Investigation: Did UBS Trader Manage The Largest Financial Conspiracy In History

Translator's note: In our blog on Geektimes, we talk about working in the stock market, describe how various technologies influence it, and also analyze situations that help to better understand the structure of the finance industry. Today we bring to your attention the first part of the adapted translation of the Bloomberg LongRead about the story of Tom Hayes, a former UBS bank trader, the lucky “Rain Man” stock market, who was in the center of the scandal and got a 14-year prison term for manipulating the LIBOR rate. Important : the material is quite voluminous, so it will take some time to read it.



In a deserted trading room in the building of the Tokyo branch of UBS Bank, Tom Hayes sat staring at one of the eight monitors in front of him. A wrinkled collar, a pale tired face and hair, disheveled by the habit of pulling them while thinking - the British trader was more disheveled than usual. On the calendar was September 15, 2008, and, as he recalled later, everything looked like it was the end of the world.

At dawn, Hayes woke up a call from his boss, who asked him to immediately appear in the office. The New York financial conglomerate Lehman Brothers was close to bankruptcy. Sitting at his desk, Hayes watched the world learn about this news and gradually panic. At such moments, Hayes plunged into a semi-unconscious state, quickly processing the flow of incoming information in his head and thinking about how best to get out of this situation.

Hayes was known in UBS as a human phenomenon: he was one of the best in derivatives trading. All year, the financial crisis played into his hands. The confusion allowed him to buy securities at a low price from those who were desperate to leave the game, and sell them at a high price to those unfortunate people who were forced to continue trading. While most dealers in fear quit their activities, Hayes continued to trade with his never-ending desire for risk. He was then 28 years old, and that year he earned more than $ 70 million.



Cover of Bloomberg Businessweek, September 21-27, 2015

Now all his money was in jeopardy. Heys not only had to leave every deal made with Lehman Brothers: shortly before the incident, he had put a large sum of money so that interest rates would remain stable in the coming days. Bankruptcy of the fourth largest US investment bank would lead to a sharp jump in these rates, which in themselves were only an indicator of risk. Studying different types of bets on your trade book [eng. tradebook - a laptop with special hardware needed for electronic commerce], Hayes highlighted one of them - the London interbank bid rate [eng. London Interbank Offered Rate], or LIBOR. It is the benchmark rate on which securities around the world depend on a total value of $ 350 trillion. For traders like Hayes,

LIBOR was established by a self-selected and self-regulatory committee, which includes representatives of the largest banks in the world. The rate indicated the amount of loans that these banks provided to each other. Each morning, each of the banks included in this committee gave its assessment of this indicator. After that, the average value of these estimates was calculated, and at noon the final bid value was published. This process was repeated for each individual currency. When Hayes worked as a junior trader in London, he managed to meet several of the sixteen people who were responsible for the daily publication of the interest rate in yen on behalf of his bank. Then Hayes realized that these people often relied on inter-dealer brokers - convincing intermediaries who took part in each transaction, then to transmit information about

Hayes saw what others did not see, because he was special. Hayes' close connection with numbers, his cool-headed attitude to risk and strange habits were not the consequence of his work: all this is a sign that he was not like everyone else from birth. Hayes was only diagnosed with Asperger Syndrome in 2015 at the age of 35, and his colleagues, many of whom were experienced exchange players and graduates of prestigious educational institutions, often recalled that Hayes was very different from them. They called him "Rain Man."

Most traders looked down on brokers as second-rate people. But Hayes perfectly understood their significance and paid them to lie, as he did.

By the time the London market opened, the Lehman Brothers bankruptcy had already become official news. Hayes by then managed to send a message to one of his brokers in the UK, indicating in which direction LIBOR should move. “Buddy, knock down the bet,” he wrote, omitting the courtesies. “How much does it make?” The broker sent him a confirmation and after a few hours worked according to the already proven scheme. When one of the banks determining the LIBOR rating asked for the broker's opinion, he reported incredible, terrible news that the rate was likely to fall. LIBOR was often called "the most important indicator in the world": in fact, this rate depended on the opinions of people who, depending on their mood, were indifferent, optimistic or scared. Later that evening, when Hayes checked the LIBOR value, he, fortunately, discovered

However, Hayes still did not consider himself completely safe. Over the next three days, he almost did not leave the office and slept for three hours a day. While the market fluctuated, the balance of his account managed to change from $ 20 million in losses to 8 million in net profit. In the midst of all this mess, LIBOR was the only indicator that Hayes could at least somehow control. He used all his connections, offering his brokers an extra fee for help and assistance in working with banks around the world. By Thursday, September 18, Hayes was exhausted. It was the very day for which he had been working this way all week. If LIBOR then jumped, all his efforts would be in vain. The LIBOR movement takes place in small steps, which are usually called base points. Each of them is a hundredth of a percent,

After the ruin of Lehman Brothers, Hayes for the hundredth time dialed the number of one of his most trusted brokers in London. “I need the rate to remain minimal,” Hayes wrote. “Crying, say, fifty, one hundred thousand, no matter. How much will you ask, okay? ”

“Good,” the broker replied.

“I am the man of the word,” said Hayes.

“I know, don't worry. You can rely on me, ”the broker assured him.

At noon on the same day that LIBOR rates were published in London, Hayes was still in his office. The yen rate fell by one basis point, while rates in other currencies continued to rise. The crisis bypassed Hayes side. Using his connections, he single-handedly managed to fine-tune the entire global financial infrastructure. He took off his headphones and headed home. And this man was sleeping under a blanket with superheroes whom he had been hiding since he was eight years old.

Thomas William Alexander Hayes has always been an outsider. In the 1980s, he grew up in the urban area of ​​Hammersmith in West London and was a very smart child, but he constantly had difficulty communicating with other children. His parents divorced while he was still in elementary school. When his mother got married again, he moved to the prosperous “green” town of Winchester. Hayes retained a London accent, and on weekends he went to the capital to watch the games of the Queens Park Rangers football team, the eternal outsiders of the league.

Most of the British boys were avid football fans, but Hayes' interest was more like an obsession. The presence of obsessions is one of the symptoms of Asperger Syndrome along with communication problems, a tendency to stress, and a preference for numbers over words. Because of this, children in Winchester often scoffed at him. Hayes continued to remain alienated at the next stage of education at the University of Nottingham. When his peers were leaving for the summer holidays, he washed and dragged dishes for 2 pounds and 70 pence per hour to pay for his studies.

Trying to find a better paying job, Hayes received an internship at the UBS office in London. After graduating from the university in 2001, he got a job at Royal Bank of Scotland (RBS) and worked as an intern in the interest rate derivatives department. Because he made tea for others and took away someone else's clothes from dry cleaning, traders allowed him to ask them twenty minutes a day about everything that was interesting to him. This was a revelation to Hayes. Unlike social interactions incomprehensible to him and hidden motives in communication that he had to face in everyday life, the formula for success in financial business was simple for him: make money, and the rest will form itself. This formula became the main rule for Hayes, and he began to eagerly read about markets, options pricing models,



June 20, 2013. Tom Hayes leaves Westminster Court Building

In the cheeky and hedonistic environment of money markets, a clumsy twenty-one-year-old man stood out from his entourage. Occasionally he would join other bankers when they had parties. He also loved hot chocolate, for which he was nicknamed “Chocolate Tommy”, and when Hayes walked around the trading floor, his colleagues shouted quotes from the movie “Rain Man”, for example: “Quantas planes never fall.” He did not understand the jokes, giving them too much importance. A particularly popular mockery was his baby blanket with superheroes. Hayes believed that his bedding regularly performs its function, and did not see the point of buying a new one.

Not all financiers were so arrogant. Hayes made a few friends, and he also found that his method of writing messages extremely fast and placing trades made him a favorite among brokers who were not interested in what kind of education a trader had if he knew how to make deals. As a result, Hayes stopped paying attention to all ridicule, since his obsession, which prevented him from communicating with people, turned into superpower at the moments when he connected to his trading terminal. Despite the ridicule of others, Hayes still managed to find his place in life. He got up early, worked 12 hours a day, and rarely stayed awake after ten in the evening. Often, Hayes got up in the middle of the night in order to check the status of his trading positions.

In particular, Hayes took part in trading interest rate swaps. Swaps, originally conceived as a means of protecting a company from interest rate fluctuations, were now bought and sold by professional traders from banks and hedge funds. They also became a new type of securities, on the basis of which it was possible to bet. The swap market has grown at an incredible rate. In 2000, the volume of transactions using this financial instrument was estimated at $ 50 trillion. In 2010, this figure rose to 500 trillion. For Hayes, complex calculations and constant mental stress were not difficult, and he realized that he had an even more unique ability: he easily took risks. While other young traders sought to get guaranteed profits and quickly reduce losses, Hayes successfully conducted his operations, despite sharp fluctuations in the market. At first, his income was unstable, but his superiors even then saw him as a huge talent. In 2004, he was recruited by a smaller organization, Royal Bank of Canada, where Hayes could have a higher position. He had at his disposal a separate trading portfolio oriented to the yen derivatives market.

Traders of the largest organizations immediately noticed that the modest RBC bank began to take part in major transactions. It may be difficult for Hayes to enter into a relationship with colleagues, but when he saw the complex matrix of derivatives in yen, he easily understood its meaning. “Understanding the situation, identifying weaknesses in the market structure, finding new opportunities and using them is similar to solving equations,” Hayes later said. “You either make money or lose it.” Everything is extremely simple. ”

In the summer of 2006, Hayes again changed his job, moving to UBS. RBS, RBC, UBS - the name of the company did not matter to Hayes, as long as he had a telephone, several monitors and a bank account, which allowed him to take a certain risk. He later received a major promotion and was sent to Tokyo. Shortly after this event, a strange young man who drank cocoa and covered himself with a baby blanket, according to many, turned into an aggressive and dangerous trader.

In poker, players are divided into two types: tyhoni, who expect good cards to come to them, then make big bets and hope to make money on it, and daredevils who cannot but play in every hand, while annoying their rivals and forcing to pass players with weak nerves. Hayes, no doubt, could be attributed to the second type. His main methods were continuous trading, collecting fragmentary information from various sources, increasing the commission on the position of a market maker, and creating the image of a large player willing to take risks.

Hayes moved to Japan at the very moment when the government for the first time in a long time decided to raise interest rates, thereby activating a market of several trillion dollars, which until that time was at rest. Most of the securities he traded were somehow related to LIBOR. LIBOR rates are published for all major currencies of the world and for various periods - from several hours to 12 months. In any transaction, the LIBOR rate was the most important indicator determining the amount of profit or loss. Hayes understood that the art of trading lies in the ability to predict the future based on incomplete and continuously updated information. No one knew what the size of the LIBOR bet would be at every next moment. Hayes set himself the goal of taking control of the chaos surrounding him and finding out everything that was not clear to him. “I saw LIBOR even in a dream,” Hayes said a few years later. - This bet was everything to me. She was the tool on which all my trading activities were based. I was just crazy about her. "

Hayes loved his job, but when something went against his plans, he also passionately hated it. On the fifth floor of UBS headquarters in Tokyo, he angrily watched what was happening on his monitors. In the yard was October 2006. Hayes worked at the bank for only a few weeks, and already managed to wallow in problems: he was losing a lot of money at short-term interest rates. LIBOR in yen refused to move in the right direction, and this angered Hayes even more.

If the world of finance over the past quarter century has completely changed with the introduction of new technologies, then LIBOR remained in the same state. Every day, London banks reported to the British Bankers Association. British Bankers' Association, BBA] about how much money they can lose if they invest in different currencies and for a different term: there are 150 such combinations in total. In each of them, the four upper and lower grades are removed, and the average of the remaining grades is published as LIBOR for the current day. That, in fact, is all. LIBOR influenced a variety of indicators - from the size of loans for American students to the cost of futures for Kazakh gas - and at the same time its value was formed by a group of people who are constantly distracted and make inaccurate forecasts.

Later that day in Tokyo, Hayes talked about his plight to one of the London brokers he trusted. This broker invited him to speak with his colleague, who was responsible for sending out daily letters with an estimated LIBOR score to a small group of bankers who were calculating the actual LIBOR value. This newsletter played a large role, despite the fact that it was conducted informally (the British court urged not to disclose the names of these two people, since they are currently being tried). The information in the letters should have been objective, but the broker said that at the request of Hayes, he could reduce the indicators mentioned in the letters. There is a possibility that the laziest of those who set the rate are less familiar with the foreign exchange market and simply believe what the letter says.

And then Hayes dawned. He already knew that banks always slightly adjust their final LIBOR calculations for their own benefit, and yet the system did not allow external pressure to be exerted: no organization can greatly influence the final rate when 15 other banks make one and also. But Hayes managed to work in several banks, and he had connections with so many brokers that he could affect several people involved in calculating the rate. He could twist the ropes from them until they suspected anything. In addition, Hayes was in very good relations with his brokers, which few could boast of. As a graduate of a regular English school with a Cockney accent, he was close to them in spirit.



Tom Hayes makes his last bad bet

The broker did everything exactly as Hayes asked him to. Later that month, Hayes contacted him again and offered a good reward. This time, Hayes wanted the six-month LIBOR in yen to begin to grow. He already had about 400 billion yen ($ 3.3 billion) in his hands, and each increase of one hundredth of a percent (one basis point) was equivalent to receiving several hundred thousand dollars. Hayes pestered his brokers with messages and phone calls, and within a few days the rate increased by almost three basis points. Hayes wrote a message to his boss, Mike Pieri, to share his joy that his plan worked - at first emotionally, and then, when the real amount of the gain became known, it was also material. Later that week, Hayes wrote to his broker: "I’m paying any money, just tell me the amount."

Hayes discovered that LIBOR betting was not only easy to manipulate, but also not so expensive: a London broker forced his colleague to cooperate by treating him with a free portion of curry sauce. Hayes began calling up with familiar traders from other banks and asking them to influence the rate. By the spring of 2007, RBS and JPMorgan Chase traders were already in his network of contacts. One of his assistants, Peter O'Leary, an intern at the London branch of HSBC, was his half-brother.

In April, after a friendly correspondence, Hayes asked him: “Do you know the guy from his work who sets LIBOR in yen? He trades yen and Scandinavian currencies. If I'm not mistaken, his name is Chris Darcy. ”

“Of course I know,” replied O'Leary. “In my opinion, after all, his name is Chris Porter. But everyone calls him Darcy, because he speaks like a major. ”

Hayes asked O'Leary to persuade his colleague to lower the three-month LIBOR. Each base point, he estimated, was worth a million dollars. In telephone conversations, Hayes explained to his stepbrother how best to approach the problem: he suggested sitting with this man over a glass of beer and rubbing confidence in him. O'Leary was reluctant. Moreover, the person who set the LIBOR value worked on another floor and in another department. Hayes insisted, and after a while O'Leary already thanked a colleague for his help. Chocolate Tommy did a great job. Hayes later apologizes to O'Leary for dragging him into this matter, and never again asked him for a favor, somehow related to LIBOR.

At UBS, Hayes completed all tasks on time. At regular morning meetings, he talked about his current situation and explained to his colleagues and management how he was going to influence the rate movement. That summer, Hayes signed an agreement with one of his inter-dealer brokers. On top of the fixed monthly fee UBS paid to brokers for their services, Hayes offered an additional £ 15,000 per month for helping offset the benchmark rate, five of which were personally handed over to the broker responsible for sending out LIBOR forecasts.

A UBS spokeswoman later said: “It is foolish to assume that it was Hayes who came up with the idea of ​​manipulating the LIBOR bet on HBS. Neither Hayes nor UBS were the inventors of the bid management method and were not the first to put it into practice. The responsibility for the incident lies with the entire financial industry, including many banks and brokers, acting both individually and together for a long time. ”

August 3rd. Former trader Tom Hayes and his wife Sara arrive at Royal Southwark Court in London

Hayes never thought about what he was able to control. He could not predict the future, but he could set the right direction for him. He later found out that his ability to offset this rate brought him only about ten percent of all his income, but even in such a fierce business this was enough to get ahead of his rivals and become a UBS star who earned $ 50 million for the bank. In September of the same year, in one of Tokyo's swimming pools, he met with corporate lawyer Sarah Tai, who, like Hayes, grew up in the UK. Some time later, Ty was already listening to Hayes's incoherent speech about how he made money on the collapse of the British bank Northern Rock, and after this meeting she wanted to see him again. She became strongly attached to Hayes and considered his personality traits to be cute, and his determination to be attractive. Unlike the chaos that reigned in his work, Hayes found harmony in his personal life.

This article is based on more than 200 interviews with traders, brokers, regulatory authorities, lawyers, company executives, as well as thousands of documents and emails presented at the final trial.

On a cold April morning in 2008, Vince McGonagle closed at his office at the Commodity Futures Trading Commission. Commodity Futures Trading Commission, CFTC], located in Washington, and began to read the morning newspapers. A short, sinewy, criminal-like McGonagle had been involved in law enforcement at the CFTC for 12 years, during which time his red hair turned slightly gray. At that time, he held the position of senior manager. The headline on the front page of the Wall Street Journal read: "Bankers express doubt about key rates in the wake of the crisis."

The article began as follows: “One of the most important indicators, indicating the financial situation in the world, can deceive us. The development of the situation, affecting borrowers around the world - from Russian oil companies to homeowners from Detroit - makes bankers and traders fear that the London interbank exchange rate, known as LIBOR, may turn out to be unreliable. ”

From the history it follows that banks deliberately underestimated the assessment of interest on loans so that "the market does not know how much they need money." In early 2007, even before the financial sector began to show signs of weakness, only a few of McGonagle's entourage took LIBOR into account. This benchmark rate was an important but predictable part of the financial system, which almost imperceptibly changed from one week to another, or from bank to bank. Today, with LIBOR, many can determine the level of tension in the markets.

At the time of freezing loans, LIBOR indicators for all types of currencies soared. Banks with the highest rates were noted as having difficulty. Everyone was involved in this game: the leadership urged those who determined LIBOR, and the latter tried to predict what size their rivals would publish so that their rate was slightly lower. The low intensity of trading in the cash market did not make it possible to verify the reliability of the published information. According to analysts, the published indicators were 40 basis points below the mark at which they should have been. The reason for this decline was not personal gain: the whole point was survival. Leading bankers and investors tried to figure out who, following Bear Stearns, could sink into the abyss of bankruptcy.

McGonagle did not know much about LIBOR, but one of the articles of the Wall Street Journal drew his attention to this bet. In 1996, shortly after he got a job at CFTC, McGonagle joined the legal team, which was commissioned to study the activities of Texas-based energy company Dynegy. According to rumors, the company provided false information about the volume of natural gas sold and bought by it in order to affect the reference rates for this product. The CFTC and other institutions have fined Dynegy and twenty other companies, including Enron, with a fine of more than $ 300 million.

In the spring of 2008, there were no clear signs that traders manipulated the LIBOR rate in order to increase their income, but McGonagle was confused by too many coincidences: the value of the reference rate depends on the honesty of the traders, and those, in turn, are interested in shifting it. Unlike natural gas bets, which were set up by private companies, LIBOR was regulated by the British Bankers Association, a lobbying group from London that has a reputation as an inspiration for the financial industry. In both cases, the body responsible for regulating the rate did not have the authority to impose fines, so little prevented companies from resorting to fraud.

As a true Catholic, McGonagle earned a law degree from Pepperdine University, a Christian school in California, where he took seriously the principles of life, which included “having a goal, serving people, and developing leadership.” While his peers held high-paying positions in law firms, where they defended the interests of companies and individuals accused of corruption, McGonagle moved up the career ladder, initiating legal proceedings against them.

He gathered his closest colleagues that week to discuss whether they should investigate the LIBOR case. The biggest obstacle to starting an investigation was jurisdiction issues. In 1975, when the CFTC was founded, the commission issued a directive that allowed it to regulate the futures and options market, which was dominated by farmers and corporations, and affect the value of goods. In subsequent years, the derivatives market soared to several million dollars, while the size of the commission and the volume of resources grew slightly.

The regulatory body had great authority and could intervene in the activities of financial markets, but complex financial matters automatically fell under the competence of the Securities and Exchange Commission [eng. Securities and Exchange Commission, SEC] or the US Federal Reserve. Harvey Pitt, the chairman of SEC in 2001-2002, known for his rude manners, somehow raised the question of who exactly controls this or that product together with his colleague from CFTC. Having lost patience, he shouted: “Everything is simple! Everything related to securities or financial instruments belongs to us. All that has four legs belongs to you. ” This view of many things annoyed. In the midst of the financial crisis, CFTC had the opportunity to expand its operations.

It was also necessary to take into account the actions of the British authorities: after all, it was a question of the London interbank offer rate. McGonagle contacted his colleagues at the Financial Regulatory and Supervisory Authority. Financial Services Authority, FSA] in the UK to learn about the progress of the LIBOR manipulation investigation. Representatives of the regulatory body were not interested in this and expressed their disapproval in connection with the invasion of their territory. (FSA declined to comment on this situation).

This did not stop McGonagle, and he ordered his team to continue collecting information. Over the past few weeks, its employees have found that LIBOR was the benchmark for several billion dollar futures rates traded on the Chicago Board of Trade. Chicago Mercantile Exchange, CME]. The CME fell under CFTC competency: this is exactly what McGonagle needed. That summer, the CFTC contacted six banks and requested information on how LIBOR is actually formed. This was the first cautious step, the result of which was the largest case in the history of this organization.

To be continued...