The Spider Network Page 2
In 1990, one of the school’s students was Tom Hayes. The ten-year-old was big for his age, with a mop of sandy blond hair and small dark eyes. He was burning with anger. It was hard to pinpoint the exact reason. His parents had split up six years ago after his mother, Sandy, caught his father, Nick, cheating. Hayes detested Nick’s absence from his life. Nor was he thrilled that upon his father’s remarrying in 1989, Tom and his younger brother, Robin, had inherited two stepsisters from Nick’s new wife, as well as a baby half sister. But Nick wasn’t the only issue. Hayes resented what he saw as Sandy’s cold, controlling nature and the fact that she seemed more devoted to her job than to mothering her two sons.
Money was tight. Once, before his parents divorced, angry debt collectors showed up at their small, two-floor brick house in Shepherd’s Bush after Nick, a ponytailed television journalist, fell behind on the utility bills. Hayes told himself that when he grew up, he’d make enough to ensure that the bailiffs never returned. Every day, he counted his money, which he had earned doing odd jobs around the neighborhood. He stacked the coins by denomination. He memorized the quantities. The rituals made him feel safe. He started carting around all his essential belongings in his backpack, as if ready to flee if the need suddenly arrived.
Sandy worked as a researcher for Gordon Brown, a jowly, Scottish politician in Britain’s Labour Party. She toiled long hours, delegating child-rearing duties to a series of au pairs. Hayes perceived her as anxious, angry, and strict. Among her rules: Hayes was only allowed to drink water. To say their relationship was contentious would have been an understatement. Once, in a fit of rage, she hurled a hot baked potato at Hayes. After another fight, Hayes locked his mother in the cellar. Another time, he flung a saucepan at her head. He threw violent tantrums. (Sandy was not his only target. He once assaulted his stepbrother, who came along with Sandy’s new husband, Tim, with a pool cue.) “The au pairs couldn’t cope,” she would later tell a psychiatrist.
Hayes was desperate to win his mother’s favor. The only way to do that, as far as he could tell, was to excel at school, so that’s what he set out to do. By the time he was six, he was already emerging as a standout math pupil. (Once, he badgered Sandy to buy him a math workbook as a gift.) “Tom is a mature and sensitive boy who gets emotionally upset at times due to family problems,” a teacher wrote in a 1987 review that was sent to his parents. “His anger and frustration, and particularly his aggressive will to win, have frequently got him into trouble in the playground and with his peers, though he has calmed down recently.”
As confident as Hayes was when it came to math, that’s how dysfunctional he was interacting with his peers, especially girls. He could hardly work up the guts to talk to them. He kept track of his number of friends at any given time; he rarely counted more than three and almost never saw them outside of school. Part of the problem might have been his demeanor. Endlessly teased for his attire (Brackenbury didn’t have a strict dress code, but Hayes nonetheless routinely showed up wearing a blazer), he won a dubious award from his peers for “best uniform” of the year. “Tom can sometimes come across as arrogant about his abilities,” a teacher wrote in 1992. “He should appreciate the value of diplomacy!” his English teacher said on another occasion. Hayes acknowledged the problem: “I need to improve my attitude in that I respect ideas I disagree with,” he wrote in a self-assessment.
Buffeted by strife at home and unpopular at school, it wasn’t surprising that Hayes sought refuge in things he could easily understand. From his bedroom window, he could see the floodlights over Loftus Road, the stadium that was home to the Queens Park Rangers professional soccer team. When QPR scored, Hayes could hear the crowd roar. The sport became a lifelong passion, and for years he attended every home and road game that the Rangers played. He saw QPR as a second family.
And Hayes became obsessed with collecting things. He stockpiled used train tickets. He built a vast army of metal toy soldiers. He amassed dozens and dozens of soccer stickers, which he arranged in particular orders. His purest love, though, was mathematics. He cherished the simplicity, the objectivity of numbers. They never lied, they never disappointed you, unlike so many people in his life. You couldn’t misinterpret numbers—a valuable quality for a literal-minded boy like Hayes. Equations were beautiful, not to mention reliable: Marriages could fail, friends could fight, girls could ignore you, and QPR could (and often did) lose, but the square root of nine was always three, the angles of a triangle always added up to 180 degrees.
That fed a budding interest in finance. It was partly because Hayes had an intuitive understanding for numbers; he wasn’t scared of them the way many kids were. Another factor was his paternal grandfather. Raymond Hayes had been a stockbroker for an old firm, Mullens & Company, in the City of London, as the capital’s financial district is known. Raymond’s nickname at work had been “Talkie” because he was such a blabbermouth, and he loved gabbing to his attentive grandson. Raymond trained Hayes to read the tiny newspaper columns of daily stock price movements, instructing him to search for patterns, and he entertained Hayes with colorful stories, some of which might have been apocryphal, about his days of traipsing into the City wearing a shiny, black top hat. A favorite tale involved Queen Elizabeth II’s coronation in 1953. Raymond wanted to watch the ceremony, but he didn’t own a TV or have the money to buy one. He told his boss, who advised him to buy shares of a specific company. Raymond bought the shares. They immediately rallied. The next day, he unloaded the shares, pocketing enough money to buy his TV and watch the coronation. (Insider trading didn’t become a crime in England until 1985. During Raymond’s heyday, the practice was rife.) Decades later, a watercolor painting of the ornate Mullens headquarters would hang in Hayes’s living room—a gift from Raymond before he died in 2000.
* * *
Just as Hayes was getting into a groove at school, Sandy and Tim, a management consultant, decided it was time to escape dirty urban living in favor of Winchester, a town in the English countryside best known for its medieval cathedral. Hayes was fifteen. The hardest part wasn’t moving away from his few friends; it was his newspaper route. He earned £20 (roughly $40) a week, and it was easy money—his route consisted of a single luxury apartment building. He barely had to venture outside.
At his new school, Hayes remained an academic star. “Tom is a talented mathematician,” his annual assessment said. Newspaper delivery no longer an option, he sought out other means of pulling in some cash. At lunchtime, his classmates were always desperate for a little extra money to buy more food, generally a supplemental portion of dessert. It was a ripe opportunity for someone to make a nice profit, Hayes realized, so he skipped eating and instead loaned out his lunch money to classmates. He charged usurious 50 percent daily interest rates—in other words, someone who borrowed $5 would owe $7.50 the next day. Hayes reckoned he had to charge so much because his borrowers tended to default at an alarming rate. The venture was profitable, keeping Hayes flush with pocket money.
Other moneymaking opportunities beckoned. British high school students tend to hang out in pubs. Once, sitting in a Winchester watering hole, his friend David Brown noticed Hayes staring at a row of slot machines. Brown thought Hayes was just zoned out. He wasn’t. The slot machines had signs on them advertising how often they paid out—for example, that an average of one in ten wagers would be a winner. Hayes was watching people robotically feed coins into the machines and calculating which machine was due to deliver the next jackpot. Then he would put his money in. The tactic worked.
Hayes didn’t plan to build a life around math. Though his interest in finance remained, he realized that his argumentative streak could be enjoyably put to use and decided that he wanted to be a lawyer. In college, preferably at Oxford University, he hoped to major in history and then pursue postgraduate legal studies. But his interview with an Oxford admissions officer went poorly. Given his outstanding academic performance, the point of the interview was more social than scholarly
. But Hayes had developed a deep aversion to eye contact, finding it easier to concentrate if he fixed his gaze on an inanimate object rather than a human face. The resulting conversation was labored. The admissions officer tried to let Hayes down gently, telling him he just wouldn’t enjoy himself at Oxford—British code for him not seeming like the right stock. Hayes was stunned. It was the first time he’d failed for what he assumed were academic reasons.
So it was that an eighteen-year-old Hayes ended up at the University of Nottingham. Nottingham wasn’t especially strong in history, but it boasted excellent math and engineering departments. Falling back on his acknowledged strengths, Hayes abandoned the social sciences to become an expert in partial differential equations, advanced calculus, and fluid mechanics.
Freed from his mother’s disciplined home—Hayes had a strict 9:30 p.m. bedtime until he left for Nottingham—he went a bit wild, vigorously transitioning from water to much harder stuff. At 3 a.m. one night, Hayes was belting out QPR soccer anthems in his dorm. A professor was awoken and nearly had him kicked out. Still, by the rambunctious standards of most college kids, Hayes seemed normal, more or less. And, for perhaps the first time in his life, he was happy.
* * *
By then, Sandy’s career, attached to that of Gordon Brown, was soaring. Brown had become chancellor of the Exchequer, the British equivalent of the U.S. Treasury secretary and the second-most-powerful post, behind the prime minister, in Tony Blair’s Labour government. (It wasn’t Hayes’s only connection to the British establishment. Sandy’s sister was married to a Bank of England official named Chris Salmon, whose career also would soon take off.) After Hayes’s first year in college, Brown told Sandy that her son could have a summer job working in the Treasury. She turned down the offer on Hayes’s behalf, without asking him. Sandy felt her son was too conservative to fit into Blair and Brown’s center-left government. She described Hayes to acquaintances as a Thatcherite, a reference to the 1980s Conservative prime minister Margaret Thatcher. Coming from Sandy, the label was derogatory.
It’s hard to imagine how Hayes’s life might have ended up differently if he had gotten that summer job. Working in finance in a powerful government department, under the watchful eye of his mother and a supportive boss, might have opened up a world of different possibilities for someone with prodigy-like math skills. Hayes didn’t even learn of the job offer until years later.
Instead, he spent that summer and the next working behind the bar at the Winchester tennis and squash club near where Sandy and Tim lived.* He worked eighty hours a week, earning about £3.75 an hour, for a weekly haul of £300, not bad for a summer job. But he chafed as patrons condescended and belittled him, regarding Hayes as lower-class even though his family was a member of the club. Come the end of the summer, he could hardly wait to return to school.
One day in the fall of 1999, Hayes was in the computer lab at the University of Nottingham when he overheard two older students talking about internships they planned to apply for in the London offices of the Swiss bank UBS. The internships paid about £500 a week, though what they actually entailed was a bit unclear to Hayes; they involved something about “operations.” That sounded sufficiently vague that Hayes figured he probably could do it—whatever it was. He didn’t know much about investment banking, aside from vague notions he’d picked up from his grandfather’s stories, but the money sounded great.
That December, he showed up for an interview at UBS’s London offices. He was running a high fever, felt awful, and didn’t think he performed well. He figured he was heading for a repeat of the Oxford rejection, but a few days later, UBS offered him a summer job. The pay was even better than Hayes had expected: £600 a week, or on track to be £27,000 a year. That was more than most adults in Britain earned at the time—and double what he’d earned the prior summer for what he guessed would be less strenuous, more rewarding work. Back to London he would go.
* * *
The internship ran from July to September. Hayes rented a place in London and commuted into UBS’s offices, right around the corner from the old Mullens building where his top-hatted grandfather once worked. (In fact, S. G. Warburg, which had been purchased by UBS, had itself purchased Mullens in the 1980s.) Hayes found the job boring. He worked behind the scenes, helping UBS manage its technology and computerized trading systems. At the end of the summer, the bank offered him a permanent job. It wasn’t even conditioned on Hayes graduating—that’s how much they wanted him. But in his few months at UBS, Hayes had learned about the investment banking pecking order. Back-office roles, such as the one he’d been offered, were close to the bottom. At or near the top were traders.
For most people, the notion of a trader is based largely on movies depicting Wall Street’s wild ethos. Bellicose traders, their sleeves rolled up, shout profanities into multiple phone lines simultaneously, while gawking at a half-dozen computer screens and, in their spare time, abusing subordinates, harassing the few women in their midst, and casually cheating anyone they can. The caricature isn’t too far from the truth, but it doesn’t explain what a trader actually does.
In fact, there were different types of traders, Hayes learned that summer. One common variety was called a market maker. A market maker’s defining trait was that he fielded queries from other banks, asset managers, hedge funds, insurance companies, and other institutions that wanted to buy or sell financial products in the market maker’s area of specialization, say Mexican government bonds. If a trader at a hedge fund called up and said he wanted to sell $10 million of those bonds, the market maker’s job (as an expert in Mexican bonds) was to quickly assess the characteristics of the proposed transaction and then offer the hedge fund a price at which he would be willing to execute the transaction. To be good at the job, the market maker needed a hearty appetite for risk, because if he agreed to do the deal, he then became the proud owner of those Mexican bonds. Sometimes that would be only for a period of a few minutes, before he sold them to another trader at a different institution, but other times it could be much longer. When someone else came along looking to buy Mexican bonds, the market maker would try to eke out a profit by selling the bonds for at least slightly more than he had paid for them.
As long as he was holding on to the securities, the market maker also needed to make sure that the bonds weren’t vulnerable to big swings in value. One way to accomplish that was to buy instruments whose values were likely to move in the opposite direction of the original Mexican bonds—such as a type of insurance contract that gained in value as the risk of the Mexican bonds defaulting rose. That tactic of protecting himself through offsetting positions was known as “hedging.” It was similar to a die-hard Red Sox fan placing a bet that the Yankees would beat his team in the playoffs—that way, even if the fan’s heart was broken, he would at least win a little money as a consolation prize.
Pulling off profitable transactions on behalf of clients wasn’t the only way that traders made money. They also were expected to place their own separate bets on the direction of markets and to amass positions so that they profited if their bets turned out to be correct. This was fundamentally different from market making, but market makers were among those plying this type of trade in addition to their main jobs. By the time Hayes arrived on the scene, this had become standard operating procedure, but it represented a seismic shift in the traditional role played by a bank. No longer was the bank serving mainly as an intermediary whose trading was designed to lubricate the financial system or assist clients in managing their finances; this type of trading was an end in itself, designed to benefit nobody other than the bank and its employees.
There were many reasons for this transformation. One was that regulators in the United States, Britain, and elsewhere, lulled by the lack of a recent financial crisis and swayed by the industry’s enormous political clout, had taken a hands-off approach to overseeing this sort of speculative activity. In the United States, a law imposed in the wake of the Great Depress
ion that prohibited commercial banks from partaking in investment banking activity was repealed, paving the way for the creation of megabanks like Citigroup whose trillion-dollar balance sheets allowed the placement of massive wagers with the banks’ (or, more precisely, its investors’ and customers’) own money. Another factor was that, over the past couple of decades, many old Wall Street partnerships—firms like Goldman Sachs, Bear Stearns, Lehman Brothers, and Morgan Stanley, which had been owned by a small group of their uppermost, longest-serving employees—had converted into publicly traded companies. That allowed the firms’ partners to cash in on their ownership stakes, catapulting some of them to near-billionaire status. But it also meant that the companies became accountable to a new class of owners, many of whom demanded to see profits grow quarter after quarter, year after year. Unleashing their traders to roll the dice more aggressively was one way for the Wall Street banks to achieve that—assuming, of course, that their bets paid off.
Whatever the causes of the shift, it didn’t take long for traders—often paid a portion of the profits they generated—to rise to the top of the banking totem pole, to churn out ever-greater profits (and the occasional catastrophic loss) for their institutions,* and, with a little help from Hollywood, to capture the public’s imagination. And the interests of a trader whose performance was measured based on how much he helped clients versus one who was rewarded based on how much money he raked in through his own trading—well, they were very different. So were the interests of a bank that mainly focused on its clients’ needs and one that profited in large part from trading that was divorced from—and sometimes diametrically opposed to—what its customers wanted.