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Afficher les exemplaires de cette édition ISBNTom 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 embarrassment to Britain. Serious Fraud Office chief David Green had pushed the rate-rigging investigations in London into overdrive, assigning sixty people on his staff to move the case through to an indictment phase. If Hayes was as important as the Americans said he was, could he be persuaded to cooperate with British prosecutors?
On that dreary morning, no one but Hayes knew exactly how much information he had to trade. Bankers, journalists, and lawyers alike feared and hoped that he would offer the names of others who had helped him rig the LIBOR rate. His naming of names could extend beyond the banks where he had worked to other financial institutions, including rivals and interbank brokers, where friends and colleagues worked. If so, that would be bad news indeed for many big banks, and not only those already embroiled in the controversy.
Potentially more explosive was his knowledge of higher-ups—possibly much higher—on the corporate ladder who were co-conspirators in the scheme to rig interest rates at UBS and Citigroup. He’d already hinted as much: Three days after his dismissal in September 2010, an angry Hayes (his firing had come just a few weeks before his wedding day) wrote a letter to a Citigroup human resources executive, ominous in its implications for higher executives. “My actions were entirely consistent with those of others at senior levels,” Hayes had written “[and] . . . senior management at [Citigroup Japan] were aware of my actions.”
· · ·
In less than a decade, the fortunes of Tom Hayes, derivatives whiz kid, had earned him millions in bonuses and the status of certifiable star in the world of finance. As this book goes to press, it isn’t clear whether he will land behind bars. His future almost certainly depends upon a different set of skills than those that made his fortune: With his trial expected to begin in January 2015 in London, its outcome hinges on his capacity for negotiating the British legal system and, possibly, the American justice system in the future.
To understand LIBOR, its workings and its crisis requires getting to know the other essential players in New York and Washington, in London and Tokyo. Though he may be the most visible villain in the drama, the story began well before Hayes. In the chapters that follow, you will learn about dozens of men and women on Wall Street and in the City of London. Together, they, like the balls on a billiard table, repeatedly collided, transforming their fortunes and careers and the lives of us, the unwitting investor, in a rigged game they knew was an open secret. The ricochet patterns that emerged are crucially important, as they have altered the global financial landscape.
CHAPTER 1
Is LIBOR a Lie?
In April 2008, Mark Whitehouse and Carrick Mollenkamp had almost given up bothering to go home to sleep. The schlep from the London bureau of the Wall Street Journal often didn’t seem worth it when they knew they’d have to turn around and come back again after just a few hours of rest. Instead, the two American reporters regularly camped at the bureau’s offices in central London, accommodating the time lapse that separated Greenwich mean time and the Journal’sNew York deadlines. The long evenings spent at the London office only accentuated the sense that the paper’s main offices on the other side of the Atlantic resembled a hungry beast, always ravenous for another batch of copy.
The night of April 14 promised to be another long one as they waited for their work to be digested.
Though Mollenkamp and Whitehouse had already filed their stories for the next day’s editions, their New York bosses, as usual, kept them waiting. The London bureau folks had to be at hand until the final edit was completed, usually around seven p.m. New York time. That meant midnight in London. But as the darkness fell over the British capital, the Americans abroad had time to mull over the story they were breaking and that, they hoped, would break big. They wondered and worried and dared to hope—this one could just be the sort most reporters come across once in a lifetime.
Nearing forty years old, Mollenkamp already had a solid track record. He had joined the Journal in 1997, rising swiftly to become one of its top reporters. During a several-year stint in Atlanta, he’d covered the Southeast and, in particular, Big Tobacco. Though he hadn’t been persuaded to give up cigarettes (he remained a devoted smoker), his reporting gained him a promotion to cover the banking world in London’s financial district.
In the banking crisis at hand, he believed he’d uncovered something important. He and Whitehouse were still thinking through what it could mean, what might follow. The subject—interest rate machinations in international markets—was complex and involved some deep financial history.
After all, the story had begun to unfold around the time he was a young boy.
· · ·
In 1969, another American in London had a brainstorm while bathing (in sixties Great Britain, showers were rare indeed). As one colleague remembered years later, “There is no historic plaque affixed to the door at No. 13 Pelham Crescent in London, yet it was in the bathtub at this house that Evan Galbraith is said to have invented the floating-rate note.”
A man comfortable on two continents, Evan G. Galbraith had moved back and forth between business and public service since the 1950s. He had gone to Yale (his contemporary William F. Buckley would be a lifelong friend) and graduated from Harvard Law School. He served on active duty in the U.S. Navy from 1953 to 1957, attached to the CIA. In 1960 and 1961 he was the confidential assistant to the U.S. secretary of commerce before moving on to the private sector, where he quickly became a high-level businessman. Having been a director of Morgan et Cie in Paris in the 1960s, he moved to London, where he worked for Dillon Read in the 1970s. He held positions on several corporate boards, including Groupe Lagardère in Paris, and he was later chairman of the board of the New York subsidiary of Louis Vuitton Moët Hennessy, the luxury goods giant.
“I’ve lived in Europe probably twice as much as any Foreign Service officer existing today,” he once said. “I’ve lived in Europe twenty years. I’ve lived in France now ten years. I’ve lived in England eleven years. I have had business transactions in thirty-five different countries, and I’m not rare. There are a lot of us out there.” Galbraith confided that there were many businessmen like himself who engaged in high-level negotiations and dealings; in his case, he would later shift streams again, becoming a diplomat (he served as U.S. ambassador to France during the Reagan years). Galbraith never expected that his fame in financial circles would be linked to the rate he dreamed up in the tub for U.S. dollars, but Institutional Investor magazine would later memorialize him as the father of the floating-rate note.
It came about during the Nixon administration, when Galbraith worked at Bankers Trust International, which was considered an innovator; that reputation would gain luster thanks to Galbraith. A year after his big idea, Galbraith found a way to put it to work. When the Italian state electric company, Enel, came to the market in 1970, Galbraith helped convince Guido Carli, governor of the Banca d’Italia, that the interest rate on $50 million in notes should be reset, at six-month intervals, at 0.75 percent over the interbank rate. (The year 1970 would be a notable one in the history of finance in another way too, as it also saw the creation of money market funds, created to offer investors better returns than bank savin...
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