London Calling in on the LIBOR scandal

Published by MAC on 2015-09-14
Source: Nostromo Research

Was Tom Hayes Running the Biggest Financial Conspiracy in History?

Or just taking the fall for one?

Liam Vaughan & Gavin Finch

14 September 2015
 
On a deserted trading floor, at the Tokyo headquarters of a Swiss bank, Tom Hayes sat rapt before a bank of eight computer screens. Collar askew, pale features pinched, blond hair mussed from a habit of pulling at it when he was deep in thought, the British trader was even more disheveled than usual. It was Sept. 15, 2008, and it looked, he would later recall, like the end of the world.

Hayes had been woken at dawn in his apartment by a call from his boss, telling him to get into the office immediately. In New York, Lehman Brothers was plunging into bankruptcy. At his desk, Hayes watched the world process the news and panic. Each market as it opened became a sea of flashing red as investors frantically dumped their holdings. In moments like this, Hayes entered an almost unconscious state, rapidly processing the tide of information before him and calculating the best escape route.

Hayes was a phenom at UBS, one of the best the bank had at trading derivatives. All year long, the financial crisis had been good for him. The chaos had let him buy cheaply from those desperate to get out, and sell high to the unlucky few who still needed to trade. While most dealers closed up shop in fear, Hayes, with his seemingly limitless appetite for risk, stayed in. He was 28 years old and he was up more than $70 million for the year.

Now that was under threat. Not only did Hayes have to extract himself from every deal he’d done with Lehman, but he’d made a series of enormous bets that in the coming days, interest rates would remain stable. The collapse of the fourth-largest investment bank in the U.S. would surely cause those rates, which were really just barometers of risk, to spike. As Hayes examined his tradebook, one rate mattered more than any other: the London interbank offered rate, or Libor, a benchmark that influenced $350 trillion of securities around the world. For traders like Hayes, this number was the Holy Grail. And two years earlier, he had discovered a way to rig it.

Libor was set by a self-selected, self-policing committee of the world’s largest banks. The rate measured how much it cost them to borrow from each other. Every morning, each bank submitted an estimate, an average was taken, and a number was published at midday. The process was repeated in different currencies. During his time as a junior trader in London, Hayes had gotten to know several of the 16 individuals responsible for making their bank’s daily submission for the Japanese yen. His stroke of genius was realizing that these men mostly relied on interdealer brokers, the fast-talking middlemen involved in every trade, for guidance on what to submit each day.

If Hayes could manipulate the system at the peak of the worst crisis in memory, there seemed to be no limit to what he could do next.
Hayes saw what no one else did because he was different. Hayes’s intimacy with numbers, his cold embrace of risk, and his manias were more than professional tics; they were signs that he’d been wired differently since birth. Hayes would not be officially diagnosed with Asperger’s syndrome until 2015, when he was 35, but his coworkers, many of them savvy operators from fancy schools, often reminded Hayes he wasn’t like them. They called him Rain Man. Most traders looked down on brokers as second-class citizens, too. Hayes recognized their worth. He’d been paying them to lie ever since he had.

By the time the market opened in London, Lehman’s death was official. Hayes instant-messaged one of his brokers in the U.K. capital to tell him what direction he wanted Libor to move. “Cash mate, really need it lower,” he typed, skipping any pleasantries. “What’s the score?” The broker sent his assurances, and, over the next few hours, followed a well-worn playbook. Whenever one of the Libor-setting banks called and asked his opinion on what the benchmark would do, the broker said—incredibly, given the calamitous news—that the rate was likely to fall. Libor was often called “the world’s most important number,” but this was how it was set: conversations among men who were, depending on the day, indifferent, optimistic, or frightened. When Hayes checked later that night, he saw to his inexpressible relief that yen Libor had fallen.

 Hayes was not out of danger yet. Over the next three days, he barely left the office, surviving on three hours of sleep a night. As the market seesawed, his profit and loss in one stretch went from minus $20 million to plus $8 million in just hours. Amid the bedlam, Libor was the one thing Hayes had some control over. He cranked his network to the max, offering his brokers extra payments for their cooperation, and calling in favors at banks around the world. By Thursday, Sept. 18, Hayes was exhausted. This was the day he’d been working toward all week. If Libor jumped today, his puppeteering would have been for naught. Libor moves in increments called basis points, equal to one one-hundredth of a percentage point, and every tick was worth roughly $750,000 to his bottom line.

For the umpteenth time since Lehman faltered, Hayes dialed one of his most trusted brokers in London. “I need you to keep it as low as possible, all right?” Hayes said. “I’ll pay you, you know, $50,000, $100,000, whatever. Whatever you want, all right?”

“All right,” the broker repeated.

“I’m a man of my word,” Hayes said.

“I know you are. No, that’s done, right, leave it to me,” the broker said.

Hayes was still in the office when that day’s Libor was published at noon in London. The yen rate had fallen one basis point, while comparable money market rates in other currencies continued to soar. Hayes’s crisis had been averted. Using his network, he had personally tilted one of the central pillars of the planet’s financial infrastructure. He pulled off his headset and headed home to bed. He’d only recently upgraded from the superhero duvet he’d slept under since he was 8 years old.

Thomas William Alexander Hayes had always been an outsider. Raised in the urban sprawl of Hammersmith, West London, in the 1980s, Hayes was bright but found it hard to connect with other kids. His parents divorced when he was in primary school; when his mother remarried, he moved to the leafy, affluent town of Winchester. Hayes held onto his inner-city accent, traveling back to the capital on weekends to watch Queens Park Rangers, perennial underdogs.

Lots of British boys were die-hard football fans, but Hayes’s interest was something more like obsession. Fixations are a symptom of Asperger’s, along with social problems, elevated stress, and a propensity for numbers over words. The kids in Winchester bullied him for it. Hayes remained a peripheral figure in college, at the University of Nottingham. While his fellow students took their summer holidays, he paid for school by cleaning pots and lugging kitchen supplies for £2.70 an hour.

Seeking better money, Hayes won an internship at UBS in London. After graduating, in 2001, he joined Royal Bank of Scotland as a trainee on the interest rate derivatives desk. For 20 minutes a day, as a reward for making the tea and collecting dry cleaning, he was allowed to ask the traders anything he wanted. It was an epiphany. Unlike the messy interactions and hidden agendas that characterized day-to-day life, the formula for success in finance was clear: Make money and everything else will follow. It became Hayes’s guiding principle, and he began to read voraciously about markets, options pricing models, interest rate curves, and other ­financial arcana.

In the laddish, hedonistic culture of the money markets, the awkward 21-year-old was an odd fit. On the rare occasions he joined other bankers on their nights out, he stuck to hot chocolate. They called him “Tommy Chocolate,” and blurted out Rain Man quotes like “Qantas never crashed” as Hayes walked the trading floor. He was bad at banter, given to taking quips and digs at face value. The superhero duvet was a particular point of derision. The bedding was perfectly adequate, Hayes thought; he didn’t see the point in buying another one.

Not everyone in finance was a jerk. Hayes made a few friends, and he found that his machine-gun approach to messaging and trading made him a favorite among brokers, who didn’t care where a trader had gone to school as long as he brought them deals. And ultimately, Hayes went along with the jokes because the obsessive traits that had marginalized him socially turned into power the moment he logged on to his trading terminal. For all the ribbing, Hayes had found a place where he belonged. He rose early, worked at least 12 hours a day, and rarely stayed awake past 10 p.m. He often got up to check his trading positions during the night.

Particularly, Hayes was taking positions in interest rate swaps. Originally designed to protect companies from fluctuations in interest rates, swaps were now mostly bought and sold between professional traders at banks and hedge funds, another form of high-stakes security to wager on. The market for swaps was exploding. In 2000, $50 trillion of the securities changed hands every year. In 2010, it was $500 trillion. For Hayes, the complex calculations and constant mental exertion came easily, but he found he had something rarer: a steely stomach for risk. While other rookie traders looked to book gains or curb losses quickly, Hayes rode out volatile market swings. In those early years his results were mixed, but his superiors knew a natural when they saw one. In 2004, Hayes was headhunted by Royal Bank of Canada, a smaller outfit where Hayes could take a more prominent role. He was given his own trading book focused on the yen derivatives market.

Traders at the largest firms recall suddenly seeing minnow RBC taking the other side of big-ticket deals. Hayes may have been baffled by the simple rituals of office camaraderie, but when he looked at the serpentine matrix of yen derivatives he saw clarity. “The success of getting it right, the success of finding market inefficiencies, the success of identifying opportunities and then when you get it right—it’s like solving that equation,” Hayes would later say. “It’s make money, lose money, and it’s just so pure.”

In the summer of 2006, Hayes was poached again, this time by UBS. RBS, RBC, UBS—the name on the door mattered little to Hayes, as long as he had a phone, his screens, and the bank’s balance sheet to wager. The firm sent him to Tokyo, a major promotion that officially retired his image as a cocoa-sipping, blankie-clutching eccentric, and recognized him for what he’d become: an aggressive and formidable trader.

In poker, there are two types of player: tight folk who wait for the best hands, then bet big and hope to get paid; and hawks who can’t resist getting involved in every hand, needling opponents and scaring the nervous ones into folding. Hayes was firmly in the latter camp. His M.O. was to trade constantly, picking up snippets of information, racking up commissions as a market maker, and building a persona as a high-volume, high-stakes risk-taker.

Hayes moved to Japan just as the government raised interest rates for the first time in a generation, reinvigorating a multitrillion-dollar market that had been lying dormant. Most of the instruments he traded referenced Libor. There are Libor rates for all the major currencies, and for time frames ranging from overnight to 12 months. On any given trade, Libor was the single most important number that determined profit or loss. By now, Hayes knew that the art of trading involves building a sense of the future based on incomplete and evolving information. Where Libor would land tomorrow was the great unknowable. It became his mission to control the chaos around him, to eradicate the shades of gray. “I used to dream about Libor,” Hayes said years later. “They were my bread and butter, you know. That was the thing. They were the instrument that underlined everything that I traded. I was obsessed.”

Hayes loved his job, but when things weren’t going his way, he hated it just as fiercely. On the fifth floor of UBS’s Tokyo headquarters, he stared at his bank of screens, fuming. It was October 2006. He’d only been at the bank a matter of weeks and was already in a hole, on the losing side of a huge bet on the direction of short-term interest rates. Yen Libor was refusing to budge, and he was getting angrier.

While finance had been transformed by technology over the past quarter century, the way Libor was set remained rudimentary. Every day, banks in London told the British Bankers’ Association how much it might cost them to borrow in various currencies, for various lengths of time. There were 150 total combinations. For each one, the top and bottom quarter of figures are discarded, and the average of the remaining numbers became that day’s Libor. That was it. Libor was a component in securities ranging from U.S. student loans and credit cards to Kazakh gas futures, but it was determined each day by just a handful of distracted, guesstimating individuals.

Later that afternoon in Tokyo, Hayes was venting about his predicament to one of his London brokers, a trusted confidant. The broker offered to talk to his colleague, who was in charge of e-mailing a daily Libor prediction—unofficial but handy—to the small group of bankers that came up with the number. (The U.K. court has ordered that the two men cannot be named because they are facing trial.) The e-mail was supposed to be impartial, but if Hayes wanted, the broker said, he could skew the guidance lower. Maybe some of the lazier rate setters, those who didn’t do much business in the currency anyway, would simply follow along.

For Hayes, it was a light-bulb moment. He knew that banks had always tailored their Libor submissions to benefit their own positions, but the system resisted tampering: no single institution could have much impact on the overall rate when 15 other banks were doing the same thing. But Hayes had worked at enough banks and befriended so many brokers that he realized he could sway several submitters at once. He could pull their strings without them even knowing it. And Hayes was on better terms with his brokers than most. They had in Hayes a kindred spirit—a state school Londoner with a cockney accent.

Tom Hayes Loses Last Gamble

Hayes’s broker did as he was asked. The intervention didn’t make much difference, but the idea had taken root. Later that month Hayes went back to the broker, and also approached a second for good measure. This time, Hayes wanted six-month yen Libor to go up. He had a 400 billion yen ($3.3 billion) position about to mature, and every increase of a hundredth of a percentage point (or basis point) was worth hundreds of thousands of dollars. Hayes bombarded his brokers with IMs and phone calls, and over the next few days the rate rose by almost three basis points. Hayes e-mailed his boss, Mike Pieri, to express his delight that the plan had worked—infinitesimally, but when multiplied by the size of Hayes’s bets, valuably. Later that week, he wrote to his broker: “Whatever it takes, bill me.”

Hayes discovered that Libor was not only easy to manipulate, but cheap as well. The London broker had won his colleague’s cooperation by dangling nothing more than a free curry. Hayes began reaching out to traders he knew at other banks, asking for their help in moving the rate. By the spring of 2007, his network had grown to include traders at RBS and JPMorgan Chase. One of his recruits was his stepbrother, Peter O’Leary, a graduate trainee at HSBC in London.

After some small talk over e-mail in April, Hayes asked: “Do you know the guy who sets yen Libors at your place? I think he trades yen and scandi cash and his name is Chris Darcy.”

“Ha ha yeah I do!” O’Leary typed. “His name is actually Chris Porter I think. Everyone calls him Darcy, I think, cos he sounds pretty posh.”

Hayes asked O’Leary to press his colleague for low three-month Libor. Every basis point, he said, was worth $1 million. In a series of phone calls, Hayes told his stepbrother how to make the approach, suggesting he befriend the man over a few pints. O’Leary was reluctant, noting that the rate setter worked on a different floor, in a different part of the business. Hayes persisted, and O’Leary eventually hit his colleague up for the favor. Tommy Chocolate had come a long way. Hayes later apologized to O’Leary for involving him, and never asked for a Libor favor again.

At UBS he showed no inhibitions. At regular 8:30 a.m. meetings, he discussed his positions and explained to colleagues and bosses how he planned to influence the rate. That summer, Hayes formalized his arrangement with one of his interdealer brokers. On top of the fixed monthly fee UBS paid for its services, Hayes negotiated an additional £15,000 a month for helping to move the benchmark, £5,000 of which was personally earmarked for the broker who sent the daily Libor prediction e-mail. 

A UBS spokesperson said: “To suggest that Hayes had a 'light-bulb' moment at UBS about Libor manipulation is ludicrous. Neither Hayes nor UBS invented or initiated LIBOR manipulation. It was industry-wide conduct involving many banks and brokers acting individually and collectively over a prolonged period of time.”

Hayes never knew for certain how much influence he had. But if he couldn’t quite control the future, he could give it a shove in whatever direction he wanted. Hayes later estimated that his ability to move the rate only accounted for perhaps 10 percent of his profits—but in a cutthroat business, it was an edge over his competitors that helped mark him as a star at UBS and make $50 million for the bank in 2007. That September, at a Tokyo swimming pool, he met a corporate lawyer named Sarah Tighe, a fellow Brit far from home. Later, Tighe listened to Hayes ramble about the fortune he made off the collapse of Northern Rock bank—and still wanted to see him again. This was a keeper, someone who found his idiosyncrasies endearing and his ambition attractive. Out of the chaos of markets and everyday life, Tom Hayes was creating order.

This account is based on more than 200 interviews with traders, brokers, regulators, lawyers, and executives, as well as thousands of documents and e-mails introduced at his eventual trial.

On an unseasonably cold April morning in 2008, Vince McGonagle closed the door of his office at the Commodity Futures Trading Commission in Washington and settled in to read the morning papers. Small and wiry, with a hangdog expression, McGonagle had been at the enforcement division of the CFTC for 12 years, during which time his red hair had turned gray around the edges. He was now a senior manager. The headline on Page 1 of the Wall Street Journal read, “Bankers Cast Doubt on Key Rate Amid Crisis.”

It began: “One of the most important barometers of the world’s financial health could be sending false signals. In a development that has implications for borrowers everywhere, from Russian oil producers to homeowners in Detroit, bankers and traders are expressing concerns that the London interbank offered rate, known as Libor, is becoming unreliable.”

The story suggested that banks were providing deliberately low estimates of their borrowing costs to avoid “tipping off the market that they’re desperate for cash.” Before the financial sector had begun to show signs of catastrophic weakness in early 2007, few people in McGonagle’s world cared about Libor. The benchmark was an important but predictable part of the financial plumbing that barely moved from week to week or bank to bank. Now it had become a closely followed indicator of stress in the markets.

As credit froze, Libor in all currencies shot up. Banks with the highest submissions were singled out as struggling. A daily game developed in which ­Libor-setters, spurred on by senior executives, tried to predict what their rivals would submit, and then come in slightly lower. With so little trading in the cash market, it was impossible to check the veracity of their submissions. Some analysts estimated that the published rates were as much as 40 basis points below where they should be. The motivation for lowballing had nothing to do with profit: This was about survival. Central bankers and investors were hunting for any sign of who might follow Bear Stearns into the abyss of bankruptcy.

The rate setters had no idea what to submit each morning, and became even more dependent on their brokers—brokers who were in Hayes’s pocket.
McGonagle knew little about Libor, but the Journal story made him suspicious. Shortly after joining the agency in 1996, he’d been one of a team of lawyers appointed to investigate Dynegy, a Texas energy company, over allegations it had lied about how much natural gas it was buying and selling in order to influence the commodity’s benchmarks. The CFTC and other agencies ultimately fined Dynegy and more than two dozen other companies, including Enron, more than $300 million.

There was no inkling in the spring of 2008 that traders were pushing Libor around to boost their own profits, but to McGonagle, the similarities were striking: Here was a benchmark that relied on the honesty of traders who had a direct interest in where it was set. While natural gas benchmarks were compiled by private companies, Libor was overseen by the BBA, a London-based lobbying group with a reputation as an industry cheerleader. In both cases, the body responsible for overseeing the rate had no punitive powers, so there was little to discourage firms from cheating.

A practicing Catholic, McGonagle got his law degree from Pepperdine University, a Christian school in California where he took more seriously than most the mission of a life of “purpose, service, and leadership.” While classmates took highly paid positions defending companies and individuals accused of corruption, McGonagle built a career bringing cases against them.

That week, he called a meeting of his closest lieutenants. Should they investigate Libor fraud? The biggest obstacle they could see to launching an investigation was the question of jurisdiction. When the CFTC was formed in 1975, its directive was to regulate a futures and options market dominated by farmers and corporations with exposure to commodity prices. In the intervening years, derivatives ballooned into a multitrillion-dollar industry, but the commission’s stature and resources hadn’t grown commensurately.

The agency had a broad remit to intervene in financial markets, but complex financial cases were still automatically considered the preserve of the Securities and Exchange Commission or the Federal Reserve. According to Washington regulatory lore, Harvey Pitt, the SEC’s notoriously gruff chairman from 2001-02, was once discussing who had oversight of a particular product with a counterpart at the CFTC when he lost his patience and bellowed: “It’s pretty simple. Anything that is a security or a financial instrument is ours. Anything that has four legs is yours.” That perception rankled. With the financial crisis raging, here was an opportunity for the CFTC to step up.

There were also the U.K. authorities to consider. It was, after all, the London interbank offered rate. McGonagle contacted his counterparts at the U.K.’s Financial Services Authority about looking into Libor manipulation. The agency wasn’t interested, bristling at the encroachment onto its turf. (The FSA declined to comment.)

Undeterred, McGonagle ordered his team to keep digging. In the weeks that followed, his staff learned that Libor was a benchmark for billions of dollars of interest rate futures contracts traded on the Chicago Mercantile Exchange. The CME fell squarely within the CFTC’s purview. It was the green light he needed. That summer the CFTC wrote to six banks requesting information on how the Libor-setting process worked. It was the first tentative step in what would become the biggest case in the agency’s history.

Hayes was sent the Journal article by a worried friend, but brushed it off as irrelevant: fraud in dollar Libor had nothing to do with his yen Libor trading book. By the day Lehman Brothers fell in September 2008, Hayes’s system was working better than ever. The money markets, the cardiovascular system of the financial body, had gone into arrest as banks refused to lend to one another and hoarded what cash they had, terrified that their counterparts might not survive the night. The rate setters had no idea what Libors to submit each morning and became even more dependent on their brokers for guidance—brokers who were in Hayes’s pocket.

The only issue was how to pay them enough to remain loyal. On Sept. 18, with the market frozen and only a small window in which both Tokyo and London markets were open, Hayes was struggling to find deals big enough to reward those not on a fixed fee for their efforts. Then a novel idea struck him. He called one of his brokers and suggested a so-called wash trade, where counterparties place matching deals through a broker that cancel one another out, but still trigger fees for the middleman. The transactions were prohibited at many firms and served no commercial purpose. It was purely a means to pay large amounts of “bro”—slang for commission.

It took some explaining before the broker fully understood what Hayes was proposing, but once he did, he was overjoyed. “All right, let’s see what we can do, then,” the broker said, laughing. “F------ hell. All right.” Hayes got traders at JPMorgan and RBS to go along with the wash. The former did it as a favor. The latter extracted a £500 lunch for his coworkers from a nearby restaurant. Hayes later told the broker on a phone call that this was how he was going to pay him in the future. (JPMorgan and RBS declined to comment.)

Over the next 11 months, Hayes paid more than £470,000 in kickbacks through wash trades to his brokers, including a third he had recruited to his network. If Hayes could manipulate the Libor system to protect his profits at the peak of the worst crisis in memory, there seemed to be no limit to what he could do next.

His success had started to draw the attention of other players in the market. In the summer of 2008, Goldman Sachs had approached Hayes about a job, offering him a $3 million signing bonus. Hayes declined, telling colleagues he was staying loyal to the firm that had brought him to Tokyo. Privately, he worried he wasn’t good enough to join the world’s most prestigious investment bank.

A year later, in June 2009, he agreed to meet Chris Cecere, a star trader at Citigroup, at the swanky, low-light jazz bar at the Grand Hyatt Tokyo. Cecere had beer. Hayes stuck to orange juice, and listened as Cecere outlined plans to build a world-beating derivatives business, with Hayes at the center. He offered the same $3 million signing bonus as Goldman. This time, Hayes said yes. Cecere boasted to colleagues that he’d found “a real f------ animal.”

As Hayes’s stature shot up, McGonagle and his team at the CFTC were stuck. Since asking banks to volunteer information about the benchmark, the regulators had received a few useful leads but in most instances were roundly ignored. And in the months after the financial crisis, the enforcement division spent most of its time investigating whether commodity speculators were behind a huge spike in the price of crude oil.

In London, the BBA, the trade body that oversaw Libor, had moved quickly to suppress talk of rate manipulation. Responding to the Journal and other publications, the lobbying group issued a statement claiming that the uproar surrounding the benchmark was the result of misunderstandings by journalists rather than any malfeasance at the banks. U.K. regulators demonstrated no interest in learning the truth. They were busy trying to save the financial system from meltdown. (The FSA, SFO, and BBA declined to comment.)

By early 2010, only one firm, Barclays, was still meaningfully cooperating with the CFTC’s Libor investigation. The British bank had hired the agency’s former head of enforcement, Greg Mocek, as an attorney to advise it on Libor after uncovering evidence of blatant manipulation. Mocek remained close with his former colleagues and took the view that it was better to admit everything and seek more favorable treatment.

With a new administration in the White House, the agency was led by Gary Gensler, a former Goldman Sachs executive with a reported net worth of $60 million. Gensler, who describes himself as “a short, bald Jew from Baltimore,” was tasked by President Obama with regulating derivatives, which by now were blamed by many for exacerbating the crisis. Since taking over as chairman in May 2009, Gensler’s aim had been to bring “swagger” to the agency. Libor was exactly the kind of meaty case he wanted to pursue, and he was eager to get it restarted. One day in March, a package arrived that granted his wish.

It was an audio CD from inside Barclays. Gensler, his coterie, and members of the enforcement division gathered on scuffed-up sofas and chairs in the waiting area outside his office—the only meeting place with a working CD player—to listen. It was a telephone conversation between two Barclays middle managers that had taken place 18 months earlier, during some of the most turbulent days of the crisis. Speaking in a cut-glass English accent, one of the men told a subordinate that he needed to start lowering the bank’s Libors. When the more junior employee started to object, the first man told him the order had come from the most senior levels of the bank, who in turn were acting on instructions from the Bank of England.

The recording stopped. Outside Gensler’s office, there was a stunned silence. The discussion was so unambiguous it almost seemed like the two men knew they were being recorded, one CFTC official recalled. After months of frustration, here was the evidence that would break open the case. If Barclays executives were discussing rigging Libor so openly, it seemed logical that other banks were doing the same thing. (Barclays declined to comment.)

“Trading a large derivatives book,” Hayes said, “is like looking after a big, living organism. After trading for years and years you get an innate feeling for how everything relates.”

The default position of the CFTC was to jealously guard its cases, lest one of the larger agencies swoop in and take over. But with the Barclays CD in hand, the investigators knew they had no choice but to bring in the Department of Justice. The feds had the power to force firms to cooperate with the probe, and could criminally charge individuals. The CFTC’s avuncular acting head of enforcement, Steve Obie, called his point person at Justice, a tall, genial, gray-bearded attorney named Robertson Park. Obie and Park had worked cases together over the years and still met up for the occasional beer.

“Rob, drop what you’re doing and listen to this,” Obie said. Holding the handset of his phone up to the computer speakers on his desk, he played the Barclays recording down the line. When it was over, Park’s first words were “Holy s---.”

The Justice Department’s criminal division faced almost daily criticism in the press for failing to hold banks to account for their part in causing the crash. Here was a chance to hit back. Within a month, Park had put together a team to begin its own probe into Libor.

That forced the British to get involved. Libor may have been set by bankers in London and overseen by the BBA, but the FSA had all along resisted what its leaders saw as an expensive and politically messy inquiry. Since 2008, its role had been essentially postal, receiving evidence from the banks and forwarding it to the CFTC. Now, after a series of meetings, the FSA consented to join the ranks of the U.S. investigators.

With its new backup, the CFTC subpoenaed 16 banks, compelling them to hand over evidence and make staff available for interviews. The agency also instructed the banks to appoint external law firms to undertake investigations into Libor-rigging and report back with their findings by the end of the year.

Within weeks, boxes of evidence started arriving at the CFTC. McGonagle and Obie’s investigators spent countless hours in offices, slouched over their desks, cataloguing documents, and listening to recordings. Wall charts were drawn up showing the management structure and chain of command in different teams at different banks. The language the traders used—their cryptic references to “IMM dates” and “reset ladders” —was slowly deciphered.

One of the subpoenaed banks was UBS. At its headquarters in Zurich, attorneys filtered vast archives of chats and e-mails using keywords like “Lower 6m” and “favor.” One trader’s name cropped up more than any other.

Before Hayes could begin trading at Citigroup, he had to wait out a three-month noncompete period. He spent the time laying the groundwork for a fresh assault on Libor. He arranged for a junior Citi trader in Tokyo, Hayato Hoshino, to relocate to London and befriend the Libor submitters there so Hayes could pass on his desired moves in the rate. Hayes also began the process of getting the bank to join the panel that set Tibor—the Tokyo interbank offered rate. In October, Hayes flew to London to meet Citi’s rate setters in person.

Hayes was escorted upstairs at Citi’s European headquarters in Canary Wharf and introduced to the head of the cash desk, Andrew Thursfield. The first words out of Hayes’s mouth were: “Nice to meet you. You can help us out with Libors.”

Thursfield was a dour, straight-laced Englishman who’d spent more than two decades in Citi’s risk-management department. Balding and bespectacled, with a reedy voice and pedantic manner, he was more accountant than banker. He liked to think of himself as the guardian of the firm’s balance sheet.

Hayes was unshaven, rumpled, and oblivious. He told Thursfield how the cash desk at UBS used to skew its submissions to suit his book and boasted of his close relationships with rate setters at other banks and how they would do favors for each other. Hayes was trying to charm Thursfield, but he’d badly misjudged the man and the situation. Thursfield took an instant dislike, and the next day called his manager with concerns about the new hire. “Whoever is the desk head, or whatever,” Thursfield said, should “have a close watch on just what he’s actually doing and how publicly.” Hayes, he said, seemed very “barrow boy”—London finance slang for a low-class poseur.

Hayes couldn’t have chosen a worse person to offend. Citi was already cooperating with the CFTC’s investigation into Libor rigging, and Thursfield had even delivered an 18-page presentation via video link to investigators in March 2009 on the rate-setting process. Hayes, for his part, thought little of the meeting and later couldn’t even remember Thursfield’s name.

When Hayes finally showed up to Citi’s offices at Tokyo’s Shin-­Marunouchi Building in December, his preparations unraveled. Not only did the bank’s submitters tell him more than once they couldn’t take his positions into account when setting Libor, even his old allies started turning their backs on him. Word had leaked out about the CFTC’s investigation, and people were getting nervous. “I asked him a little while ago and he f------ said to me not to ask him again but I will try, mate,” one broker told Hayes, who had been badgering him. “They’ve all got right f------ funny on it recently.”

Hayes also started making disastrously bad calls on the market and was racking up big losses. In June, after a Citi colleague quit and leaked details of Hayes’s trading book to his old boss at UBS, they teamed up with others in the market to target his weak spots. Pushing the market against him, they cost the trader nearly $100 million.

At the tail end of one of the worst months of his career, Hayes was getting desperate. Sitting at his desk on June 25, with his profit and loss ledger looking worse than ever, Hayes picked up his mobile phone and dialed Hoshino’s mobile in London. Even though he’d been told repeatedly that the rate setters weren’t happy talking about Libor, Hayes ordered his subordinate to approach them again. He had a huge trade maturing at the end of the month and needed the benchmark up.

In Hoshino, Hayes had chosen a poor henchman. Shy and known as “Little Hoshino” around the office, Hoshino had never actually approached the submitters when Hayes had asked. With his faltering English, the young trader found them too intimidating. This time, Hayes was more insistent than usual. Just after lunch, Hoshino made the short walk across the trading floor to the rate setter’s desk and passed on Hayes’s request. It was a fatal misstep. The CFTC had just subpoenaed Citi and ordered it to probe whether their derivatives traders were trying to rig the rate. Aware of the heat on the bank, the submitter told Hoshino he was being inappropriate and reported the approach to Thursfield, who immediately called the bank’s compliance department.

In the months that followed, Hayes was interviewed for more than 12 hours by Citi’s lawyers. His bosses told Hayes he would be fine, that it was part of a wider investigation. Then, on Sept. 6, as Hayes made his way into the office, he was pulled into a nondescript meeting room. He saw the two Citi executives who’d hired him less than a year earlier, Andrew Morton and Brian McCappin, sitting at a conference table, looking solemn. Citigroup’s general counsel and head of human resources in Japan were also there. (Morton, McCappin, Thursfield, and Hoshino did not respond to requests for comment sent through Citigroup.)

As Hayes sat, McCappin said the bank had been investigating him for months and had uncovered multiple episodes of his manipulating rates. Such conduct violated the bank’s code of conduct, and he was being fired. Hayes was floored. Only the previous week, he’d been trading as usual and discussing strategies with McCappin in his corner office.

Characteristically, Hayes recovered quickly from the shock. “Well, that’s sort of ironic that you’re firing me, given that you were involved in it up to your eyeballs,” Hayes later recalled telling McCappin.

“Oh, but he wasn’t,” the general counsel said quickly. “He didn’t have any trading positions.”

Hayes disputed the point—as the head of Citi’s investment bank in Japan, McCappin had ultimate responsibility for every trade—and then made a remarkable counterattack. “How much are you going to pay me to go quietly?” he asked. “Otherwise, I’m going to make a real fuss about this.”

Citi hadn’t been expecting that. The executives asked Hayes to leave the room while they discussed his contract. After calling him back in, they told Hayes that he wouldn’t get any new money. But he could keep his $3 million signing bonus.

In the months that followed, Hayes did his best to rebuild his life. Days after his dismissal, he returned to England and married Tighe in a lavish ceremony at the Four Seasons hotel in rural Hampshire. In 2011, they had their first child, Joshua, and bought the Old Rectory, a six-bedroom former vicarage in a pretty village outside London. They paid the £1.2 million ($1.9 million) price in cash, with no mortgage, according to land records. Hayes signed up for a British MBA course, and Tighe kept up her work as a lawyer. Together they began to remodel their hillside idyll, adding a new wing and filing plans to build a six-foot electronic gate to keep out intruders.

Meanwhile, U.S. investigators were grinding ahead with their case. Hayes heard rumors, but had no way of knowing he was one of the prime targets. He sent a Facebook message to Mirhat Alykulov, a trader who’d sat next to him for years at UBS Tokyo, and one day several weeks later, he got a call back. Hayes cut off any chitchat and asked: Had the bank said anything about speaking to the Justice Department? Unbeknownst to Hayes, Alykulov was calling from his criminal lawyer’s office in Washington on a recorded line the FBI had set up to appear as if it originated in Tokyo. As casually as he could manage, Alykulov asked Hayes what he planned to do. Alykulov, who was facing Libor fraud charges of his own, had cut a deal with the feds—they agreed not to prosecute if he told them everything he knew and helped pin Hayes. If Hayes suggested they lie to the government, he could be charged with obstruction as well as fraud.

Hayes paused, as if somehow aware of the trap. “The U.S. Department of Justice, mate, you know, they’re like the dudes who, you know, you know, absolutely like, you know, you know—put people in jail,” Hayes said. “Why the hell would you want to talk to them?” (Alykulov, through his lawyer, declined to comment.)

Two weeks before Christmas in 2012, at 7 a.m. on a Tuesday, Hayes heard a knock at the door. More than a dozen police officers and Serious Fraud Office investigators swept through the property, gathering computers and documents into boxes. Hayes was arrested, taken to a London police station, and told he was suspected of conspiracy to defraud.

Hayes declined to comment and was released. Eight days later, he would later testify, Hayes was watching TV when a bulletin cut to a press conference in Washington. Before flashing cameras, U.S. Attorney General Eric Holder announced that UBS had been fined $1.5 billion and had pleaded guilty to rigging Libor at its Japanese arm. The DOJ was also criminally charging Hayes and a former colleague, Roger Darin, and seeking to extradite them. Hayes had had no idea.

Hayes considered the evidence against him. Investigators on three continents had thousands of his incriminating e-mails and audio recordings. The only way to avoid extradition to the U.S. and its harsh sentencing laws, Hayes’s lawyers told him, was to enter a “supergrass” (informer) deal in the U.K., confessing everything and giving up everyone he’d collaborated with. The British were eager to cut a deal. They’d been late to the investigation, but still wanted a guilty plea at home.

So began a period of intense unburdening. Over the next three months, Hayes’s life eased into a familiar routine. At least once a week, he would make his way to the SFO, just off Trafalgar Square. After signing in under a false name—usually some former legend from his beloved Queens Park Rangers soccer team—he took the elevator to the fourth floor, walked past the vending machines, and stepped into his confessional: a stark white room with a desk, a projector, his lawyer, and two investigators in suits. They barely had to prod to get him to talk.

“The first thing you think,” Hayes said early on, “is where’s the edge, where can I make a bit more money, how can I push, push the boundaries, maybe, you know, a bit of a gray area, push the edge of the envelope.” He finally paused for breath. “But the point is, you are greedy, you want every little bit of money that you can possibly get because, like I say, that is how you are judged, that is your performance metric.”

The shorter, stockier investigator began: “At the time that the conduct took place, do you think you knew at that point, that what you …”

“Well look, I mean it’s a dishonest scheme, isn’t it?” Hayes interrupted. “And I was part of the dishonest scheme, so obviously I was being dishonest.” Hunched over a desk in the cramped interrogation room, he stared vacantly ahead as he launched into another cathartic torrent.

Hayes seemed to relish reliving moments from his past, his voice speeding up when he described heady days piling into positions, squeezing the best prices from brokers, and playing traders against each other. “Trading a large derivatives book,” he said during one exchange, “is like looking after a big, living organism. After trading for years and years you get an innate feeling for how everything relates.”

In June, after 82 hours of interviews, Hayes was formally charged. He had identified more than 20 people as co-conspirators, including his own stepbrother. (O’Leary is not facing charges, nor Pieri, Hoshino, and McCappin.) The list included traders at JPMorgan, RBS, Deutsche Bank, and HSBC, as well as brokers at the two biggest interdealer brokerage firms. For Hayes, betraying the men was rational. Knowing that he would serve a likely shorter sentence in the U.K. and not the U.S. prison system, Hayes said, made him feel like a man who’d been diagnosed with cancer and then given the all-clear.

As the scope of the Libor scandal grew that summer, making headlines around the world, Hayes’s relief was corroded by anger. Over the course of his confession, investigators had shown him pieces of evidence that he couldn’t forget. As much as they illustrated the strength of the case against him, he thought they also proved the unfairness of it all. Hayes spent the summer at a desk inside his house poring over documents that fueled his indignation: e-mails from senior managers condoning his efforts; transcripts that showed manipulation predating his hiring; even what he believed were internal bank guidelines on cheating the system. A rage built inside him. Libor-rigging was an industrywide practice. Why should he take the fall?

On Oct. 9, as the SFO was finalizing its case against Hayes and his co-conspirators, a white envelope arrived. It was from Hayes’s lawyers. “As a matter of courtesy we are now in a position to advise that Mr. Hayes will plead Not Guilty to all Counts,” the letter said. “Accordingly he now formally withdraws from the process.” Having avoided extradition, the natural born trader was taking the biggest risk of his life, reneging on the deal and entrusting his fate to random jurors in a London courtroom.

“I’d rather put my fate in the hands of 12 people than plead guilty to a politically driven process,” Hayes later said. “I may not agree with what they decide in the end, but I will accept it.”

On May 26, 2015, seven years after investigations began, the first individual to face trial for rigging Libor walked nervously past a packed gallery and took his seat in Court Two of Southwark Crown Court, an austere brown-brick cube on the bank of the River Thames. Dressed in chinos, a black sweater, and wearing no tie, his blond hair atypically neat, Hayes looked meek—and not at all like the aggressive bully the prosecution wanted to portray. His mother looked on from a reserved seat among the press pack.

The jury, seven men and five women, was told about Hayes’s Asperger’s diagnosis early in the proceedings. The disorder didn’t affect his ability to distinguish between honest and dishonest acts, the judge said, but might help explain the brusque nature of his answers. Because of his condition, Hayes was allowed to sit behind a desk with his legal team rather than alone in the dock, an enclosed glass box in the center of the courtroom. Next to him throughout the trial was an intermediary whose role was to monitor Hayes for signs of stress and who would mouth “calm down” when he became irate, which often included shaking his head wildly and scribbling notes to his lawyers.

The SFO’s chief prosecutor, Mukul Chawla, an amiable bear of a man in a black robe, with a mane of silver hair and an e-cigarette he chugged on during breaks, presented the case against Hayes in measured tones. “You may think, having heard the evidence, that here the motive was a simple one,” Chawla said during his opening. “It was greed. Mr. Hayes’s desire was to earn and to make as much money as he could. The more that he earned for his employers, the more they would value his services and inevitably, he hoped, the more that they would pay him.”

There was no disputing what Hayes had done, but to get convictions, Chawla needed to demonstrate that he knew what he was doing was dishonest. The prosecutor’s greatest weapons were the trader’s own words.

“I knew that, you know, I probably shouldn’t do it,” Hayes said in one 2013 interview with the SFO, played at high enough volume through the court’s speakers that they started to distort. “But, like I said, I was participating in an industrywide practice that predated my arrival at UBS and postdated my departure.”

When it was Hayes’s turn on the stand, he disavowed the SFO interviews, claiming he’d exaggerated his culpability to make sure he would be charged in the U.K. During two weeks of testimony, Hayes argued that he wasn’t dishonest because the practice of trying to influence Libor was so common across the industry he had no idea it was wrong. His counsel backed up his claims with documents showing managers at UBS encouraging his behavior, and the BBA sanctioning lowballing during the crisis.

At one point Hayes broke down in tears. “I don’t think I’ve done anything,” he said, looking to his wife in the gallery, her blonde hair tied neatly back and her hands clasped in her lap. She nodded back in support.

When the prosecution played audio clips of Hayes joking around with his contacts in the market, he looked down and smiled to himself, caught up in the memories. “It could be the worst job in the world,” Hayes testified. “It could make you want to jump off a bridge and it can make you feel physically sick every time you went into work.” Still, one of the hardest things about his current situation, he said, was that he was no longer allowed to trade. “I was, and to a lesser degree now, still obsessed with the markets, the financial markets, and very, very, very much miss my old job,” he said. “I very much miss my old career. It was a big, big part of my identity, that job and that career for me.”

By the end of Hayes’s first week on the stand, what had begun as an open-and-shut-case was slipping away from Chawla. The young man came across as straightforward, affable, naïve—as much a victim of the system as the perpetrator of a crime.

But any hope for Hayes drained dramatically upon cross-examination. Asked to confirm basic facts, such as what instruments he traded, the trader turned evasive and combative. Physically, he tensed up, clenching his jaw and narrowing his eyes. When Chawla probed Hayes on the evidence against him, Hayes changed the subject, decrying the investigation as lacking any rigorous analysis and claiming he was a victim of a struggle for supremacy between the U.K. and U.S. authorities—a “fugitive from American justice.” At one point, the judge intervened, telling Hayes to answer the questions and refrain from speeches. A member of the defense team moaned to a reporter during a break: “Two years of my life over in two minutes.”

Ten weeks after the trial began, the jury was sent away to deliberate. After five days, they returned a unanimous verdict: guilty on all counts.

Half an hour later, Hayes walked back into the packed, hushed courtroom for the final time. On this occasion he couldn’t avoid the dock. Before entering, he asked a uniformed guard if he could kiss his wife goodbye. Dressed in a blue shirt and light blue sweater and carrying an overnight bag, he was led into the glass cell and the door locked behind him.

Hayes barely reacted when the judge announced he would be imprisoned for 14 years, a sentence at the very highest end of the spectrum for white-­collar criminals in the U.K. His wife shook her head, bent forward toward her lap, and grasped the arm of Hayes’s mother, who stared straight ahead, silently shaking.

“What you did, with others, was dishonest, as you well appreciated at the time,” the judge said in his closing remarks. “What this case has shown is the absence of that integrity which ought to characterize banking.”

 Hayes is now incarcerated at Her Majesty’s Prison Wandsworth, a Victorian fortress south of the Thames known for its poor conditions and violent residents. In October, the six brokers accused of using their sway over the banks to help Hayes push around Libor will follow his path up the steps of Southwark Crown Court for their own trials. The SFO says privately it plans to charge further co-conspirators in the months ahead.

The investigations into Libor kick-started by McGonagle and his colleagues at the CFTC have resulted in close to a dozen firms being fined a combined $10 billion. More than 100 traders and brokers have been dismissed, or have left the industry. For those who remain in banking, the trading floor in the post-Hayes era looks like a very different, more chastened place. Emboldened by their success on Libor, regulators have successfully settled manipulation probes in foreign exchange, precious metals, and derivatives markets. Banks have built up their compliance staffs. Gone are the firm-funded trips to Val d’Isere and the $1,000 meals at Le Gavroche. Traders today describe living in a state of paranoia that their past conversations will be raked over and used against them. The draining of excess from banking in recent years is commonly attributed to the financial crisis. But as the public well knows, nobody who ranked on Wall Street went to jail over subprime mortgages. With Hayes behind bars, and others set to follow him to the dock, Libor and the related collusion cases have an equal if not greater claim to the new, subdued reality.

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Adapted from The Fix: How Bankers Lied, Cheated and Colluded to Rig the World’s Most Important Number, by Liam Vaughan and Gavin Finch (Wiley, 2016).