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In 2012, the global markets were rocked by revelations about a scam so massive it was almost hard to comprehend: the LIBOR ( London Interbank Offered Rate) scandal. Like the U.S. federal funds rate, LIBOR is a key benchmark short-term interest rate upon which other financial instruments are based. While the target for the U.S. rate is set by the Fed, LIBOR is the average of self-reported interest rates major banks charge one another to borrow money. By colluding to manipulate LIBOR, the banks’ traders raked in a fortune by betting on assets influenced by the interest rate.
David Enrich followed the story while he was working for The Wall Street Journal and got close to the central figure in the scandal — star derivatives trader Tom Hayes. In the book, The Spider Network: The Wild Story of a Math Genius, a Gang of Backstabbing Bankers, and One of the Greatest Scams in Financial History, Enrich, now with The New York Times, shares the tale of this brazen scam on the Knowledge@Wharton show on Sirius XM channel 111.
An edited version of the interview appears below.
Knowledge@Wharton: David, that’s a phenomenal book title. It covers about everything there. This book started with a series of articles you did for The Wall Street Journal several years ago.
David Enrich: That’s right. The mastermind of the LIBOR scandal was a guy named Tom Hayes, a mildly autistic mathematician who was a star trader at some of the world’s biggest banks. He was accused, at the end of 2012, of being the central figure in this scandal by both American and British prosecutors. Right around that time, I started to get to know Tom Hayes really well personally. I first interviewed him for an article that I was doing in The Wall Street Journal. Over the ensuing months and years, I’ve spent an enormous amount of time talking on the phone with him, having coffee with him, drinking beers with him. I got to know him really well, his wife really well, and the rest of his family as well. And that gave me this interesting glimpse into the world in which Hayes was operating.
Knowledge@Wharton: Was it surprising to you that you had such free access to the guy who essentially started this whole scam?
Enrich: That’s what I thought at first. I was stunned by the serendipity of the thing. This all got started because Hayes was the central person who had been accused by prosecutors. Not a whole lot was known about him, so I started talking to some of his friends and former business school classmates. One of them turned out to be pretty helpful and offered to pass on my phone number to him, with the caveat that, obviously, this guy is facing criminal charges — the last thing he’s going to do is call a reporter to talk to him.
I was in the London bureau of the Journal at the time, and I was sitting at home one evening, and my iPhone buzzed with a text message from a number I didn’t recognize. And it said, “This goes much, much higher than me. Not even the Justice Department knows the full story. I’m willing to talk to you, but I need to make sure I can trust you.” It was Tom Hayes.
“The mastermind of the LIBOR scandal was a guy named Tom Hayes, a mildly autistic mathematician.”
He offered to meet me the following morning at a really busy train station in London outside a Burger King. He said he’d be wearing a brown leather jacket. And I’m thinking to myself that I’m stumbling into All The President’s Men or something.
Knowledge@Wharton: I was just going to say Watergate all over again.
Enrich: I’m thinking I’m Bob Woodward here. He ended up canceling the next morning because his wife had somehow seen his text messages to me, and his wife was a lawyer and thought this was a really bad idea. But the most fascinating thing to me is that what I’d thought about this at the outset was, “I cannot believe this criminal mastermind is naïve enough to be talking to me.” It turned out part of the reason he was so eager to talk to me is because the story was a lot more complicated than I had originally thought.
It wasn’t as clear-cut and black-and-white as prosecutors and regulators were portraying it, which was that he was the bad apple or the evil mastermind or evil genius who had orchestrated this scheme to rip off all these innocent people. It was much more a story about a financial system run amok, and how the overall banking system encouraged, more or less, this type of behavior not just from Hayes but from a really wide range of people, including a lot of his superiors who ended up not suffering particularly severe consequences from that.
Knowledge@Wharton: When we talk about the LIBOR, … it’s unique in that it’s reliant on so many banks around the world to work together in setting it.
Enrich: That’s right. Here’s a quick primer on LIBOR for the people who focused on this briefly a few years ago and promptly forget about it — which I think was probably the vast majority of the human population. It’s the London Interbank Offered Rate. Every day around lunchtime in London, some of the worlds biggest banks, including a bunch of American ones, estimate how much it would cost them, theoretically, to borrow money from another bank. They then take that number, and zip it over in an email to the British Bankers Association, which is basically a lobbying group in London.
The BBA tosses out the high and low estimates, and then averages the rest. Then — presto! — that’s LIBOR. And LIBOR is often described as the world’s most important number because it is the basis for interest rates on huge quantities of debt all over the world — a lot of variable-rate mortgages, auto loans, credit cards, student loans, things like that. But the bigger issue is that when companies borrow money, the interest rate they pay is often based on LIBOR.
“My iPhone buzzed with a text message. … And it said ‘This goes much, much higher than me.’”
And if towns or cities or pension funds or university endowments are looking to protect themselves against swings in things like interest rates, they often use instruments that are tied to LIBOR. So if LIBOR is being skewed by banks, it has the potential to ripple through the financial system in a way that almost no other type of manipulation has the power to do.
Knowledge@Wharton: How did Tom Hayes, with his mathematical background, fit into this puzzle? Was it because he was able to gauge what these markets were going to do, and what the impact was going to be so that potentially the banks could profit?
Enrich: Well, yes. He was really building on the important work done by some of his predecessors. Because starting about 20 years ago, when LIBOR became increasingly prevalent in the financial system, a lot of traders at banks realized — and these are guys, by the way, that are transacting in huge volumes of derivatives that are based on LIBOR. So they stand to gain or lose a lot of money based on very small movements in LIBOR up or down, on a daily basis.
These guys realized that no one’s paying any attention to how LIBOR’s set. No one’s supervising the process. They can place a phone call or send an email to the relatively low-ranking person elsewhere in their bank or in another bank and say, “Hey, can you do me a favor, can you today move LIBOR up by a few hundredths of a percentage point?” Generally, the answer is yes.
Hayes’ genius realization was that he could take things a step further. Instead of just quietly pestering people elsewhere in his bank, he also went to people at other banks — his competitors. He used brokers to reach out to even more people. He basically took what was a long-standing industry practice to a new, higher, more ambitious, more creative level. In some ways, he just pushed the envelope a little bit further and a little more aggressively than anyone else had before him.
And that’s in keeping with the financial industry’s long-time mantra, which is, the way you make money as a trader is, first, you identify inefficiencies in the market: weaknesses, loopholes, things like that. Then you find ways to exploit those loopholes and those weaknesses and those inefficiencies. That can be in the form of having better information than your competitors. It can be in the form of having dumber clients than your competitors, or faster trading systems, or better technology — or the ability to subtly nudge something that you’re trading on. That’s what Hayes did with great pleasure, and great applause from his superiors.
“These guys realized that no one’s paying any attention to how LIBOR’s set.”
Knowledge@Wharton: But it seems like at some point he had hesitation, and he understood what was going on and the impact that manipulation was having around the world.
Enrich: I’m not sure he ever realized what the impact it was having. He did, at times though, have real qualms about some of what he was doing. This was something that he told me over and over again as I was first getting to know him — that he did not think that most of what he was doing was wrong because he saw everyone else doing it, and it was so embedded in the industry’s DNA. But he did acknowledge that there were a number of times where they pushed the envelope especially far, to the point where he felt like he was colluding with his competitors.
He felt like he was doing something that was really just false and misleading. And he took solace in the fact that the bosses knew about and generally approved of what he was doing. But as most of us learn from a very early age, just because everyone is doing something bad doesn’t mean it’s OK for you to do something bad yourself. That’s a message that was really lost on an entire generation of people in the financial industry, I think.
Knowledge@Wharton: I want to ask about the governments involved in this. What roles did they have? What did they see, and what did they fail to see, that allowed this to play out the way it did?
Enrich: The government’s role in this is really important. At a starting point, the basis for this scam was that no one was paying any attention to this really important instrument. That was a direct and immediate result of the fact that governments in both the U.S. and elsewhere, in the 1980s, 1990s and early 2000s deliberately took a totally hands-off approach to the banking industry. And at the time, there was a race under way between different financial centers — especially between New York and London — to see which could take the lightest touch to supervising the banks. The reason for that was they were competing with each other to land jobs and investments and things like that. So there was a really aggressive back-and-forth between these cities trying to deregulate as quickly as possible.
Then, as LIBOR manipulation took hold, there were, over and over again, warnings given to central banks on both sides of the Atlantic, saying: “This is exactly what’s happening. Please intervene. Please help. Please stop this from spreading.” And those requests, which came from the banks themselves, fell on completely deaf ears.
“It was staggering seeing just the kind of depths of depravity that some of these bankers and traders demonstrated.”
Knowledge@Wharton: To a degree, that’s not so surprising, given the way government is run.
Enrich: They knew; they just didn’t care. They didn’t want to do anything about it because LIBOR is so deeply embedded in the financial system, and acknowledging a problem with it was potentially very destabilizing. In fairness to governments, there was a lot of other stuff going on at the time. This was happening during the height of the financial crisis. The banking system seemed to be on the precipice of disaster. That context is important, because there are only a certain number of hours in every day, and you have to triage in situations like that. LIBOR didn’t seem like an existential issue. Something untoward was clearly going on, but was it a priority? Apparently not.
I think a bigger thing was that there generally is an attitude among regulators and prosecutors to take the path of least resistance, and do the thing that is most likely to quickly yield a positive result. That’s human nature, to an extent. But it generates a very unambitious, very uncreative way of policing these very complicated sectors.
So with LIBOR, what you saw is that initially, they just didn’t want to deal with it at all. The CFDC [Commodity Futures Trading Commission] in Washington, which was — especially at the time — an obscure, very underfunded government agency, was the only institution in the world that expressed any interest in doing this. For years, they were on this lonely mission — a lonely, very slow mission — trying to persuade banks to cooperate and, frankly, trying to persuade other government agencies elsewhere in the world to get out of their way and let them do their job. Were it not for their stubbornness on this, a lot of this stuff never would have come to light.
Knowledge@Wharton: Nobody has been doing any jail time because of this. That’s a disturbing pattern on a lot of fronts, because we’ve seen a similar result here in the U.S. after the financial crisis, and many of the other banking-related scandals that have occurred.
Enrich: You know what’s interesting? As part of the publicity for this book, I’ve done a tremendous amount of radio. And radio, as you know, can be very deeply polarized on both the right and the left in this country. So just as preparation for a lot of these interviews, I did some quick research: Is this a Trump radio station or Clinton or Bernie Sanders radio station? And I was expecting different slanted questions. You know what? Everyone’s asked the exact same thing, which is, ‘Why do the financial elites keep getting away with murder?’ It seems to be this really unifying theme across the country right now. It just makes people’s blood boil. There was so much public pressure on politicians and prosecutors after the crisis to find some individuals to hold to account for the massive harm that the banking industry caused to the country and to the economy, really to the world.
“The thing that would scare some of these bank CEOs is … the prospect of being perp-walked in front of TV cameras in handcuffs.”
And prosecutors, instead of going after people at the top of the food chain — the CEOs and business leaders who are responsible for setting the culture at their institution, responsible for in many cases the practices of their institutions — instead of going after those guys, they uniformly went after a small group of relatively low-level people. Don’t get me wrong, Hayes in particular did things that were wrong, he knew they were wrong, or at least should have known they were wrong, and deserves to be punished. But what is crazy to me is that Tom Hayes is currently serving an 11-year sentence in a maximum-security prison. And as far as I can tell, he is the only banker currently in jail for crimes committed during the financial crisis.
… One of the things I found interesting researching this book is that there are a lot of people out there, experts in law enforcement and criminal justice, who really think that the situation we’re now in is a direct result of a lack of ambition and creativity and guts among prosecutors in some of the biggest countries in the world, including the U.S. The thing is, prosecutors do not like to lose cases, so they’ve taken, in general, a very conservative approach to what cases they’re going to bring because they don’t want to gamble on losing. They’ve built up these very impressive win/loss records as prosecutors. Some of them are undefeated. And they boast about that.
To me, that’s a really unhealthy sign, because the thing that would scare some of these bank CEOs is not losing some money or losing their jobs; it’s the prospect of being perp-walked in front of TV cameras in handcuffs, or the prospect of possibly losing your liberty in front of a jury of your peers. That is a terrifying thing. To me, the great missed opportunity of the financial crisis was that prosecutors didn’t do that a single time with a CEO or a top executive of any major financial institution. They might have lost those cases, but at least it would have struck some fear in the hearts of people. That’s just a tremendous missed opportunity, in my opinion.
Knowledge@Wharton: You got access to all kinds of data in the course of doing this book. Going through it, were there times where even you were surprised at the lengths that these bankers were able to go to?
Enrich: Yes, absolutely. I got access to basically an entire hard drive’s worth of evidence that prosecutors had collected — everything from emails and chat transcripts to recorded phone calls and personnel records for dozens of traders and brokers who were involved in this scandal. And one of the things that was really fun about this book, the goal was for it to read almost like fiction or like a thriller, not like a banking or finance book. So there’s a ton of personal stuff in here about what was motivating these people on an individual basis.
To me, it was staggering seeing just the kind of depths of depravity that some of these bankers and traders demonstrated, some of the completely amoral, unethical things they were doing. But at the same time, it was really interesting to see how, on the one hand, these guys would be having a phone conversation bantering with their colleagues about the prostitutes they were out with the night before, and the next moment, their phone rings at work and it’s their wife on the line, complaining that the guy screwed up the DVR and Law and Order didn’t record properly. It’s this combination of wild antics and then mundane normal life. It’s just a reminder that these are all human beings, and that these aren’t institutions committing crimes. These are individuals who commit crimes and individuals who are affected by their institutions’ cultures. It was really interesting for me as a journalist to see this all connected to human faces.
Knowledge@Wharton: I understand that you still stay in touch with Tom Hayes family. What have they said, or what has Tom said, about the fact that he’s the only guy in jail?
Enrich: He’s furious. Furious doesn’t even begin to describe it. He is in a deep, dark, angry depression, just raging at the world. His wife, Sarah, who is a lawyer by trade, is a little more emotionally balanced, I would say, than Tom. … It’s enraging for them. They’ve got a little boy, a little son, who is growing up at home without his dad. And it’s enormously painful and enormously difficult for them. Again, I’ve developed a lot of sympathy for them and their situation there. I do want to make clear that he is not an innocent victim here. He is someone who was participating, and he was not acting properly. He was acting illegally, and I think deserves to be punished. I just find it galling that he is alone in being punished.
“My concern is that as memories of these massive penalties fade … the pressure is going to return for banks to amp up their profits.”
Knowledge@Wharton: What we’ve seen since this story played out is that there doesn’t seem to be any concern in the banking industry that there are potential situations where people could actually go to jail. Obviously, Tom Hayes did in this case, but it appears they don’t feel like there’s any cause for fear or concern at this point.
Enrich: I’m not sure I agree with that, actually. I think the culture of the industry has actually changed quite a bit in the past few years, partly as a result of how severe and stiff the penalties have been that are imposed on the banks. The ultimate people who drive behavior at banks are actually the shareholders. And right now, the shareholders of banks are very worried about banks getting slapped with multibillion-dollar fines.
My concern is that as memories of these massive penalties fade and memories of the crisis fade, the pressure is going to return for banks to amp up their profits. As that becomes the priority among shareholders, it’s going to become the priority among senior executives. At that point, the cultural stuff goes out the window, and the No. 1 priority once again becomes just making as much money as quickly as you can.
And we’ve seen how that movie ends — it ends with envelope-pushing being the norm and being encouraged. It leads to people breaking the rules. It leads to normal people being hurt. And it leads to big scandals and crises that engulf the industry, and that’s not in anyone’s interest.
Knowledge@Wharton: You talk as well about the personalities involved in this, and the fact that Tom Hayes, out of all the people involved in this process, was leading one of the calmest lifestyles. Obviously, anyone who has seen The Wolf of Wall Street has a little bit of an idea about what that Wall Street lifestyle can be. And a lot of the other bankers and traders who were around Tom Hayes in this behaved something like that.
Enrich: This is part of the reason I love Hayes as a central character for this book — because he’s not your cookie-cutter banker out of central casting. This is a guy who is much happier going home after a day of work and having a bucket of fried chicken and an orange juice and watching Seinfeld reruns than he is going out to Michelin-starred restaurants or a swanky club. To me, his massive social awkwardness — the fact that he would go to a dinner party, and sit next to a stranger, and start talking to her very loudly about his dandruff problem — he had no idea how to behave in normal society.
That makes him slightly endearing as a character, I think, but it also kind of helped explain how he stumbled into this. He was just completely unable to pick up on any subtle cues or social boundaries that normally would help moderate someone’s behavior. That makes him the perfect guy to emerge at the center of a scandal like this, because he just has no filter and no ability to distinguish shades of gray.