Open Secret: The Global Banking Conspiracy That Swindled Investors Out of Billions - Hardcover

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Prologue

Tom Alexander William Hayes looked the part of the unremarkable British man. He sported short, dark blond hair, slightly wide-set eyes ringed with brown circles, a white button-down dress shirt, grayish blue V-neck sweater pilling on the back, and black trousers over black leather slip-on shoes. Like most Londoners commuting around town, he carried an umbrella, as that autumn day it was drizzling.

A private man by nature, Hayes remained largely in seclusion at his home in Surrey, with his wife and one-year-old son. He had stayed behind closed doors for good reason: On the days he did go out into the world, television cameras and paparazzi followed him like buzzards.

This particular day, October 21, 2013, was no exception. Outside the gray, modern-style courthouse, photographers waited to snap photos of him entering and leaving the building. Hayes offered no answers to their questions, yet one word seemed to hang over the proceedings as if written in London’s cloudy sky.

It was an acronym, one that consisted of five letters: L-I-B-O-R. Shorthand for London Interbank Offered Rate.

That little word—and its complex financial ramifications—represented countless billions of dollars in allegedly illegal gains and the means by which Hayes might lose his freedom.

• • •

Hayes had grown up in London, a middle-class lad with a gift for math and computers (a classmate called him an “incredibly smart geek”). His college record was such that employers flew him first-class to their offices for interviews, and, long before he became the poster boy for the largest financial scandal in London in anyone’s memory, he accepted, in 2001, a position as a junior trainee at the Royal Bank of Scotland.

At RBS, his specialty was derivatives, the financial instruments that, with the advent of electronic trading in the 1990s, represented finance’s new magic. Derivative agreements are contracts that specify an exchange of cash or other assets owned by one party for the second party’s assets within some time frame. Hayes’s talents aligned nicely with Wall Street’s growing appetite for derivatives. The market included options, swaps, and other transactions priced off of interest rates, commodities, and a variety of other underlying assets, and Hayes demonstrated a particular knack.

Hayes didn’t favor Savile Row suits as some of his well-paid coworkers did; for him, the dress code was post-college casual—jeans, pullover shirts, and sweaters. Fast food sufficed for Hayes, rather than the thousand-dollar dinners celebrated by some in finance.

In 2006, he accepted a new job, leaving RBS to work for the global banking power UBS (known in earlier days as Union Bank of Switzerland). That spring his new employer posted him to Tokyo, and his promising career—he hadn’t yet turned thirty—took off, as he quickly became one of the most powerful derivatives traders in Tokyo.

In Japan, Tom Hayes gained a reputation for one particular proficiency: He proved skilled at betting on the difference between the lending rates offered by banks overnight in buying and selling derivatives. He hedged the tiny differences in the LIBOR, set in London, and the Tokyo overnight rate, set by the Bank of Japan. His ability to play the rate game came to mean millions in profits for UBS, elevating him from merely a trader to a recognized corporate asset, one whom the bank entrusted with immense sums in UBS assets.

Outside brokerage firms and other banks took note and, in 2009, he jumped ship, lured away by Citigroup—and a pay package that more than doubled the cool $2 million or so he took home annually at UBS. One of his new bosses proclaimed him “a star.”

Within the financial world, Hayes’s ability to make the market’s numbers move his way mystified his rivals. Tom Hayes had truly arrived.

• • •

Southwark Crown Court sits between London Bridge and slightly east of Shakespeare’s Globe Theatre. The drama unfolding with Hayes as the central actor, however, was of a distinctly twenty-first-century sort.

By the time he entered the courtroom in October 2013, the only thing different about him was the exhaustion clearly etched on his face. Hayes still wore his dark blond hair short, but on that autumn morning Hayes’s wide-set eyes had bags, as if he had slept poorly. Though his expression was impassive, his demeanor was glum. He had been the first man arrested in the international scandal that had roiled the banking business.

Since 2008, businesspeople around the world had encountered the word “LIBOR” as they ate breakfast and surveyed the morning news. They had learned that LIBOR, established four decades earlier as a convenience in the early days of variable interest rates, had morphed, in effect, from a gentlemen’s agreement to a vehicle for outright theft. In Britain, the United States, and elsewhere, journalists reported, LIBOR had become subject to widespread—and illegal—manipulation.

Hayes had drawn the special attention of authorities in the United States and the UK. They were eager to serve up the scalps of the men who had rigged the LIBOR, and the U.S. Department of Justice in particular spun a narrative in which Hayes was the principle protagonist, the figure most responsible for rigging the LIBOR. In a long and detailed complaint, filed the previous December, the FBI asserted (among many other allegations) that, in the months between November 2006 and August 2009, Hayes had sought to alter the LIBOR rate on 335 out of 738 business days. The agency cited emails and a plethora of documents. To the Americans, he was the mastermind.

Hayes knew the truth was a great deal more complicated, that the years-long fixing of interest rates couldn’t be done by just one person; it took a village of traders, brokers, and go-betweens arrayed around the globe, along with bribes, soft threats, and hard financial rewards to push LIBOR up or down. But with the American prosecutors aiming squarely at him, Hayes’s legal problems included the risk of extradition to the United States for trial.

As he anticipated his day in court, extradition was a prospect that not only Hayes but his countrymen found disquieting. The British public were outraged when three bankers for Enron (David “Bermie” Bermingham and two colleagues, known collectively as the NatWest Three) ended up being tried, convicted, and incarcerated in American prisons rather than in their home country ten years earlier. At the time, many Britons had actually protested the extradition of the men to America.

Thus, Tom Hayes had ample reason for looking grim on what was to be his offer of a plea, guiltyor not guilty. This was a hearing, not a trial, but he’d had to relinquish his passport. Despite having no place to go, however, he was by no means without leverage.

One avenue was the press. The previous January, he had texted the Wall Street Journal with a tantalizing message: “This goes much higher than me.”It had been a key public comment, one awash with implications for former bosses and colleagues. It implied that Hayes hadn’t acted alone but had fiddled interest rates with the full knowledge and perhaps the blessing of his bosses. It also made him more sympathetic. The public was hungry to understand more, to learn the identity of other banker perpetrators, to get the whole story. A plot turn that implicated higher-ups just might improve his odds.

A proven manipulator of information, Hayes might also use what he knew to good advantage with the courts. In recent months, prosecutors in London had been gaining ground on their U.S. counterparts; the LIBOR scandal was an...