The Spider Network

1. Tom Hayes: A Math Genius Drawn into Banking's Amoral World

He cherished the simplicity, the objectivity of numbers.

Early life. Tom Hayes grew up in a working-class London neighborhood, marked by family strife and financial insecurity. A mathematical prodigy, he found solace and safety in numbers, meticulously counting and organizing his meager earnings. Socially awkward and often bullied, he struggled with human interaction but excelled academically, particularly in math.

Entry into finance. Inspired by his stockbroker grandfather and lured by the promise of wealth, Hayes pursued a career in finance despite his parents' reservations. He landed internships and entry-level positions at major banks (UBS, RBS, RBC), quickly demonstrating exceptional quantitative skills and an intuitive grasp of markets. However, he also absorbed the prevailing banking culture.

Culture of profit. Hayes learned that success on the trading floor was measured solely by profit generation, often at the expense of clients or ethical considerations. This environment, coupled with his personality traits like obsessiveness and a black-and-white view of the world, shaped his approach to trading and risk-taking, setting the stage for his later actions.

2. Libor: The World's Most Important Number, Vulnerable by Design

If something was wrong with Libor, the pool of potential victims would be vast.

Benchmark's origin. Libor (London interbank offered rate) originated in 1969 as an informal mechanism for banks to price large syndicated loans based on their average borrowing costs. Formalized in 1986 by the British Bankers' Association (BBA), it became a daily benchmark for interbank lending rates across various currencies and time periods.

Global importance. Libor rapidly became the foundation for trillions of dollars in financial products worldwide, including:

• Variable-rate mortgages and consumer loans
• Corporate loans
• Complex derivatives like interest-rate swaps

Inherent vulnerability. Despite its critical role, Libor's calculation relied on banks submitting subjective estimates of their borrowing costs, with little oversight. This created a fundamental conflict of interest, as banks could manipulate their submissions to benefit their trading positions or project an image of financial health, potentially harming countless individuals and institutions globally.

3. Brokers: The Middlemen Who Facilitated and Profited from Manipulation

One illustration of the industry’s culture was that brokers used the word broking to mean "tricking" or "misleading"—as in, I was broking him to believe something that wasn’t true.

Role in the market. Interdealer brokers like ICAP, RP Martin, and Tullett Prebon acted as intermediaries, matching buyers and sellers of financial products, including interest-rate derivatives. They earned commissions on each trade, incentivizing high trading volumes.

Cultivating relationships. Brokers competed fiercely for business by cultivating close relationships with prolific traders like Hayes. This often involved lavish entertainment, gifts, and favors, sometimes blurring the lines into kickbacks. The cost of this "entertainment" was often recycled from the commissions generated by the trader's business.

Facilitating manipulation. Brokers became key conduits for information and, crucially, for facilitating Libor manipulation. They could relay traders' requests to bank Libor submitters or subtly influence market expectations through daily "run-throughs" or gossip, often exaggerating their influence or outright lying to clients like Hayes to maintain the relationship and commissions.

4. Manipulation: A Widespread Practice Driven by Trader Greed and Bank Culture

Just give the cash desk”—the guys responsible for the bank’s Libor submissions—“a Mars bar, and they’ll set wherever you want.

Trading-driven requests. Traders like Hayes, whose massive derivatives portfolios gained or lost millions based on tiny movements in Libor, routinely pressured bank employees responsible for submitting Libor data to nudge the rate in favorable directions. This was often done openly, sometimes even with managerial awareness or encouragement.

Broker involvement. Hayes enlisted brokers like Terry Farr and Darrell Read to relay his Libor-moving requests to submitters at other banks. Brokers, eager for commissions, would lobby their contacts, sometimes using "switch trades"—meaningless mirror-image transactions—to reward banks or individuals for complying, effectively paying for manipulation.

Systemic issue. The practice was not confined to Hayes or a few individuals; it was widespread across numerous banks and brokerage firms. Internal communications revealed traders and managers at various institutions discussing and coordinating efforts to influence Libor, viewing it as a normal, albeit sometimes "dodgy," part of the job, driven by the relentless pursuit of profit.

5. The Financial Crisis: Exposing Libor's Flaws and Triggering Investigations

The bill was finally coming due for decades of reckless financial expansion.

Crisis impact. The 2008 financial crisis highlighted Libor's flaws. As banks became terrified of lending to each other, actual interbank borrowing plummeted, making Libor submissions based on hypothetical rates meaningless guesswork. Banks also had incentives to lowball submissions to appear financially stable.

Media scrutiny. Journalists, notably at the Wall Street Journal, began questioning Libor's accuracy, publishing studies showing discrepancies between banks' reported Libor and other indicators of their borrowing costs. These reports, initially dismissed by the BBA and banks, drew public attention to the benchmark.

Regulatory awakening. The media reports and complaints from institutions like pension funds prompted US regulators, particularly the CFTC, to launch investigations. Initially slow and hampered by a lack of understanding and cooperation from British authorities and banks, the investigations gained momentum as evidence of deliberate manipulation began to surface.

6. UBS's Strategy: Confess First to Gain Leniency and Finger Others

If UBS raced to the authorities in the United States and elsewhere before anyone else did, and not only confessed its own sins but also promised to help build cases against its rivals, it might win leniency.

Internal discovery. Following Hayes's controversial departure from Citigroup and subsequent rumors, UBS launched an internal investigation into his trading and communications, initially tasked to his former manager, Mike Pieri. This probe, later taken over by outside lawyers, uncovered extensive evidence of Libor manipulation involving numerous employees across different regions.

Cooperation strategy. Facing potentially massive fines and criminal charges, UBS adopted a radical strategy: become the first bank globally to confess to Libor manipulation and cooperate fully with authorities. Led by lawyer Gary Spratling, UBS approached regulators worldwide, offering evidence and employee testimony in exchange for leniency.

Setting the narrative. UBS's cooperation proved highly effective. It secured partial immunity from antitrust charges and positioned the bank to shape the narrative of the scandal, often casting former employees like Hayes as rogue operators responsible for the wrongdoing, thereby deflecting blame from current management and the bank's culture.

7. Regulatory Turf Wars: US and UK Agencies Vie for Control and Targets

What’s a cabal?

Initial disinterest. British regulators, particularly the FSA and SFO, were initially slow and seemingly uninterested in investigating Libor manipulation, despite early warnings and media reports. The FSA adhered to a "light touch" approach, and the SFO was plagued by internal issues and a focus on other cases.

US initiative. The CFTC, under Chairman Gary Gensler, took the lead, launching an investigation despite limited resources and initial resistance from banks and the BBA. The discovery of damning evidence, like the Barclays recordings, galvanized US prosecutors at the Justice Department.

Clash over targets. As US authorities closed in on British citizens like Hayes, the SFO belatedly launched its own criminal investigation. This led to turf battles, with the SFO arresting Hayes just before US charges were unsealed, effectively preventing his extradition and cooperation with US prosecutors, much to Justice's frustration.

8. The Arrest: Hayes Becomes the Prime Target Amidst Broader Impunity

Just like that, their lead suspect—someone whom the fraud section and FBI had spent nearly two years building a case against, collecting evidence, interviewing witnesses, even placing entrapping phone calls—had essentially vanished.

UBS's testimony. UBS, in its global cooperation efforts, presented Hayes as a central figure in the Libor manipulation scheme, providing regulators with extensive evidence from his communications. This positioned him as a prime target for prosecution.

SFO's move. Motivated by the impending US charges and a desire to assert its authority, the SFO arrested Hayes in a dawn raid in December 2012. This was the first arrest in the global Libor investigation and immediately drew significant media attention, identifying Hayes as the alleged ringleader.

Impact on US case. The SFO's arrest, and subsequent seizure of Hayes's passport, effectively blocked the US Justice Department's plan to extradite and prosecute him. This forced US authorities to pursue other targets while Hayes faced charges in the UK, highlighting the complexities of international financial crime investigations.

9. The Trial: A Battle Over Honesty, Intent, and Systemic Guilt

Was this all a dishonest charade involving you and your lawyer?

Defense strategy. Facing overwhelming evidence, including his own admissions to the SFO, Hayes pleaded not guilty. His defense argued that:

• He did not believe his actions were dishonest according to industry standards.
• He was following orders and operating within a widespread system.
• His Asperger's syndrome affected his perception of social norms and honesty.
• His SFO confessions were coerced under duress.

Prosecution's case. The prosecution, led by Mukul Chawla, portrayed Hayes as a greedy, dishonest mastermind who knowingly manipulated Libor for profit. They relied heavily on his recorded SFO interviews and electronic communications, arguing that his claims of innocence and coercion were a calculated charade to avoid conviction.

Focus on intent. The trial hinged on whether Hayes subjectively believed his actions were dishonest, according to the legal definition of fraud. The defense presented evidence of the pervasive nature of manipulation and the lack of clear rules, while the prosecution emphasized Hayes's attempts to conceal his actions and his own words admitting dishonesty.

10. The Verdict: A Scapegoat's Fall in a System Unchanged

The contrast between Hayes’s fate and those of his peers was stark.

Conviction and sentence. Despite his defense, Hayes was convicted on all eight counts of conspiracy to defraud. Judge Jeremy Cooke sentenced him to fourteen years in prison, later reduced to eleven on appeal, one of the longest sentences for a white-collar crime in British history.

Unequal accountability. Hayes's conviction stood in stark contrast to the outcomes for many others involved. While some brokers and lower-level traders faced charges or regulatory penalties, numerous senior executives who oversaw or were aware of manipulation largely escaped prosecution. Banks paid fines but avoided widespread criminal charges against individuals.

Systemic issues persist. The scandal exposed deep-seated cultural issues within the banking industry and regulatory failures, but Hayes became the primary symbol of the wrongdoing. Many individuals involved in the manipulation or the subsequent investigations benefited from the "revolving door," moving into lucrative roles advising the same industry they once policed, suggesting that fundamental systemic change remained elusive.

Last updated: May 5, 2025