Behind One of the Biggest Financial Scams in History

The LIBOR rate rigging will prove to be one of the biggest finance scans ever. Knowledge@Wharton has published an interesting post on what went on behind the scenes and how the institutions involved simply milked it.  This is just a couple of the opening paragraphs, but read the entire article over at the Wharton site or listen to the podcast.

In 2012, the global markets were rocked by revelations about a scam so massive it was almost hard to comprehend: the LIBOR (London Interbank Offered Rate) scandal. Like the U.S. federal funds rate, LIBOR is a key benchmark short-term interest rate upon which other financial instruments are based. While the target for the U.S. rate is set by the Fed, LIBOR is the average of self-reported interest rates major banks charge one another to borrow money. By colluding to manipulate LIBOR, the banks’ traders raked in a fortune by betting on assets influenced by the interest rate.

David Enrich followed the story while he was working for The Wall Street Journal and got close to the central figure in the scandal — star derivatives trader Tom Hayes. In the book, The Spider Network: The Wild Story of a Math Genius, a Gang of Backstabbing Bankers, and One of the Greatest Scams in Financial History, Enrich, now with The New York Times, shares the tale of this brazen scam on the Knowledge@Wharton show on Sirius XM channel 111.

Knowledge@Wharton: David, that’s a phenomenal book title. It covers about everything there. This book started with a series of articles you did for The Wall Street Journal several years ago.

David Enrich: That’s right. The mastermind of the LIBOR scandal was a guy named Tom Hayes, a mildly autistic mathematician who was a star trader at some of the world’s biggest banks. He was accused, at the end of 2012, of being the central figure in this scandal by both American and British prosecutors. Right around that time, I started to get to know Tom Hayes really well personally. I first interviewed him for an article that I was doing in The Wall Street Journal. Over the ensuing months and years, I’ve spent an enormous amount of time talking on the phone with him, having coffee with him, drinking beers with him. I got to know him really well, his wife really well, and the rest of his family as well. And that gave me this interesting glimpse into the world in which Hayes was operating.

Knowledge@Wharton: Was it surprising to you that you had such free access to the guy who essentially started this whole scam?

Enrich: That’s what I thought at first. I was stunned by the serendipity of the thing. This all got started because Hayes was the central person who had been accused by prosecutors. Not a whole lot was known about him, so I started talking to some of his friends and former business school classmates. One of them turned out to be pretty helpful and offered to pass on my phone number to him, with the caveat that, obviously, this guy is facing criminal charges — the last thing he’s going to do is call a reporter to talk to him.

I was in the London bureau of the Journal at the time, and I was sitting at home one evening, and my iPhone buzzed with a text message from a number I didn’t recognize. And it said, “This goes much, much higher than me. Not even the Justice Department knows the full story. I’m willing to talk to you, but I need to make sure I can trust you.” It was Tom Hayes.

He offered to meet me the following morning at a really busy train station in London outside a Burger King. He said he’d be wearing a brown leather jacket. And I’m thinking to myself that I’m stumbling into All The President’s Men or something.

Knowledge@Wharton: I was just going to say Watergate all over again.

Enrich: I’m thinking I’m Bob Woodward here. He ended up canceling the next morning because his wife had somehow seen his text messages to me, and his wife was a lawyer and thought this was a really bad idea. But the most fascinating thing to me is that what I’d thought about this at the outset was, “I cannot believe this criminal mastermind is naïve enough to be talking to me.” It turned out part of the reason he was so eager to talk to me is because the story was a lot more complicated than I had originally thought.

It wasn’t as clear-cut and black-and-white as prosecutors and regulators were portraying it, which was that he was the bad apple or the evil mastermind or evil genius who had orchestrated this scheme to rip off all these innocent people. It was much more a story about a financial system run amok, and how the overall banking system encouraged, more or less, this type of behavior not just from Hayes but from a really wide range of people, including a lot of his superiors who ended up not suffering particularly severe consequences from that.

Author: Martin North

Martin North is the Principal of Digital Finance Analytics

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