Libor scandal: the bankers who fixed the world’s most

important number1
With arrogant disregard for the rules, traders colluded for years to rig Libor, the
banks’ lending rate. But after the crash, the regulators were on their trail
At the Tokyo headquarters of the Swiss bank UBS, in the middle of a deserted trading floor, 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 dishevelled than usual. It was 15 September 2008, and it looked, in Hayes’s mind,
like the end of the world.

Hayes had been woken up at dawn in his apartment by a call from his boss, telling him to get to
the office immediately. In New York, Lehman Brothers was hurtling towards bankruptcy. At his
desk, Hayes watched the world processing the news and panicking. As each market opened, it
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 phenomenon at UBS, one of the best the bank had at trading derivatives. So far, the
mounting financial crisis had actually 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 a seemingly limitless appetite for risk, stayed in.
He was 28, 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 had
done with Lehman, he had also made a series of enormous bets that in the coming days interest
rates would remain stable. The collapse of Lehman Brothers, the fourth-largest investment bank
in the US, would surely cause those rates, which were really just barometers of risk, to spike. As
Hayes examined his trading book, one rate mattered more than any other: the London interbank
offered rate, or Libor, a benchmark that influences $350 trillion of securities and loans around the
world. For traders such as 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, and for various amounts of time, ranging from overnight to a
year. During his time as a junior trader in London, Hayes had got to know several of the 16
individuals responsible for making their bank’s daily submission for the Japanese yen. His flash
of insight was realising that these men mostly relied on inter-dealer brokers, the fast-talking
middlemen involved in every trade, for guidance on what to submit each day.

Brokers are the middlemen in the world of finance, facilitating deals between traders at different
banks in everything from Treasury bonds to over-the-counter derivatives. If a trader wants to buy
or sell, he could theoretically ring all the banks to get a price. Or he could go through a broker
1
It is taken from The Guardian, 18 Jan 2017, written by Liam Vaughan and Gavin Finch, which was 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). https://www.theguardian.com/business/2017/jan/18/libor-scandal-the-
bankers-who-fixed-the-worlds-most-important-number#comments (Last accessed on 20 Sep 2019).
who is in touch with everyone and can find a counter-party in seconds. Hardly a dollar changes
hands in the cash and derivatives markets without a broker matching the deal and taking his cut.
In the opaque, over-the-counter derivatives market, where there is no centralised exchange,
brokers are at the epicentre of information flow. That puts them in a powerful position. Only they
can get a picture of what all the banks are doing. While brokers had no official role in setting
Libor, the rate-setters at the banks relied on them for information on where cash was trading.

Most traders looked down on brokers as second-class citizens, too. Hayes recognised their worth.
He saw what no one else did because he was different. His intimacy with numbers, his cold
embrace of risk and his unusual habits were more than professional tics. Hayes would not be
diagnosed with Asperger’s syndrome until 2015, when he was 35, but his co-workers, many of
them savvy operators from fancy schools, often reminded Hayes that he wasn’t like them. They
called him “Rain Man”.

By the time the market opened in London, Lehman’s demise was official. Hayes instant-
messaged one of his trusted brokers in the City to tell him what direction he wanted Libor to
move. Typically, he skipped any pleasantries. “Cash mate, really need it lower,” Hayes typed.
“What’s the score?” The broker sent his assurances and, over the next few hours, followed a well-
worn routine. 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 may have featured in hundreds of trillions of dollars of loans and derivatives,
but this was how it was set: conversations among men who were, depending on the day,
indifferent, optimistic or frightened. When Hayes checked the official figures later that night, he
saw to his 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 convulsed, his profit and loss jumped around from
minus $20 million to plus $8 million in just hours, but Hayes had another ace up his sleeve.
ICAP, the world’s biggest inter-dealer broker, sent out a “Libor prediction” email each day at
around 7am to the individuals at the banks responsible for submitting Libor. Hayes messaged an
insider at ICAP and instructed him to skew the predictions lower. Amid the chaos, Libor was the
one thing Hayes believed he had some control over. He cranked his network to the max, offering
his brokers extra payments for their cooperation and calling in favours at banks around the world.

By Thursday, 18 September, Hayes was exhausted. This was the moment he had been working
towards all week. If Libor jumped today, all his puppeteering would have been for nothing. 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 reached out to his brokers in London. “I
need you to keep it as low as possible, all right?” he told one of them in a message. “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 Tokyo office at 8pm when that day’s Libors were published. The yen rate
had fallen 1 basis point, while comparable money market rates in other currencies continued to
soar. Hayes’s crisis had been averted. Using his network of brokers, he had personally sought to
tilt part of the planet’s financial infrastructure. He pulled off his headset and headed home to bed.
He had only recently upgraded from the superhero duvet he’d slept under since he was eight
years old.

Hayes’s job was to make his employer as much money as possible by buying and selling
derivatives. How exactly he did that – the special concoction of strategies, skills and tricks that
make up a trader’s DNA – was largely left up to him. First and foremost he was a market-maker,
providing liquidity to his clients, who were mostly traders at other banks. From the minute he
logged on to his Bloomberg terminal each morning and the red light next to his name turned
green, Hayes was on the phone quoting guaranteed bid and offer prices on the vast inventory of
products he traded. Hayes prided himself on always being open for business no matter how
choppy the markets. It was his calling card.

Hayes likened this part of his job to owning a fruit and vegetable stall. Buy low, sell high and
pocket the difference. But rather than apples and pears, he dealt in complex financial securities
worth hundreds of millions of dollars. His profit came from the spread between how much he
paid for a security and how much he sold it for. In volatile times, the spread widened, reflecting
the increased risk that the market might move against him before he had the chance to trade out
of his position.

All of this offered a steady stream of income, but it wasn’t where the big money came from. The
thing that really set Hayes apart was his ability to spot price anomalies and exploit them, a
technique known as relative value trading. It appealed to his lifelong passion for seeking out
patterns. During quiet spells, he spent his time scouring data, hunting for unseen opportunities. If
he thought that the price of two similar securities had diverged unduly, he would buy one and
short the other, betting that the spread between the two would shrink.

Everywhere he worked, Hayes set up his software to tell him exactly how much he stood to gain
or lose from every fraction of a move in Libor in each currency. One of Hayes’s favourite trades
involved betting that the gap between Libor in different durations would widen or narrow: what’s
known in the industry as a basis trade. Each time Hayes made a trade, he would have to decide
whether to lay off some of his risk by hedging his position using, for example, other derivatives.

Hayes’s dealing created a constantly changing trade book stretching years into the future, which
was mapped out on a vast Excel spreadsheet. He liked to think of it as a living organism with
thousands of interconnected moving parts. In a corner of one of his screens was a number he
looked at more than any other: his rolling profit and loss. Ask any decent trader and he will be
able to give it to you to the nearest $1,000. It was Hayes’s self-worth boiled down into a single
indisputable number.

By the summer of 2007, the mortgage crisis in the US caused banks and investment funds
around the world to become skittish about lending to each other without collateral. Firms that
relied on the so-called money markets to fund their businesses were paralysed by the ballooning
cost of short-term credit. On 14 September, customers of Northern Rock queued for hours to
withdraw their savings after the bank announced it was relying on loans from the Bank of
England to stay afloat.

After that, banks were only prepared to make unsecured loans to each other for a few days at a
time, and interest rates on longer-term loans rocketed. Libor, as a barometer of stress in the
system, reacted accordingly. In August 2007, the spread between three-month dollar Libor and
the overnight indexed swap – a measure of banks’ overnight borrowing costs – jumped from 12
basis points to 73 basis points. By December it had soared to 106 basis points. A similar pattern
could be seen in sterling, euros and most of the 12 other currencies published on the website of
the British Bankers’ Association each day at noon.

Everyone could see that Libor rates had shot up, but questions began to be asked about whether
they had climbed enough to reflect the severity of the credit squeeze. By August 2007, there was
almost no trading in cash for durations of longer than a month. In some of the smaller currencies
there were no lenders for any time frame. Yet, with trillions of dollars tied to Libor, the banks had
to keep the trains running. The individuals responsible for submitting Libor rates each day had no
choice but to put their thumb and forefinger in the air and pluck out numbers. It was clear that
their “best guesses” were unrealistically optimistic.

A game of brinkmanship had developed in which rate-setters tried to predict what their rivals
would submit, and then come in slightly lower. If they guessed wrong and input rates higher than
their peers, they would receive angry phone calls from their managers telling them to get back
into the pack. On trading floors around the world, frantic conversations took place between
traders and their brokers about expectations for Libor.

Nobody knew where Libor should be, and nobody wanted to be an outlier. Even where bankers
tried to be honest, there was no way of knowing if their estimates were accurate because there
was no underlying interbank borrowing on which to compare them. The machine had broken
down.

Vince McGonagle, a small and wiry man with a hangdog expression, had been at the
enforcement division of the Commodity Futures Trading Commission (CFTC) in Washington for
11 years, during which time his red hair had turned grey around the edges. A practising Catholic,
McGonagle got his law degree from Pepperdine University, a Christian school in Malibu,
California, where students are prepared for “lives of purpose, service and leadership”.

While his classmates took highly paid positions defending companies and individuals accused of
corporate corruption, McGonagle opted to build a career bringing cases against them. He joined
the agency as a trial attorney and was now, at 44, a manager overseeing teams of lawyers and
investigators.

McGonagle closed the door to his office and settled down to read the daily news. It was 16 April,
2008, and the headline on page one 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, written at the Journal’s London office near Fleet Street, went on to suggest that some
of the world’s largest banks might have been providing deliberately low estimates of their
borrowing costs to avoid tipping off the market “that they’re desperate for cash”. That was having
the effect of distorting Libor, and therefore trillions of dollars of securities around the world.

The journalist’s sources told him that banks were paying much more for cash than they were
letting on. They feared if they were honest they could go the same way as Bear Stearns, the 85-
year-old New York securities firm that had collapsed the previous month.

The big flaw in Libor was that it relied on banks to tell the truth but encouraged them to lie.
When the 150 variants of the benchmark were released each day, the banks’ individual
submissions were also published, giving the world a snapshot of their relative creditworthiness.
Historically, the individuals responsible for making their firm’s Libor submissions were able to
base their estimates on a vibrant interbank money market, in which banks borrowed cash from
each other to fund their day-to-day operations. They were prevented from deviating too far from
the truth because their fellow market participants knew what rates they were really being charged.
Over the previous few months, that had changed. Banks had stopped lending to each other for
periods of longer than a few days, preferring to stockpile their cash. After Bear Stearns there was
no guarantee they would get it back.

With so much at stake, lenders had become fixated on what their rivals were inputting. Any
outlier at the higher – that is, riskier – end was in danger of becoming a pariah, unable to access
the liquidity it needed to fund its balance sheet. Soon banks began to submit rates they thought
would place them in the middle of the pack rather than what they truly believed they could
borrow unsecured cash for. The motivation for low-balling was not tied to profit – many banks
actually stood to lose out from lower Libors. This was about survival.

Ironically, just as Libor’s accuracy faltered, its importance rocketed. As the financial crisis
deepened, central bankers monitored Libor in different currencies to see how successful their
latest policy announcements were in calming markets. Governments looked at individual firms’
submissions for clues as to who they might be forced to bail out next. If banks were lying about
Libor, it was not just affecting interest rates and derivatives payments. It was skewing reality.

There was no inkling at this stage that traders such as Hayes were pushing Libor around to boost
their profits, but here was a benchmark that relied on the honesty of traders who had a direct
interest in where it was set. Libor was overseen by the British Bankers Association (BBA). In
both cases, the body responsible for overseeing the rate had no punitive powers, so there was
little to discourage firms from cheating.

When McGonagle finished reading the Wall Street Journal article, he emailed colleagues and
asked them what they knew about Libor. His team put together a dossier, including some
preliminary reports from within the financial community. In March, economists at the Bank for
International Settlements, an umbrella group for central banks around the world, had published a
paper that identified unusual patterns in Libor during the crisis, although it concluded these were
“not caused by shortcomings in the design of the fixing mechanism”.

A month later, Scott Peng, an analyst at Citigroup in New York, sent his customers a research
note that estimated the dollar Libor submissions of the 18 firms that set the rate were 20 to 30
basis points lower than they should have been because of a “prevailing fear” among the banks of
“being perceived as a weak hand in this fragile market environment”.

While there was no evidence of manipulation by specific firms, McGonagle was coming around
to the idea of launching an investigation.

In 2009, Hayes was lured away from UBS to join Citigroup. The head of Citigroup’s team in
Asia, the former Lehman banker Chris Cecere, a small, goateed American with a big reputation
for finding new ways to make money, had been given millions of dollars to attract the best talent
– and Hayes was his round-one pick.

It wasn’t just the $3m signing bonus that had won Hayes over. The promise of a fresh start at one
of the world’s biggest banks, with him at centre stage in its aggressive expansion into the Asian
interest-rate derivatives market, had proved too tempting to resist. After persuading him to join,
Cecere boasted to colleagues that he’d found “a real fucking animal”, who “knows everybody on
the street”.

Cecere set in motion plans for Citigroup to join the Tibor (Tokyo interbank offered rate) panel
which, Hayes would crow, was even easier to influence than Libor because fewer banks
contributed to it. Hayes wanted to hit the ground running when he started trading, and being able
to influence the two benchmarks that helped determine the profitability of the bulk of his
positions was an important step. Another was bringing Citigroup’s own London-based Libor-
setters on board.

On the afternoon of 8 December, Cecere was at his desk on the Tokyo trading floor. He had an
office but seldom used it, preferring to be amid the action. He believed that six-month yen Libor
was too high. After checking the submissions from the previous day, he was surprised to see that
Citigroup had input one of the highest figures.

Cecere contacted the head of the risk treasury team in Tokyo, Stantley Tan, and asked him to find
out who the yen-setter was and request that he lower his input by several basis points. It turned
out the risk treasury desk in Canary Wharf was responsible for the bank’s Libor submissions.

“I spoke to our point man in London,” Tan wrote back to Cecere that afternoon. “I have asked
him to consider moving quotes [lower]”.

Cecere checked the Libors again later that night and was annoyed to see that Citigroup had only
reduced its six-month rate by a quarter of a basis point.

He wrote to Tan, “Can you speak with him again?”

The following day, Tan went back to the treasury desk in London as requested. He also
forwarded the message chain to Andrew Thursfield, Citigroup’s head of risk treasury in London.
The response he got back from his UK counterpart left little room for misinterpretation: it was a
thinly veiled warning to back off.

Hayes, who sat just behind his boss, was not on the email chain, but Cecere sent it to him.

Thursfield was a straitlaced man in his forties who had spent more than 20 years in risk
management at Citigroup after joining as a graduate trainee. He saw himself as the guardian of
the firm’s balance sheet and didn’t take kindly to being told how to do his job by a pushy trader
who knew nothing of the intricacies of bank funding.

Rather than lowering the inputs, Thursfield’s team increased its submission days later, pushing
the published Libor rates higher. Hayes would have to try a different tack. On 14 December he
sent an email to his London counterpart, asking him to approach the rate-setters directly.

“Do you talk to the cash desk and did we know in advance?” Hayes asked, referring to the bank’s
decision to bump up its Libor submissions. “We need good dialogue with the cash desk. They can
be invaluable to us. If we know ahead of time we can position and scalp the market.”

What Hayes didn’t realise was that no amount of schmoozing was going to get the rate-setters
onside. Unlike some banks, Citigroup was taking the CFTC’s investigation into Libor seriously.
In March 2009, Thursfield had personally delivered an 18-page presentation via video link to
investigators on the rate-setting process. The cash traders weren’t about to risk their necks for
someone they didn’t know who worked on the other side of the world.
It wasn’t just that they knew they were being watched. Thursfield was not only a stickler for the
rules but had taken a personal dislike to Hayes when the pair had met three months earlier. It was
October 2009, shortly after Hayes had accepted the job at Citigroup, and his boss had sent him to
London to meet the bank’s key players.

“Good to meet you. You can help us out with Libors. I will let you know my axes,” Hayes said by
way of an opening gambit when he was introduced to Thursfield.

Unshaven and dishevelled, Hayes told the Citigroup manager how the cash desk at UBS
frequently skewed its submissions to suit his book. He boasted of his close relationships with
rate-setters at other banks and how they would do favours for each other. Hayes was trying to
charm Thursfield, but he had badly misjudged the man and the situation. The following day
Thursfield called his manager, Steve Compton, and relayed his concerns.

“Once you stray on to talking about Libor fixings, I mean we just paid another $75,000 bill to the
lawyer this week for the work they’re doing on the CFTC investigation,” Thursfield said.
“Whoever is the desk head, or whatever, [should] have a close watch on just what he’s actually
doing and how publicly. It’s all, you know, very much barrow-boy-type [behaviour].”

The knock on Hayes’s door came at 7am on a Tuesday, two weeks before Christmas 2012.
Hayes padded down the bespoke pine staircase of his newly renovated home in Woldingham,
Surrey, to let in more than a dozen police officers and Serious Fraud Office investigators. A year
before, he had been fired from Citigroup, and shortly afterwards returned to the UK, where he
married his girlfriend Sarah Tighe.

Hayes stood at his wife’s side as the officers swept through the property, gathering computers and
documents into boxes and loading them into vehicles parked at the end of the gravel driveway.
The couple had only moved in a fortnight before. Their infant son was upstairs in bed. Traffic
was heavy by the time the former trader was led to the back of a waiting car. The 20-mile crawl
from Surrey to the City of London passed in silence.

Bishopsgate police station is a grey, concrete building on one of the financial district’s busiest
thoroughfares. In a formal interview, Hayes was told he had been brought in to answer questions
relating to allegations that between 2006 and 2009 he had conspired to manipulate yen Libor with
two of his colleagues. Hayes responded that he planned to help but would need time to consider
the 112 pages of evidence so would not be answering any questions that day. It was late when he
arrived back in Surrey.

In June, Barclays had become the first bank to reach a settlement with authorities, admitting to
rigging the rate and agreeing to pay a then-record £290 million in fines. From the moment
Barclays had settled, sparking a political firestorm that burned for weeks, Hayes’s destiny had
been leading to this point. The Serious Fraud Office (SFO), which had previously resisted
launching a probe into Libor rigging, was forced to reverse its position and on 6 July issued a
statement announcing it would be undertaking a criminal investigation. That week the
government launched its own review into the scandal. The British public and its politicians were
out for scalps.

On 19 December, eight days after his arrest, Hayes was at home on his computer when a news
bulletin popped up with a link to a press conference in Washington. As cameras flashed, Attorney
General Eric Holder and Lanny Breuer, head of the Justice Department’s criminal division, took
turns outlining the $1.5bn settlement the authorities had reached with UBS over Libor. The Swiss
bank, they explained, had pleaded guilty to wire fraud at its Japanese arm. Then came the sucker
punch.

“In addition to UBS Japan’s agreement to plead guilty, two former UBS traders have been
charged, in a criminal complaint unsealed today, with conspiracy to manipulate Libor,” said
Breuer. “Tom Hayes has also been charged with wire fraud and an antitrust violation.” Neither
Tan nor Cecere has ever been charged with wrongdoing.

At that moment the full horror of the situation hit Hayes for the first time. The two most powerful
lawyers in the US planned to extradite him on three separate criminal charges, each carrying a
20–30 year sentence. Less than 24 hours later, a member of Hayes’s legal team was on the phone
to the SFO to discuss cutting a deal.

Fighting the charges seemed futile: the UBS settlement made reference to more than 2,000
attempts by Hayes and his colleagues to influence the rate over a four-year period. He was the
star attraction, the “Jesse James of Libor”, as he would later tell it. The US authorities had yet to
issue extradition papers, but it was only a matter of time.

So began a race to convince the SFO to take on Hayes as a sort of chief informant, who in return
would receive leniency and, more importantly, an agreement that he would be dealt with in the
UK.

To secure this arrangement Hayes had to agree to tell the SFO everything he knew and promise to
testify against everybody involved. Crucially, he also had to plead guilty to dishonestly rigging
Libor. It was not enough to admit trying to influence the rate. He had to confess that he knew it
was wrong.

During two days of so-called scoping interviews to test his knowledge of the case, Hayes talked
openly about his campaign to rig Libor, for the first time in his life. At the SFO’s offices near
Trafalgar Square he admitted he had acted dishonestly and brought the investigators’ attention to
aspects of the case they knew nothing about. The interviews covered everything from his entry
into the industry and his trading strategies to how the Libor scheme began and the various
individuals who helped him rig the rate. They barely had to prod to get him to talk. Hayes seemed
to relish reliving moments from his past. His voice sped up when he talked about heady days
piling into positions, squeezing the best prices from brokers and playing traders off against each
other.

“The first thing you think 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 grey area, push the edge of the envelope,”
he said in one early interview. “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.”

Paper coffee cups piled up as Hayes went over the minutiae of the case. At one stage, Hayes was
asked about how he viewed his attempts to move Libor around. The exchange would prove
crucial.

“Well look, I mean, it’s a dishonest scheme, isn’t it?” Hayes said. “And I was part of the
dishonest scheme, so obviously I was being dishonest.”