The Spider Network: One of the Greatest Financial Scams in History

The Spider Network tells the story of one of the greatest financial scams in history–and the low-ranking math genius who wound up being the fall guy in the scandal. 

In 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 Wall Street Journal’s David Enrich sets out how the scam was hatched and came to engulf some of the biggest financial institutions on earth. The story centers around the troubled but bright financial wizard Tom Hayes and a colorful group of bankers who realized that they could manipulate Libor– the London Interbank Offered Rate–in such a way that it would reward them with huge profits.

Libor was originally created by the British Bankers Association 20 years ago. It was supposed to reflect the interest rate at which member banks could borrow from one another, a rate which serves as a sort of floor for the rates the banks charge to borrowers. Over time, it became one of the most important interest rates in the world, affecting everything from corporate loans to mortgages.

But even as Libor’s influence was everywhere, few people understood the fragile mechanism that controlled it. Hayes and his team were amongst the first to realize that the Libor rate was determined by a small group of functionaries and ultimately exploited this knowledge for their own financial gain. Hayes quickly became one of the most sought after traders on Wall Street, pursued by virtually every single one of the big banks.

Hayes was eventually sentenced to 14 years in prison for his involvement in the scheme. Banks paid heavy fines for their Libor misconduct but the top executives escaped without any personal sanctions, despite evidence showing that Hayes’ bosses not only knew about his ability to manipulate Libor but actively recruited him and promoted him for it.

Breitbart News asked Enrich to discuss his book.

Q. The Spider Network is about the man at the center of a huge financial scandal. Why should normal people care about this?

A. Two reasons. First, there’s a decent chance this scandal affected them. It involves the world’s biggest banks manipulating something called Libor, which serves as the basis for interest rates on loans and financial contracts all over the world.

For example, if you have a variable-rate mortgage, the rate you pay is likely based on Libor. If you live in a town that bought certain insurance contracts, you as a taxpayer might have lost money.

Second, a lot of people are upset about the apparent pattern of financial elites getting away with murder while low-ranking employees take the fall for the greed and recklessness that preceded the financial crisis. The Spider Network is about that phenomenon.

Q. Who’s the main character of the book?

A. He’s a young, mildly autistic mathematician named Tom Hayes. He was a star trader at some of the world’s biggest banks.

Like a lot of his peers, he was drawn to the banking industry because he was naturally good with numbers and at spotting patterns.

Also like a lot of his peers, he was encouraged from the time he entered the industry to hunt for any edge he could use to make more money. An edge could be better information, or dumber clients, or faster or more sophisticated trading programs, or finding creative ways to push the envelope.

Hayes realized that Libor was a flawed instrument that lots of people were already manipulating. He set out to take that manipulation to a higher, more ambitious level. He enlisted not only his colleagues but also his competitors and outside brokers to help him. In the process, he earned millions of dollars for his employers.

Q. So what happened to Hayes? Did he get caught?

A. The U.S. Justice Department filed criminal fraud charges against him in 2012. The next year, British prosecutors charged him with similar crimes. He was tried and convicted in a London court in 2015. He was sentenced to 14 years in prison. He’s currently in a maximum-security prison. (The U.S. charges are still outstanding.)

As far as I can tell, Hayes is the only banker currently in jail for crimes committed during the financial crisis.

Q. Why did he get singled out for punishment?

A. There are two main reasons, and this is where things get really interesting. First, Hayes did just about everything in writing. He used email and instant messages to instruct his peers to nudge Libor up or down on his behalf. When he didn’t write out his instructions, he delivered them over recorded phone lines. All this documentary material became powerful evidence against him.

The second factor is actually more important. After the financial crisis, politicians and prosecutors were under enormous public pressure to find individual bankers to hold accountable for the industry’s behavior. They could have gone after senior executives, the guys responsible for establishing their banks’ cultures and overseeing their practices.

Instead, they went after lower-level employees, guys like Hayes. That had the advantage of being much easier. The evidence against Hayes was ironclad. But locking him up is unlikely to have much impact on the banking industry’s future behavior.

Q. Is it really so simple? Did prosecutors just go after the low-hanging fruit?

A. Prosecutors live in fear of bringing charges against powerful people and then losing in court. They’re basically risk-averse. They want to run up their win-loss records by only going after slam-dunk cases. It’s an understandable impulse, but the result is that not a single senior executive at a major financial institution ever had to do a “perp walk” or show up in court for his conduct during the crisis.

What scares senior bank executives is not losing their jobs or even losing some of their money. It’s the public shame of being paraded in front of TV cameras and facing the terrifying uncertainty of being at the mercy of a jury of normal people.

So it strikes me as a huge missed opportunity not to have charged any of them.

Q. So do you view Hayes as a victim? Is he the hero of the book?

A. Not exactly. Hayes definitely did things that were wrong, and he should have known better, and he deserves to be punished. But so do a ton of other people, and that hasn’t happened.

It’s a great example of powerful government institutions punishing lower-ranking employees for systemic misconduct, and letting the big guys get away with impunity. I think normal Americans recognize this pattern, and it makes their blood boil.

This is a big source of the anger that Trump and Bernie Sanders tapped into so successfully last year.

Q. How do government regulators come across in the story? Are they the heroes?

A. No. The Libor scandal was due in large part to regulators, central bankers and politicians turning a blind eye to widespread misconduct. On occasion, whistleblowers flagged the problem and it still went unaddressed.

Even when an obscure U.S. government agency started investigating, more powerful authorities dragged their feet. It wasn’t until they realized that perhaps this would be their chance to nab a real, human banker that they sprang into action.

Q. How did you get all the detailed, personal information about Hayes and his peers that’s in the book?

A. Shortly after Hayes got in serious legal trouble, I managed to strike up a relationship with him. I gradually gained his trust and, later, his wife and other family members’ trust as well. Over the next couple years, I had a front-row seat as Hayes tried to navigate the U.S. and British criminal-justice systems and as his life unraveled.

Another key source for me was that I obtained a hard drive’s worth of evidence prosecutors had collected: Emails, chat transcript, personnel records, phone recordings and the like, and they captured not only bankers committing crimes but also bankers going about their normal lives. I got to hear them talking on the phone with their wives, for example.

It was a really extraordinary window into how the industry operates when it thinks nobody is watching.