A jailed former banker who became the face of the Libor rate manipulation scandal left behind faulty trading models and millions of dollars in losses when he quit his job at Royal Bank of Canada years earlier, a new book reveals.
Tom Hayes, a former trader at UBS AG and Citigroup Inc., was one of the only bankers sent to prison for crimes stemming from the global financial crisis. He helped mastermind the manipulation of an interest-rate benchmark that affects trillions of dollars of loans, mortgages and derivatives contracts around the world. An international investigation started in 2012 revealed widespread manipulation by multiple banks, which were slapped with billions of dollars in fines.
But his ill-fated career at UBS began in 2006 after he took a lucrative offer to leave RBC's London office, according to a new book titled The Spider Network: The Wild Story of a Math Genius, a Gang of Backstabbing Bankers, and One of the Greatest Scams in Financial History.
The Canadian bank, spurned by Mr. Hayes's defection, found he had taken ambitious trading positions using dubious models that exaggerated his success. The discoveries cast doubt over his "integrity," according to an internal report written in 2006, and RBC flagged its concerns with regulators as well as with UBS. But within months, RBC backed down from its allegations, apparently deciding Mr. Hayes had likely been sloppy or naive, rather than underhanded. A UBS employee suspected that RBC was worried cracking down on Mr. Hayes would draw unwanted attention.
Either way, the Swiss bank embraced its prized hire.
"It's not the case that had RBC pulled the plug on Tom Hayes, that the Libor scandal would not have happened," Mr. Enrich, the book's author and the financial investigations editor at the Wall Street Journal, said in an interview. Mr. Enrich developed a close relationship with Mr. Hayes while covering his downfall.
But "the reality is that if Hayes hadn't existed at UBS, the Libor scandal would have been orders of magnitude smaller."
A spokesperson for RBC said: "During his time here, he had no involvement with our Libor submission process," and that "Mr. Hayes is not alleged to have violated any laws while with RBC."
At UBS and then Citigroup, however, Mr. Hayes found he could skirt the rules to nudge the key Libor benchmark rate up or down, moving interest rates that influenced how profitable his trades would be, using both carrot and stick to gain co-operation from a network of traders and brokers.
In 2015, a British court sentenced him to 14 years in jail, which was reduced to 11 years on appeal.
Mr. Hayes joined RBC more than a decade earlier, in late 2004, having left a job at Royal Bank of Scotland after being accused of improper trading. But when RBC had a firm check his background, RBS didn't disclose any red flags.
By the summer of 2006, Mr. Hayes "was making millions of dollars for RBC," Mr. Enrich writes. His success trading products tied to Japanese interest rates soon brought job offers from competitors, including a lucrative opportunity at UBS. Fearful of losing a talented trader, RBC countered with more money, but Mr. Hayes still resigned on June 6 to join UBS.
Before leaving, he walked his RBC boss, Andy Scott, through his outstanding trades, which where far more extensive than his superiors knew: Mr. Hayes had made a flurry of trades, even as he was talking to UBS. "That day, RBC marched Hayes out of the building," Mr. Enrich writes.
In the aftermath, RBC rushed to unwind Mr. Hayes's positions, suffering losses. The bank was also on the hook for about $500,000 (U.S.) in outstanding brokers' bills. "The total tab for cleaning up Hayes's mess reached about $7-million," according to Mr. Enrich.
RBC opened an internal review. The bank found that not only had Mr. Hayes handed confidential numbers detailing his profits and losses to UBS, but the computer models he had built to price derivatives at RBC were "spitting out false numbers," Mr. Enrich writes, in a way that "exaggerated the profitability of Hayes's trading."
An internal report produced by the bank, and cited by Mr. Enrich, concluded: "This action misled the firm regarding the value of the trades and strategies employed," and raised questions about Mr. Hayes's "integrity."
RBC warned Britain's Financial Services Authority (FSA), and a compliance official phoned UBS. The Canadian bank also spoke to Mr. Hayes, who feared that RBC might withhold a reference for his new job until it finished its review, the book says.
"We made the appropriate disclosure to the regulator regarding the termination of Mr. Hayes's employment at RBC, and then to UBS as a professional courtesy," an RBC spokesperson said. "And we fully co-operated with the regulator in their requests for information relating to Mr. Hayes."
But in later phone calls, RBC's compliance office took a softer stance, according to Mr. Enrich. A UBS employee wrote a file note saying RBC "was, if not backtracking, at least playing down the severity of the seriousness of the issues."
"One surmises that if UBS were to take significant action this may place RBC … in an uncomfortable position," the UBS employee wrote.
The FSA declined to get involved, and the Swiss bank put Mr. Hayes on basic probation for three months.
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