Fixing LIBOR

It was just two weeks before Christmas of 2012 when Tom Hayes heard a loud knock on his door. He had only just recently moved back to England, into the leafy suburbs of Woldingham, in Surrey, and married his long-time girlfriend Sarah Tighe – a lawyer by trade. The knock on the door did not sound friendly, especially at 7am on a cold winter’s morning. A surprised Hayes came rushing down the staircase of his newly renovated Surrey home to reproach the uninvited party. Upon opening the door, he stood in front of more than a dozen police officers and investigators from the Serious Fraud Office (SFO) – a specialist division of the British justice system that takes on a handful of high-level fraud and corruption cases from around the United Kingdom.


From a young age, Tom Hayes was considered a prodigy. After graduating with a degree in engineering and mathematics from Nottingham University, he was given an internship at the Swiss multinational investment bank, UBS. After his internship, Hayes earned a position as a junior trader on the interest rate derivatives desk of the Royal Bank of Scotland, before being poached by the Royal Bank of Canada. After a stint at RBC, Hayes returned to UBS and was placed in the Tokyo office, where he would begin trading the spread between the signalled London Inter-bank Offered Rate (LIBOR) for Japanese yen (JPY LIBOR) and the current yen interest rate existing in the market. Hayes quickly developed connections to a strong network of traders, brokers and bankers, and was building a reputation as a crafty trader who recognised unconventional arbitrage opportunities, especially when the markets were choppy, and most were too spooked to trade. One such opportunity came two years after Hayes had joined the Tokyo office of UBS.

Rushing to work in the early hours of 15 September 2008, it looked to Hayes like the end of the world – an especially good time to make some money. The news of Lehman Brothers’ imminent collapse had broken and had made its way across the Pacific to Tokyo. Just 28 at the time, Hayes processed the chaos calmly. Even during this unprecedented event, he maintained a typically cold and calculated response – a trait that would earn him the nickname “Rain Man” amongst his colleagues, referencing Dustin Hoffman’s depiction of an autistic savant in the movie of the same name. As the markets crumbled, Hayes was not only successful in exiting all of his most at-risk positions without too much damage, but he even took up new positions in what he believed were greatly discounted securities in vastly oversold markets. Thus, whilst most traders were petrified to take up new positions at this juncture, Hayes continued to place even more bets. One such bet was that Japanese yen interest rates would remain largely unchanged in the next few days – an unlikely wager in the context of the devastation of the markets at the time, and with each basis point move in the wrong direction costing his bottom line close to $750 000. But Hayes was not betting blind, as he knew of at least one way that he could influence the outcome of his precarious position. 

Over time, Hayes had come to understand that LIBOR – the most important set of numbers in his business – was somewhat malleable. LIBOR represents a benchmark of rates, for different currencies, at which banks lend each other money. This average of the rates is calculated through a daily survey of approximately 18 major global banks that operate in the London market – with the number of banks included in the survey changing year by year. In the survey, as stated on the official LIBOR website administered by the Intercontinental Exchange (ICE), the question is asked, “At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?” Each day, representatives from surveyed banks put forward their submissions – with the highest four and lowest four submissions being thrown out – ultimately producing an average that is released to the public daily at 11:30am London time.

Currently, LIBOR is determined daily for the US dollar, the Euro, the British pound, the Swiss Franc, and the Japanese yen, at one-day, one-week, one-month, two-month, three-month, six-month, and twelve-month maturity intervals, resulting in the publication of 35 rates every applicable London business day, as detailed by the Intercontinental Exchange. Hayes would have been particularly interested in the three-month yen LIBOR, for example, as this would affect the movement of the current yen interest rate in the market, which in turn would determine the profitability of his position. Globally, LIBOR affects upwards of $350 trillion worth of loans and securities that are linked to the rate at which the benchmark is set daily. 

Hayes understood exactly how LIBOR was derived, and importantly, he knew the people who submitted the rates for each bank each day. In fact, this was not the first time the British trader needed a favourable movement in the market, but it was perhaps the most important time. Sitting with a massive and extremely risky position on his books – betting that Japanese yen interest rates would not move too much in any direction, even in light of the disastrous news of Lehman Brothers – Hayes began to ring in some favours. His first port of call was a group of brokers he had come to know during his time in London. As the middle-men for major interbank cash and derivative deals, brokers occupy a critical position with regard to information flow between banks. This position allows them to gauge the rate that other banks are borrowing at on the day, and when asked, some of these brokers give their informed opinion to the individuals submitting their daily LIBOR surveys – often in exchange for a favour – on behalf of their banks. “Cash mate, really need it lower,” is all that Hayes sent over instant message to one of his connections in London that day. The correspondence did not require pleasantries, as each party knew exactly what they stood to benefit, with previous messages from Hayes promising “$50 000, $100 000, whatever” to co-operating brokers. And when the bankers called up the broker for his opinion on inter-bank rates, the broker would lowball their figures – despite the fact that all logic around 2008 would suggest otherwise.

Given the enormity of his bet, however, this was not enough assurance for Hayes. After receiving acknowledgment from the broker that he would do his part, Hayes played the next best card in his hand and called his friend at the ICAP. As the largest international inter-dealer broker, ICAP provides a marketplace for wholesale funding for banks and other large financial institutions. Using the flow of information that passes through it, ICAP produces, as a service, a “LIBOR Prediction” which informs the market of what it expects the inter-bank rate to be on the day. This in turn – much like a broker – can give banks an indication with regard to which rate their peers may submit to the LIBOR survey. And as luck would have it, Tom Hayes knew someone at ICAP who, with a little persuasion, could manipulate the “LIBOR Prediction” in his favour before the 7am email was sent to the most important financial institutions in the world. With his hand played, Hayes waited nervously for the official JPY LIBOR average to be released for the day. Like clockwork, at 11:30 London time (20:30 Tokyo time), his wishes were granted. Against the trend of skyrocketing interest rates, with most increasing at double-digit basis points at the time, the rate for the Japanese yen, almost miraculously, ticked down by a single basis point on the day. Hayes had, again, successfully manipulated LIBOR to please his personal aims. And thus, for the price of a $750 000 profit – of which Hayes would only see a tiny part – he had essentially moved the entire Japanese yen interest rate market, worth hundreds of billions of dollars. 

Hayes emerged from the financial crisis far better off than most, and given his seemingly stellar track record, was even recruited by Citigroup to join their Tokyo office not long afterwards, with a hefty signing bonus of $3 million offered to sweeten the deal. Here, Hayes would continue to use his connections to his, and his investors’, benefit and would even brag to his colleagues about how the Tokyo inter-bank offered rate (TIBOR) was substantially easier to manipulate than LIBOR – a brazen and outspoken attitude that would eventually lead to his demise.

The trouble for Hayes really began when the Washington-based Commodity Futures Trading Commission (CFTC) began investigating the possible manipulation of LIBOR. Believing for some time that one of the financial world’s most important numbers was being fixed by a network of colluding individuals within LIBOR-submitting banks, the CFTC began to put pressure on suspected institutions to launch their own internal investigations into the matter. One of the many institutions being probed was Hayes’ new employer, Citibank, who themselves had become uneasy about the shameless manner in which their new superstar trader was going about his business. Thus, when the pressure from the CFTC began to mount, the very first name put forward, in an attempt to save some face against a growing pile of evidence that institutions were indeed manipulating LIBOR, was of course Hayes’.

In June 2012, Barclays was the first bank to admit to manipulation of the rate, settling the case with a $290 million fine. It was then that the Serious Fraud Office’s investigation into LIBOR rigging really gained momentum. From here, Hayes’ fate was sealed, as soon after, UBS pleaded guilty to rate manipulation at their Japanese branch, paying a $1.5 billion settlement, as well as identifying two individuals who were charged with conspiracy to manipulate LIBOR – one of whom being Tom Hayes. A few months later, Hayes received a knock on his door from the SFO and was placed under arrest, eventually receiving the longest ever prison sentence for a trader – even more than that of the infamous Nick Leeson of Barings Bank – at 14 years. The presiding judge, Jeremy Cooke, expressed during sentencing that he wished to “send a signal” to anyone in the financial sector that was involved in fraud, corruption or illegal manipulation of the markets. 

To date, Hayes is one of only a handful of traders that have ever been sent to prison, even taking into account the egregious actions of top executives and low-level traders alike throughout the financial crisis. However, whilst the signal sent by the judge to the financial world via Hayes’ sentence may have been laudable, we also know that Hayes by no means acted alone, as his manipulation of LIBOR necessitated the use of a large network of traders, brokers and bankers to be successful. “So many people got paid from the money I made,” says Hayes in a text message used in his trial to convict him, “and I am going to jail, it seems so unjust.” 

Before the start of his trial, at the age of 35, Hayes was diagnosed with Asperger syndrome. As of writing, Hayes still fights the charges against him from prison, in hopes of having his sentence reduced. In 2019, LIBOR is still derived each day in the same way it was in 2008.

This article is from the Monocle Quarterly Journal, A Short History of Banking. Visit our "Journals" section to read the full issue.