just so pure.”7
In poker, there are two types of player: tight folk who wait for the best cards, then bet big and hope to get paid; and hawks who can't resist getting involved in every hand, needling opponents and scaring the nervous ones into folding. Hayes was firmly in the latter camp. His M.O. was to trade constantly, picking up snippets of information, racking up commissions as a market maker and building a persona as a high-volume, high-stakes risk-taker.
Hayes's success on the trading floor brought a newfound confidence to the naturally reticent young man. Trading is primarily a solitary pursuit, one individual's battle against the world, armed only with his guile, a bank of screens and a phone. Still, among the derivative traders and quants Hayes found kindred spirits, people for whom systems and patterns were second nature and who shared his passion for financial markets and economics. He was quick to dismiss those he considered lacking in talent. Salespeople – the polished, mostly privately educated, multilingual young men and women drafted in droves by prestigious investment banks to be their public face – were given particularly short shrift.
As a state-school-educated Londoner with a cockney twang and a love of football, Hayes felt he had more in common with the mostly working-class interdealer brokers who matched up buyers and sellers. Naturally suspicious of other people's intentions, Hayes took months before he warmed to a broker. Once he did, he called him incessantly, prodding him for information about rivals at other firms and scolding him if he felt he was getting quoted poor prices. If he pushed too far, slamming down the phone or dishing out profanities, he would call back to apologize and throw some extra business the broker's way. Hayes was loyal to those he considered to be on his side and merciless with anyone he didn't. Everything was black and white. The contacts he made early in his career at the banks and interdealer brokers in London would play a pivotal role later when his gaze fixed firmly on Libor.
For all the ribbing Hayes took on the trading floor, he had found a place where he belonged. He rose early, worked at least 12 hours a day and rarely stayed awake past 10 p.m. He often got up to check his trading positions during the night. And ultimately, Hayes went along with the jokes because the obsessive traits that had marginalized him socially turned into assets the moment he logged on to his terminal.
In the spring of 2006, a headhunter put Hayes in touch with an Australian banker named Anthony Robson who was recruiting for his sales desk at UBS. The pair met in a quiet corner of a branch of Corney & Barrow, a chain of basement haunts popular with City of London bankers where deals are forged over pints of ale and pie and mash. Within five minutes it was obvious to Robson that Hayes, with his scruffy demeanor and idiosyncrasies, wasn't suited to a client-facing role. But there was something undeniably intriguing about the blond-haired kid who barely broke for breath. For an hour and a half they talked about trading methodologies, interest-rate curves and derivatives pricing models. Hayes spoke with a zeal and depth of knowledge that left Robson astounded. When the meeting was over, Robson was convinced he'd met one of the most gifted individuals he'd ever interviewed. That night he put Hayes in contact with one of his counterparts in Tokyo.
In March 2006, the Japanese central bank had announced plans to curb overheating in the economy by raising interest rates for the first time in more than a decade. The move brought volatility to money markets that had been dormant, spurring a wave of buying and selling in cash, forwards and short-term interest-rate derivatives. Keen to capitalize, UBS was putting together a small team of front-end traders, who dealt in instruments that matured within two or three years. Hayes would be the perfect addition. At the time, yen was still considered something of a backwater within the banks, a steppingstone on the way to the big leagues of trading dollars or euros. The market was full of inexperienced traders not savvy enough to know when they were being fleeced. Hayes was nervous about moving to the other side of the world but sensed it was too good an opportunity to pass up.
RBS, RBC, UBS – the name on the door mattered little to Hayes, as long as he had the bank's balance sheet to wager. That summer he packed up his belongings, said goodbye to his family and boarded a flight to Tokyo. It was a major promotion that officially retired his image as a cocoa-sipping, blankie-clutching eccentric and recognized him for what he'd become: an aggressive and formidable trader. Headquartered in Zurich, UBS was a powerhouse, combining a vast balance sheet with a hard-charging Wall Street ethos and the freedom afforded by a hands-off Swiss regulator. The culture was aggressive and, as would later be proved, fatally predisposed to corruption.8 Traders were king, and as long as they were making money, few questions were asked.
Hayes found a small apartment a short subway ride to UBS's Tokyo headquarters. His girlfriend, a young British saleswoman he'd met at RBS named Sarah Ainsworth, moved to Tokyo with Calyon Securities around the same time. The relationship petered out. The couple never saw each other. One or two old contacts from London and some particularly persistent brokers dragged Hayes out for a pint now and then amid the neon lights of Tokyo, where a wealthy young expat could have some serious fun, but Hayes was irritatingly distracted company. He had developed a more rarefied addiction.
Interest-rate swaps, forward rate agreements, basis swaps, overnight indexed swaps – the menu of complex financial instruments Hayes bought and sold came in a thousand varieties, but they shared one thing in common: Their value rose and fell with reference to benchmark interest rates, and, in particular, to Libor. Where Libor would land the next day was the great unknowable. Yet it was the difference between success and failure, profit or loss, glory or ignominy. Trading, like any other form of gambling, involves attempting to build a sense of the future based on incomplete and evolving information: rumor, historic market behavior, macroeconomic events, business flows elsewhere inside the bank. The better information a trader has, the greater his edge and the more money he can make. It became Hayes's mission to control the chaos around him, to eradicate the shades of gray. “I used to dream about Libor,” Hayes said years later. “They were my bread and butter, you know. They were the instrument that underlined everything that I traded … I was obsessed.”9
Chapter 3
Beware of Greeks Bearing Gifts
In 1969, Neil Armstrong walked on the moon, Richard Nixon became president of the United States and 400,000 hippies descended on a sleepy farm near Woodstock. On the other side of the Atlantic, on a winter's day in London, a mustachioed Greek banker named Minos Zombanakis was taking his own small step into the history books. He had hit upon a novel way to loan large amounts of money to companies and countries that wanted to borrow dollars but would rather avoid the rigors of U.S. financial regulation.
As the sun set over the rooftops of London's West End, Zombanakis was standing by his desk in Manufacturers Hanover's10 new top floor office, drinking champagne and eating caviar with Iran's central bank governor, Khodadad Farmanfarmaian. Zombanakis had just pulled off the biggest coup of his career with the signing of an $80 million loan for the cash-strapped Shah of Iran. The Iranians had brought the beluga caviar and Zombanakis the vintage champagne – the party went on into the night.
The Iranian loan was one of the first ever to charge a variable rate of interest that reflected changing market conditions and be split among a group of banks. It was just as revolutionary in the staid world of 1960s banking as the moon landing, though celebrated with less fanfare, and it marked the birth of the London interbank offered rate, or Libor.
“I felt a sense of achievement to set up the whole thing, but I didn't think we were breaking ground for a new period in the financial world,” says Zombanakis, now 90 and living back in Kalyves, on the island of Crete, amid the same olive groves his family has tended for generations. “We just needed a rate for the syndicated-loan market that everyone would be happy with. When you start these things, you never know how they are going to end up, how they are going to be used.”
Much like the rate he created, Zombanakis had a humble start in life. The second of seven children, he'd grown up in a house with dirt floors and no electricity or running water.11 Zombanakis left home at 17, fleeing Nazi-occupied Crete in a smuggler's open-topped boat to make the 200-mile journey to enroll at