Forget fat cat financiers getting away with it all. This isn’t your typical financial scandal exposé. We’re diving deeper, behind the scenes of a broken system.
Remember 2008? Everyone craved justice – jail time for bankers who gambled with the global economy. But after the crash, is it fair to vilify individuals? Or is the system itself rigged?
This is the story of Tom Hayes, the math whiz scapegoated for the industry’s interest rate manipulation. From childhood money bets to becoming the “Spider Network” mastermind, we unravel Hayes’s journey. Witness how Libor, a key global interest rate, became a plaything. See what happens when oversight crumbles and traders, brokers, and executives call the shots.
But there’s more. We’ll explore how Hayes’s Asperger’s diagnosis played a role, how he scored a mind-blowing $10 million in a single day, and why he stands alone – the only banker to face conviction.
The Spider Network
Math Marvel: Tom Hayes’ Talent for Numbers
From his earliest days, Tom Hayes displayed a natural affinity for numbers and a shrewd ability to strike advantageous deals.
At the tender age of 15, residing in Winchester, England, Hayes demonstrated his financial acumen by lending his lunch money to a friend at a hefty 50-percent interest rate. For every five pounds extended, Hayes ensured a tidy profit of £2.50.
Simultaneously, he developed a keen interest in the slot machines nestled within local pubs. With focused observation, Hayes decoded their patterns and timed his plays perfectly to secure payouts.
Yet, his mathematical prowess appeared to isolate him socially. Throughout his school years, Hayes faced bullying due to his meticulous attire and apparent detachment from the social scene.
The absence of a positive male influence compounded Hayes’s challenges. His father’s departure, prompted by infidelity towards his mother, left a void early in his life.
However, Hayes’s struggles in relationships likely stemmed from an undiagnosed case of mild Asperger’s syndrome.
Manifesting in his intense focus on complex mathematical problems, aversion to eye contact, and occasional outbursts of rage, the symptoms were unmistakable.
For Hayes, solace lay in the predictable logic of mathematics, guiding him towards the allure of the stock market.
While studying at the University of Nottingham in 1999, he secured an internship at UBS, where he delved into the fundamentals of trading stocks and bonds. This experience ignited his passion for the intricate realm of finance, leading to a permanent position at the Royal Bank of Scotland in the autumn of 2001.
The Spider Network
Understanding the Vital Link Between Libor and the Derivatives Market
During his tenure at the Royal Bank of Scotland, Hayes delved into the intricate realm of Libor, shorthand for the London Interbank Offered Rate, a pivotal benchmark shaping global interest rates.
Libor’s determination involves select London banks regularly disclosing their borrowing costs, reflecting the prevailing loan rates extended to them. These submissions are averaged to produce the current Libor rate, pivotal in various financial realms, including mortgage calculations.
While other nations adopt their own equivalents, such as Japan’s Tibor, Libor’s universal appeal stems from the perceived strength and stability of the British pound.
However, a glaring issue persisted: the absence of a verification mechanism for bank submissions, relying solely on trust for accuracy.
By the time Hayes embarked on his finance career, Libor had entrenched itself as a ubiquitous reference point in financial agreements worldwide.
Hayes also grasped Libor’s significant role in the burgeoning derivatives market of the early 2000s. These financial instruments acted as shields against risks like mortgage defaults, with banks creating derivatives to hedge various transactions, all influenced by Libor’s fluctuations.
The Spider Network
Hayes Joins Global Consortium in Manipulating Libor Rates for Bank Profits
Tom Hayes swiftly ascended the ranks of finance, his innate aptitude seemingly tailor-made for the industry. After generating substantial profits for the Royal Bank of Scotland, he seized an opportunity in 2006 to join UBS, this time in Japan.
Harnessing his mathematical prowess, Hayes adeptly navigated the intricate landscape of derivatives and fluctuating interest rates, carving out a formidable reputation in the Japanese financial arena.
It was during his tenure at UBS that Hayes stumbled upon the lucrative potential of manipulating Libor. Leveraging his network of brokers, he orchestrated a scheme wherein he could influence the submission of Libor rates to suit his financial agenda.
Following initial triumphs, a systematic approach took shape: Hayes would invest in derivatives poised to profit from Libor fluctuations, then instruct his brokers to sway Libor submissions accordingly, offering enticing incentives to the submitters.
Unbeknownst to Hayes, his brokers had devised a clever shortcut: leveraging a spreadsheet shared among bankers, particularly one owned by Colin Goodman, which suggested Libor rates for submission. Exploiting the submitters’ tendencies towards convenience, the brokers persuaded Goodman to input favorable rates into his spreadsheet, bypassing the rigorous process of calculating borrowing costs.
The Spider Network
Banks Complicit in Years of Libor Manipulation, Yielding Millions for Hayes and UBS
Hayes employed various methods to compensate brokers for their participation in his scheme, with one favored reward being the switch trade tactic.
In this arrangement, two traders, Trader A and Trader B, facilitated by a broker, executed a million-dollar trade. Initially, the trade moved from A to B, followed shortly by an identical trade in the reverse direction, from B to A. This ensured equilibrium between the traders while netting the broker substantial commissions.
Alternatively, Hayes indulged brokers and traders with lavish wining and dining experiences.
Crucially, bank executives actively encouraged Libor manipulation. Mike Pieri, Hayes’s superior at UBS, was well aware of the scheme’s mechanics. Hayes maintains that if Pieri had intervened, he would have complied. However, with UBS reaping immense profits from Hayes’s tactics, Pieri refrained from interference.
By 2007, Hayes was generating up to $10 million daily for UBS, with his contributions surpassing $100 million in 2009 alone. UBS executives, content with the windfall, enticed Hayes with substantial year-end bonuses.
Yet, Citibank recognized Hayes’s financial prowess, prompting a lucrative offer backed by a $3-million signing bonus after UBS failed to fulfill its bonus commitments. Hayes found himself welcomed by Chris Cecere, his new boss at Citibank, who eagerly facilitated his Libor manipulation endeavors. Additionally, Citibank CEO Brian McCappin leveraged his influence to garner cooperation from other banks on Hayes’s behalf.
The Spider Network
After Hayes’s Departure from UBS, Observers Note Unusual Libor Activity
As we navigate this part of Hayes’s journey, it’s crucial to consider his personality, shaped by a lifelong struggle with forging connections. This challenge persisted into his adulthood, exacerbated by the overtly macho culture prevailing in banking institutions, where profanity-laden conversations and offensive nicknames were the norm.
Hayes attempted to assimilate into this aggressive environment, adopting similar behaviors like hurling obscenities when frustrated. However, his intense demeanor alienated his colleagues, who perceived his outbursts as excessive.
Unbeknownst to his coworkers, Hayes grappled with an undiagnosed case of Asperger’s syndrome, contributing significantly to his social awkwardness. Thus, when Hayes departed for Citibank in 2009, many at UBS breathed a sigh of relief, except for his boss, Mike Pieri, who harbored feelings of betrayal and sought retribution.
Pieri’s opportunity for vengeance arose in the aftermath of the 2008 financial crisis, as public scrutiny intensified, particularly towards wealthy bankers. Observers, including Wall Street Journal reporter Carrick Mollenkamp, began noticing irregularities in Libor amidst the crisis’s aftermath. Despite widespread financial turmoil, Libor remained unaffected, prompting investigations by entities like the US Commodity Futures Trading Commission, the Justice Department, and Britain’s Serious Fraud Office.
In March 2009, these agencies launched formal inquiries into numerous banks, including UBS, to which Pieri responded.
The Spider Network
Tom Hayes: A Scapegoat in a Corrupt and Dysfunctional Banking System
The reality is that adjusting Libor rates for personal gain required extensive cooperation and coordination. While Tom Hayes may have presented challenges in his interpersonal interactions, the scandal stemmed from a financial system that incentivized brokers and traders to prioritize profit at any cost.
Despite this systemic issue, when judgment was rendered, Hayes bore the sole brunt of conviction, receiving a harsh sentence of 14 years in prison. The weight of this verdict left Sarah Tighe, his partner, in tears, and though an appeal is pending, she and their son face the absence of a husband and father.
Sadly, animosity towards Hayes led many to deflect blame onto him during the trial, painting him as a villain while absolving themselves of responsibility. Six other brokers, including Hayes’s longtime associate Darryl Read, faced trial in England but were acquitted, each placing the blame squarely on Hayes.
Meanwhile, at the University of Southampton, efforts to rectify the broken system are underway. Alex Stenfors, a former trader dismissed from Merrill Lynch due to involvement in the Libor manipulation, now teaches future traders. Viewing himself as a product of a morally bankrupt system, Stenfors pursued a PhD at the University of London, focusing on the truth behind the Libor scandal.
His class, “Risk Takers, Rogue Traders, and Rotten Apples,” delves into the sociological underpinnings of the unethical financial landscape. Despite laying bare the grim realities of high finance, Stenfors finds aspiring traders still drawn to the allure of quick riches in this morally ambiguous domain.
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