrying a mortgage or student loans, or if your town borrowed money to pave its roads, or if you work for a company that issues debt. So if something was wrong with Libor, the pool of potential victims would be vast. As it turned out, something wasn’t wrong with Libor, everything was.

  Hayes didn’t come up with the idea of manipulating Libor to turbocharge his profits. But during the course of his career, he took the practice to fantastic new heights, oblivious to or uninterested in the fact that he was engaging in unethical activity with the real potential to harm unsuspecting victims. That initially helped catapult the nerdy trader into the upper echelon of the most profitable industry on earth. By the time I met him, it had thrust him into the crosshairs of regulators and prosecutors on three continents, who were yearning to find someone to hold accountable for the mass destruction that the banking industry recently had inflicted on Western economies.

  I had spent nearly a decade writing about banks and their misadventures for the Wall Street Journal and other publications. But this was a misadventure like none other. On the surface, it wasn’t the most eye-catching scandal—which is the very reason it was so easy to pull off. The conspirators were fiddling on the margins with something that few people paid much attention to. But the stakes were so high that even small-scale tinkering had the capacity to spawn fat profits—to the tune of tens if not hundreds of millions of dollars—with commensurate losses afflicting the ofte
n-unsophisticated victims.

  But the hunt to nab Hayes and his confederates—a group that one participant dubbed the “spider network”—exposed far more than a scheme to manipulate the underpinnings of modern banking. I began to see the saga as rooted in a corrupt, broken financial system, as well as the minimalist, see-no-evil regulatory infrastructure that theoretically was supposed to keep the industry in check. Hayes’s moral compass certainly was skewed—perhaps in part due to the mild case of autism he was eventually diagnosed with, which helped explain his incompetence at human relations and his affinity for numbers over people. But just about everyone I encountered suffered from a version of the same defect: obsessed with numbers and profits, eager to use other people as tools for self-advancement, convinced that anyone on the losing end wasn’t so much a victim as a sucker who deserved whatever mistreatment he got. And the more I dug, the more it seemed that, at least in some ways, Hayes himself was that sucker, the hapless guy positioned to take the fall for an entire industry’s era of anarchic, reckless behavior. His odyssey, as well as the institutions and individuals that goaded him along, reveals a lot about why the banking industry has become synonymous with scandal—and why, even today, its awful reputation remains firmly intact.

  Part I

  The Scam

  Chapter 1

  Watching the Coronation

  The Brackenbury Primary School, in the dumpy west London neighborhood of Shepherd’s Bush, was in a three-story, redbrick Victorian-era building. From outside, the school looked grand. Inside, it was a different matter: High ceilings created a cavernous, intimidating vibe, paint was peeling from the walls, and cold air drafted in through ragged insulation. The small campus, just down the street from the Goldhawk Road Underground station, was in a part of London marked by tracts of similar-looking, century-old houses and down-on-their-luck convenience stores, pubs, and Laundromats. Brackenbury’s student body, drawn from the surrounding neighborhoods, was primarily working class.