Notes on a Scandal: The Story of the Libor Financial Scam
This content was originally published by WILLIAM D. COHAN on 4 April 2017 | 9:00 am.
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It was a shockingly simple but ingenious scheme. Here’s how it worked, according to Enrich: Since there was no precise way to tell for sure what interest rate one bank charged another to borrow money on a short-term basis, the way Libor was set daily came down, essentially, to what a bunch of clerks at a group of European banks and brokers recorded on ledgers. These ledgers were then sent to the British Bankers’ Association, a London-based trade association, which compiled the various submissions, tossed out the high and low outliers, and then averaged the various rates together to get the “official” Libor rate that was then disseminated publicly and used to calculate the price many people and businesses paid to borrow money. (Part of the reason the scandal may seem distant for many Americans is that for most of the time during which Libor was being manipulated — from 2005 to 2010 — no American banks were involved, although eventually Citigroup asked to be included in the rate setting and was admitted to the group.)
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If you could influence the clerks inside the banks and the brokers to set their Libor submissions to your liking, you would have what amounted to inside information. You could then make huge bets — tens of millions of dollars at a time — about the direction of Libor-based, short-term interest rates, knowing with a high degree of confidence that your bet would pay off. Suddenly, the traders manipulating Libor were big winners, reaping hundreds of millions of dollars in unexpected profits for their firms, and making themselves invaluable, and highly paid, star performers. Of course, the blatant scheme once again makes you wonder, for the umpteenth time, why it is so easy for people on Wall Street to lose their moral and ethical compasses.
In “The Spider Network,” Enrich makes little attempt to answer that burning question. Instead, though, he gives us a gripping narrative focused on Tom Hayes, a math whiz from a dysfunctional West London family who decides early on that he wants to work on Wall Street and make a lot of money. To do that, Hayes, then based in Tokyo as a trader for UBS, the big Swiss bank, decides that he can put himself into the Wall Street elite — in terms of pay and recognition — by cajoling a diverse group of clerks and brokers to falsify their Libor submissions in ways that benefited his large interest-rate bets. We also learn that Hayes may have a mild form of Asperger’s syndrome and therefore, Enrich suggests, did not fully appreciate the extent of his wrongdoing.
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Along the way, we meet a stranger-than-fiction cast of characters — including a French trader Hayes nicknamed Gollum and another accomplice who grew up on a chicken farm in Kazakhstan — who are only too willing to enable Hayes’s schemes in exchange for higher commissions, bonuses and other perquisites. What’s especially shocking is the willingness of Hayes’s various bosses to overlook his manipulation while he was recording exceptional profits, and for as long as no regulators were wise to the scam. Of course, once various financial regulators — most notably the underfunded Commodity Futures Trading Commission, in Washington — started investigating the Libor manipulation, these same bosses were only too happy to throw Hayes under the bus, giving him in the end what he richly deserved: a jail cell.
Enrich covered the Libor scandal when he was a London-based reporter for The Wall Street Journal. His impressive reporting and writing chops are on full display in “The Spider Network,” a vastly expanded version of his original Journal series about the scandal. (He has since moved to New York, where he leads an investigative reporting unit at the newspaper.) From the start, the book reads like a fast-paced John le Carré thriller, and never lets up. In the prologue, Enrich shares the anecdote of how, in January 2013, he was “sitting on a sofa” in his “cramped” London flat when his iPhone “buzzed with a text message from a number I didn’t recognize.” Tantalizingly, the text’s author offered to meet Enrich the next day, but only if he was sure Enrich could be trusted. It was Tom Hayes. “This goes much much higher than me and a lot of what I know,” Hayes wrote. “Even the D.O.J. is in the dark.”
Alas, not until after the book concludes, way back in the note on sources and then in the acknowledgments, do we learn the extent of the help that Hayes provided to Enrich. At first, and against the advice of his lawyers and his wife, who was then herself an attorney at the tony Wall Street law firm Shearman & Sterling, Hayes “doubled and tripled down” on the “gamble” to share his version of events with Enrich. Nearly everything Hayes conveyed to Enrich was “off the record.” But eventually, several months before Hayes’s trial began, Enrich persuaded both him and his wary wife to allow him the use of their story “in full cinematic detail.”
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To Enrich’s considerable credit, he does his very best to remain objective about the Libor scandal and Hayes’s principal role in causing it to happen. (It turned out the practice of manipulating Libor was more widespread than what Hayes and his various accomplices were doing.) But Enrich is human, and it’s clear that Hayes has captivated him. Not in a bad way, mind you, and not in a way that makes you question the accuracy of what is presented. But just enough so that one can’t help wondering how much Enrich’s version of the Libor scandal would have differed without Hayes’s considerable help, as Enrich writes, texting “at all times of day or night” and “regularly meeting me at run-down pubs and train station cafes.”
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