The story of the Libor scam

In The Spider Network, David Enrich tackles conspiracy among a small group of Wall Street traders

THE SPIDER NETWORK 

The Wild Story of a Math Genius, a Gang of Backstabbing Bankers, and One of the Greatest Scams in Financial History

David Enrich 

Custom House/William Morrow

509 pages; $29.99

There have been so many financial scandals perpetrated by Wall Street bankers, traders and executives in the past decade that it’s hard to keep up. Most everyone remembers the granddaddy of all scandals, of course: How for years Wall Street rewarded itself with big bonuses for issuing home mortgages to people who it knew had little chance of repaying the borrowed money, packaged up those billions of dollars of squirrelly mortgages into securities and then sold them off as AAA-rated investments the world over. That’s the one that helped to cause the 2008 financial crisis. Big mistake. 

But there were also scandals involving banks conspiring to rig the foreign exchange markets; banks conspiring to manipulate the markets for gold and silver; banks scheming with Iran to hide billions of dollars of illegal transactions and laundering money; banks helping their customers avoid taxes; and the so-called London Whale scandal, where a JPMorgan Chase & Company trader in London cost the bank $6.2 billion after making risky bets using depositors’ money. 

In The Spider Network, the journalist David Enrich tackles another one of these often overlooked scandals — the brazen conspiracy among a small group of Wall Street traders, brokers and their bosses, mostly based in Japan and London, to manipulate the price of Libor to ensure their big trading gains, big bonuses and big payoffs. 

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. 

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. 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. 

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. 

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 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. 

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 recognise.” Tantalisingly, 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 DOJ 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. 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. 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. 


©2017 The New York Times News Service