The Spider Network

The Spider Network Plot Summary

Introduction

In the summer of 1969, a Greek banker named Minos Zombanakis faced an unusual challenge. The Shah of Iran needed to borrow $80 million, but no single bank could provide such a large sum. Zombanakis devised an innovative solution: a syndicated loan where the interest rate would float based on what participating banks reported as their own borrowing costs. This seemingly modest financial innovation would eventually evolve into LIBOR - the London Interbank Offered Rate - a benchmark that would come to underpin hundreds of trillions of dollars in financial contracts worldwide, from home mortgages to complex derivatives. What began as a practical solution to a specific problem would, decades later, become the center of one of the most far-reaching financial scandals in history. The LIBOR manipulation scandal revealed profound flaws in the global financial system: the dangerous combination of minimal oversight, misaligned incentives, and a culture that prioritized short-term profits over integrity. Through this extraordinary tale of financial corruption, we gain unique insights into how banking really works, how regulation fails, and how seemingly technical financial matters can profoundly impact ordinary people around the world. This historical account will fascinate anyone interested in financial markets, corporate ethics, or understanding how a small group of traders managed to rig one of the most important numbers in the world.

Chapter 1: The Birth of LIBOR: Creating a Global Financial Benchmark (1969-1986)

The story of LIBOR begins in the late 1960s, a period of significant transformation in global finance. The post-war Bretton Woods system was showing signs of strain, currencies were becoming more volatile, and banks were expanding their international operations. In this environment, financial institutions needed new tools to manage risk and price loans across borders. The pivotal moment came in 1969 when Mohammad Reza Pahlavi, the Shah of Iran, sought an $80 million loan to finance a new government agency. Minos Zombanakis, a Greek banker working for Manufacturers Hanover in London, faced a challenge: the loan was too large for a single bank, and with interest rates fluctuating wildly, a fixed-rate loan could quickly become unprofitable. His innovative solution was to create a syndicate of banks that would share the risk, with the interest rate floating based on the average cost of funds reported by the participating banks. This arrangement protected lenders from interest rate volatility while ensuring the loan remained profitable. The Shah received his financing, the banks earned their interest, and Zombanakis's "very cunning" arrangement was celebrated with champagne and Iranian caviar. No one realized that this modest innovation would eventually become a cornerstone of the global financial system. By 1986, this approach had evolved into the London Interbank Offered Rate, officially administered by the British Bankers' Association (BBA). The process was straightforward: each morning, a panel of major banks would submit the rates at which they believed they could borrow funds from other banks. After discarding the highest and lowest submissions, the remaining rates would be averaged to produce the daily LIBOR rate. This period coincided with Margaret Thatcher's "Big Bang" deregulation of financial markets in 1986, which transformed London into a global financial powerhouse. Restrictions on the London Stock Exchange were loosened, foreign banks flooded into the City, and a new era of financial innovation began. As American banks exported their aggressive trading culture to London, British financial innovations like LIBOR spread throughout the global system. By the early 1990s, LIBOR had become embedded in countless financial contracts worldwide, from corporate loans to residential mortgages. From the beginning, however, LIBOR contained a fundamental flaw that would eventually prove catastrophic: it relied on the honesty of banks. The rates submitted weren't based on actual transactions but on estimates of what banks thought they could borrow at. This subjective element, combined with minimal oversight, created an opportunity for manipulation. Junior bank employees would simply call in their submissions to Thomson Reuters each morning, where a low-level employee would calculate the averages. With virtually no verification process, a bank could easily skew its submission to benefit its trading positions or project an image of financial health. As LIBOR's importance grew throughout the 1980s, so did the potential rewards for manipulating it. What had begun as Zombanakis's practical solution for a single loan had evolved into a benchmark that would eventually determine interest payments on hundreds of trillions of dollars in financial instruments. The stage was set for what would become one of the greatest financial frauds in history.

Chapter 2: The Rise of Derivatives: Setting the Stage for Manipulation (1986-2006)

Between 1986 and 2006, the financial world underwent a revolution driven by the explosive growth of derivatives. These financial instruments, whose values derived from underlying assets or benchmarks, transformed from specialized tools into the dominant force in global markets. The catalyst for this transformation was unprecedented volatility in financial markets during the 1970s and early 1980s. Oil price shocks, currency fluctuations following the collapse of the Bretton Woods system, and inflation-fighting interest rate hikes created new risks that companies and financial institutions needed to manage. A watershed moment came in 1981 when IBM approached Salomon Brothers for help with its European debt issued in Swiss francs and German marks. IBM preferred to have all its debts denominated in American dollars to avoid exchange rate risks. Salomon devised an ingenious solution: they found the World Bank, which wanted dollar-denominated debt, and arranged for the two institutions to swap their payment obligations. This transaction marked the birth of the interest rate swap, a derivative that would become ubiquitous in global finance. By the 1990s, these instruments had evolved into a massive market where banks, corporations, and governments could transfer interest rate risks. In 1996, a fateful decision embedded LIBOR even more deeply into the financial system. The Chicago Mercantile Exchange applied to the Commodity Futures Trading Commission for permission to use LIBOR as the reference rate for its increasingly popular interest rate derivatives. Despite warnings from industry experts that this could create "an opportunity for manipulation," the CFTC approved the application, declaring that LIBOR "does not appear to be readily susceptible to manipulation." This decision would prove catastrophically wrong, as it dramatically increased the volume of financial contracts tied to LIBOR and, consequently, the incentives to manipulate it. As derivatives markets exploded in size, the banking industry itself underwent dramatic transformation. Provincial institutions became global powerhouses through aggressive expansion and consolidation. The Royal Bank of Scotland, under CEO Fred Goodwin, described itself as a "supreme predator" as it pursued international growth. By 2003, RBS had accumulated £5.3 trillion of interest rate derivatives on its books. Banks competed fiercely for talented derivatives traders, lavishing them with enormous bonuses and extravagant perks. These traders became the new aristocracy of finance, their compensation reflecting the enormous profits they generated. This environment created powerful incentives for LIBOR manipulation. Since each bank's submission was made public, investors scrutinized the data for indicators about the bank's financial health. A bank reporting higher borrowing costs than its peers might appear to be in trouble, giving banks reason to understate their true costs. Simultaneously, the vast portfolios of derivatives that banks had accumulated created incentives to push LIBOR in directions that would benefit their trading positions. A small movement in LIBOR could generate millions in profits or losses on these portfolios. By the mid-2000s, the combination of minimal oversight, enormous financial incentives, and a culture that rewarded profit above all else had created perfect conditions for manipulation. The derivatives revolution had transformed LIBOR from a useful benchmark into a potential weapon for generating profits. What had begun as a tool for managing risk had ironically become a source of systemic risk itself, as the integrity of one of the world's most important financial benchmarks was increasingly compromised by the very institutions entrusted with maintaining it.

Chapter 3: Inside the Spider Network: How Traders Rigged the System (2006-2008)

By 2006, a brilliant but socially awkward young trader named Tom Hayes had emerged as a rising star in the world of interest rate derivatives. After stints at the Royal Bank of Scotland and Royal Bank of Canada, Hayes joined UBS in Tokyo, where he specialized in products linked to Japanese interest rates. Tall and slim with an extraordinary mathematical mind, Hayes could spot patterns in financial markets that others missed. His social awkwardness earned him the nickname "Tommy Chocolate" for his preference for orange juice over alcohol at industry gatherings. Hayes quickly discovered something troubling about LIBOR: it was already being manipulated. Banks were moving their submissions in ways that benefited their trading positions, a practice he had observed at his previous employers. At UBS, the traders responsible for submitting the bank's daily LIBOR data sat right next to those making wagers that depended on LIBOR movements. On his first day of trading at UBS in September 2006, Hayes casually asked broker Terry Farr to "do me a favor today and get LIBORS right up." This simple request marked the beginning of what would become an elaborate scheme to rig one of the world's most important financial benchmarks. What made Hayes's operation unique was its scope and systematic nature. He built an extensive network of collaborators across multiple institutions, creating what prosecutors would later call a "spider's web" of manipulation. He enlisted UBS's LIBOR submitters, including Roger Darin in Singapore, to move the bank's submissions up or down depending on his trading positions. When Darin had trades that would benefit from LIBOR moving in the opposite direction, Hayes would buy those positions to align their interests. He recruited his stepbrother, Peter O'Leary at HSBC, to approach that bank's LIBOR submitters. Most importantly, he developed relationships with brokers at firms like ICAP, RP Martin, and Tullett Prebon who could influence LIBOR submitters at other banks. A particularly effective ally was Colin Goodman, an ICAP broker who sent out influential daily "run-throughs" – spreadsheets containing his predictions for where LIBOR would end up. Many banks' LIBOR submitters simply copied Goodman's numbers rather than doing their own analysis, giving the self-styled "Lord LIBOR" significant power to influence the benchmark. Hayes ensured Goodman's cooperation through "switch trades" – pairs of mirror-image transactions that neutralized each other but generated substantial commissions for brokers. These meaningless trades, sometimes worth billions of dollars, could generate tens of thousands in fees – essentially bribes disguised as legitimate business. The manipulation became increasingly brazen as Hayes's network expanded. In recorded phone calls and electronic messages, participants openly discussed their efforts to move LIBOR. "If you keep 6M [six-month LIBOR] up I'll pay you, I swear I'm not lying," Hayes told one broker. When Goodman overheard Hayes shouting "Get those fucking LIBORS down" over a squawk box, he thought, "He's got to be stupid" – not because the request was improper, but because it was so explicit. This casualness reflected how normalized manipulation had become within the industry. By 2007, Hayes had earned about $48 million for UBS and received a $1 million bonus. His success attracted attention from rivals, including Goldman Sachs, which offered him $4.5 million plus a 10% cut of his trading profits. UBS countered by promoting him and guaranteeing a $2.5 million bonus for 2008. What kept Hayes up at night wasn't concern that his actions were wrong – no one had ever suggested they were inappropriate – but fear that he wasn't manipulating LIBOR effectively enough. In an industry where profit was the ultimate measure of success, Hayes had become a superstar by mastering the art of rigging the system.

Chapter 4: Crisis and Exposure: How the Financial Collapse Revealed the Fraud (2008-2009)

The 2008 financial crisis shook the global economy to its core. On September 15, Lehman Brothers filed for bankruptcy, American International Group received a massive government bailout, and Merrill Lynch was acquired by Bank of America in an emergency deal. Within weeks, financial giants like Citigroup, Bank of America, and even Goldman Sachs teetered on the brink of collapse. Overseas, the Royal Bank of Scotland required a huge bailout from the British government, while UBS was rescued by Swiss taxpayers. This catastrophic meltdown should have exposed the LIBOR manipulation scheme. Basic economic principles dictated that banks' borrowing costs would spike during such a crisis as lenders demanded higher rates to compensate for increased risk. LIBOR should have risen dramatically. Instead, Hayes and his network worked frantically to ensure that didn't happen. On the day of Lehman's collapse, Hayes called broker Jim Gilmour at RP Martin, asking him to push LIBOR down. Gilmour called Paul Robson at Rabobank to relay the request. Despite Robson's skepticism – "They might go up because people aren't going to lend again, are they? Who are you going to lend to? Everyone's going to go fucking bust" – Rabobank submitted data indicating its borrowing costs had miraculously declined amid the crisis. The manipulation became increasingly difficult to hide as the crisis intensified. In April 2008, Citigroup researcher Scott Peng published a report titled "Is LIBOR Broken?" comparing banks' LIBOR submissions with what they were paying to borrow from the Federal Reserve. The figures diverged significantly, suggesting banks were understating their actual borrowing costs. This analysis caught the attention of Wall Street Journal reporter Carrick Mollenkamp, who was already investigating problems with LIBOR. On April 16, 2008, the Journal published a front-page story headlined "LIBOR Fog: Bankers Cast Doubt on Key Rate Amid Crisis," opening with the line: "One of the most important barometers of the world's financial health could be sending false signals." This was followed on May 29 by another front-page story, "Study Casts Doubt on Key Rate," focusing on suspicious data from Citigroup, UBS, and other banks. These articles represented the first major public exposure of potential LIBOR manipulation. The banking industry mobilized to discredit these stories. J.P. Morgan published research specifically aimed at debunking the Journal's analysis, calling it "deeply flawed." Financial bloggers dismissed the concerns as conspiracy theories. Angela Knight, CEO of the British Bankers' Association, launched what she called a "charm offensive" to convince journalists, hedge funds, and others that LIBOR wasn't broken. Behind the scenes, however, regulators were beginning to take notice. Vincent McGonagle at the Commodity Futures Trading Commission read the Journal's first story and decided to launch an investigation. Tim Geithner, head of the New York Federal Reserve, discussed LIBOR concerns with Mervyn King, governor of the Bank of England. The crisis had inadvertently created perfect conditions for exposing the fraud. As banks stopped lending to each other, LIBOR became even more detached from reality. The discrepancy between what banks were reporting and what they were actually paying became too obvious to ignore. What had once been dismissed as market gossip was now being documented by researchers, reported by journalists, and investigated by regulators. By the end of 2008, the financial crisis had not only devastated the global economy but also created cracks in the facade that had protected LIBOR manipulation for years. The fraud that had been hidden in plain sight was beginning to emerge into public view, setting the stage for what would become one of the biggest financial scandals in history.

Chapter 5: Investigation and Consequences: The Slow Path to Justice (2008-2012)

The investigation into LIBOR manipulation began in earnest in April 2008 when the Commodity Futures Trading Commission decided to examine the benchmark's integrity. Initially, progress was glacial. Five months after the Wall Street Journal's first story, CFTC investigators hadn't collected any outside information or conducted interviews. The agency was constantly battling budget shortages – resources were so tight that employees had to bring their own coffee mugs to work – and complex financial investigations were expensive. Stephen Obie, who was running the CFTC's enforcement arm, recognized the potential significance of the case. Drawing on his experience investigating Enron a decade earlier, Obie knew that partnering with the Justice Department would be crucial. People readily lied to the CFTC, but it was much different when an FBI agent was in the room. By 2009, the investigation had gained momentum as the CFTC began issuing subpoenas to banks and interviewing traders and brokers. What investigators discovered was shocking: a trove of incriminating emails, instant messages, and recorded phone calls in which traders openly discussed manipulating LIBOR. "Just give the cash desk a Mars bar, and they'll set wherever you want," Hayes had told a broker in 2006. These communications revealed not just individual wrongdoing but a systemic problem spanning multiple institutions. As the investigation progressed, banks began conducting their own internal reviews. UBS discovered Hayes's central role in a vast manipulation scheme and quietly dismissed him in September 2010. By then, he had already moved to Citigroup with a $3 million signing bonus. When Citigroup learned about the investigation, they fired him as well. The first public acknowledgment of the scandal came in March 2011, when UBS disclosed in a regulatory filing that it had received subpoenas related to LIBOR. Similar disclosures from other banks followed as the investigation expanded to include the Justice Department, the Securities and Exchange Commission, the UK's Financial Services Authority, and regulators in Japan, Switzerland, and Canada. On June 27, 2012, Barclays became the first bank to settle charges, agreeing to pay $453 million to U.S. and UK authorities. The settlement documents revealed shocking details about how traders had routinely requested specific LIBOR submissions to benefit their trading positions. "For you...anything," one Barclays submitter had responded to such a request. The scandal claimed its first high-profile casualty when Barclays CEO Bob Diamond resigned a week later. In December 2012, UBS agreed to pay $1.5 billion to settle LIBOR manipulation charges – at the time, the largest penalty ever imposed on a bank. The settlement documents detailed Hayes's central role in the scheme. On December 19, the U.S. Department of Justice announced criminal charges against Hayes and another former UBS trader, Roger Darin. Hayes was described as the mastermind of a sprawling, multibillion-dollar scam. The consequences extended beyond financial penalties and criminal charges. The scandal fundamentally changed how financial benchmarks are governed. In September 2012, the UK government announced that LIBOR would be taken away from the British Bankers' Association and placed under the supervision of a new regulatory body. New rules required banks to keep records of their LIBOR submissions and prohibited traders from communicating with submitters about rates. For Hayes, the path to justice was particularly harsh. After being arrested by British authorities in December 2012, he initially agreed to cooperate with prosecutors in exchange for leniency. He later changed his mind and decided to fight the charges. In August 2015, he was convicted of conspiracy to defraud and sentenced to 14 years in prison – later reduced to 11 years on appeal. The judge described his actions as "a clear case of dishonesty." The LIBOR scandal had exposed not just individual wrongdoing but a culture of corruption that had permeated the banking industry, revealing how easily a small group of traders could manipulate a benchmark affecting trillions of dollars of financial contracts worldwide.

Chapter 6: Legacy and Reform: Rebuilding Trust in Financial Benchmarks (2012-Present)

The LIBOR scandal triggered a fundamental reassessment of financial benchmarks worldwide. In 2012, the British government commissioned a review led by Martin Wheatley, which recommended overhauling how LIBOR was calculated and governed. The British Bankers' Association was stripped of its oversight role, replaced by a new administrator, ICE Benchmark Administration, subject to formal regulation. The methodology was changed to prioritize actual transaction data rather than estimates, and the number of currency and tenor combinations was reduced to focus on those with sufficient market activity. These reforms, however, were just the beginning. Regulators recognized that LIBOR's fundamental flaws couldn't be fully addressed through incremental changes. In 2017, Andrew Bailey, head of the UK Financial Conduct Authority, announced that LIBOR would be phased out entirely by the end of 2021. This decision set in motion one of the largest financial transitions in history, requiring the renegotiation of trillions of dollars in contracts and the development of alternative reference rates like SOFR (Secured Overnight Financing Rate) in the U.S. and SONIA (Sterling Overnight Index Average) in the UK. The technical challenges of this transition have been enormous. Legacy contracts with no provisions for LIBOR's discontinuation needed to be amended. New systems had to be built to handle different calculation methodologies. Market participants, comfortable with familiar practices, have shown resistance to change. The COVID-19 pandemic further complicated the transition, though regulators have remained committed to eliminating reliance on LIBOR. This massive undertaking reflects how deeply LIBOR had been woven into the fabric of global finance and how difficult it is to reform entrenched systems, even after their flaws have been dramatically exposed. Beyond benchmark reform, the scandal prompted a broader reassessment of ethics and culture within financial institutions. Banks implemented more rigorous surveillance of trader communications, strengthened whistleblower protections, and revised compensation structures to discourage excessive risk-taking. Training programs now explicitly address market manipulation and ethical decision-making. Regulatory bodies worldwide enacted new rules specifically criminalizing benchmark manipulation, with significantly increased penalties for violations. The human impact of the scandal extended far beyond the trading floor. Cities like Baltimore and Houston filed lawsuits claiming they lost millions due to artificially low rates on their investments. Pension funds saw returns diminished, affecting retirees. Homeowners with adjustable-rate mortgages tied to LIBOR experienced different interest rates than they would have under an unmanipulated benchmark. These real-world consequences highlighted how technical financial matters can directly affect ordinary people's lives. For the individuals most directly involved, the aftermath brought dramatically different outcomes. While traders like Hayes received prison sentences, most senior executives who had overseen the institutions where manipulation flourished faced few personal consequences beyond damaged reputations. This disparity fueled criticism that justice had been selective and incomplete. Many mid-level participants in the manipulation scheme found themselves unemployable in finance, their careers destroyed by association with the scandal. Perhaps the most profound legacy of the LIBOR scandal has been its impact on public trust in financial institutions. Coming so soon after the 2008 financial crisis, the revelation that banks had manipulated a key benchmark reinforced perceptions that the financial industry operated according to different rules than the rest of society. This trust deficit continues to shape public attitudes toward banks and financial regulation, creating ongoing challenges for an industry still working to rebuild its reputation more than a decade after the manipulation was exposed.

Summary

The LIBOR scandal represents one of the most significant financial frauds in modern history, revealing fundamental flaws in the global financial system. What began as Minos Zombanakis's innovative solution for determining interest rates on a loan to the Shah of Iran in 1969 evolved into a benchmark that underpinned hundreds of trillions of dollars in financial contracts worldwide. The manipulation was made possible by a perfect storm of factors: the explosive growth of derivatives markets that increased LIBOR's importance, the subjective nature of the benchmark itself, minimal oversight from regulators, and a banking culture that prioritized profit over integrity. At its core, the scandal exposed the dangerous consequences of allowing critical financial infrastructure to operate on an honor system in an environment where the incentives all pushed toward dishonesty. The legacy of this scandal extends far beyond the $9 billion in fines paid by banks or the prison sentences served by traders like Tom Hayes. It forced a complete reimagining of how financial benchmarks should be constructed and governed, leading to LIBOR's eventual phase-out and replacement with transaction-based alternatives. More broadly, it demonstrated how seemingly technical financial matters can have profound real-world impacts on everything from municipal budgets to home mortgages. The LIBOR manipulation serves as a powerful reminder that financial markets require not just sophisticated models and efficient mechanisms, but also robust oversight and a culture of integrity. Without these ethical foundations, even the most carefully designed financial systems remain vulnerable to corruption, with consequences that ripple throughout the global economy.

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David Enrich

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