198. The Trader Who Paid For The Financial Crisis

0:00I'm in a fraud trial, there's no victims, there's no profit and loss and there's no money. Based on a rule and a law that was made 10 years after the event, I've committed a crime. Will you get compensation? I'll get nothing from the government. Hello and welcome to The Rest is Money with me, Robert Peston. Now, today I will be talking to Tom Hayes. He was the most high-profile banker, certainly in the UK, and, you know, to an extent globally, to face a really serious prison sentence over charges that he faced that he manipulated markets. This was what became known as the Libor scandal. but the striking thing about a case that for years was somehow seen as a manifestation of everything that had gone wrong in the city leading up to the financial crisis.

1:05The Supreme Court only in the last literally few weeks has overturned that judgment against him. He spent years in prison. His life was changed beyond recognition from being one of, you know, a breed of highly successful, highly paid traders into somebody who was banged up in high security prisons. And after all of that, the Supreme Court said the judgment against him was wrong. So this is his story. Some of it is quite technical because in order to understand it, you've got to understand derivatives trading. You've got to understand what LIBOR is. But it's also a really powerful human interest story about an individual who says, as you will hear, that he never thought he was breaking any rules.

2:04But he became, he would say, a scapegoat for all those excesses that led up to the financial crisis. So here's the first part of my interview with Tom Hayes. Some people listening may think that if you're found guilty of a white-collar crime, somehow prison is cushy. The punishment that you suffered was extreme horrible. The sentence that I received from that judge was 14 years. He gave me only 30 minutes to say goodbye to my family between the verdict and the sentencing. So I didn't get to go home and say goodbye to my son, explain that I wouldn't be coming home. He was only three and a half at the time.

2:47I got 30 minutes to try and say goodbye to my parents. And then, and usually he told me my sentence at the start of the sentencing remarks, which judges don't normally do. They normally give you the remarks and then send it to the end. And he did that, I believe, because he wanted to watch how uncomfortable and how painful it was. I remember looking across at my then, wife and looking across my mum you know and my sister and everyone being in tears and being really worried and me feeling terrified and I got out of the dock and we went into this holding cell and the officer said god he must have been really pissed off today referring to the judge because I think he could quite believe the sentence I'd got and then I went downstairs into another cell and then eventually my lawyers came down to see me and I just remember telling them I was really scared I was really scared at that point.

3:38So let's go back to the beginning of the story. We've had some of the end. We need for our listeners to go into some of the detail of what you did for a living. Yeah. You know, you were at UBS in Tokyo. Yeah. The period for which you were tried was... 2006, 2010. 2006, 2010. Yeah. First of all, just tell us what were you doing for UBS? I mean, you were a very successful trader for them, weren't you? Yeah, I made them over a quarter of a billion dollars in like three years. A quarter of a billion dollars you made for UBS? Over that, yeah, more like 300 mil. What were you trading? Interest rate derivatives.

4:20The derivative you specialised in was what exactly? Interest rates, Japanese interest rates. And so those in the wholesale market, virtually all of my trades, I did like 28 ,000 libel trades at UBS. and that was like some portion of my total number of trades. They were all done with other banks. I made markets for the street for other banks, really. So if we could just start with what LIBOR is. So as I understood it when I was immersed in this stuff, LIBOR is supposed to tell you the rate at which banks can borrow. Is that correct? Yeah, from one another. So it's the London Interbank offered rate.

5:00and the question, the definition of LIBOR is at what rate at 11am could you go out and accept interbank offers, so lending between banks in reasonable size, so in a decent amount of money, what rate would you be required to pay? And the reason it originally mattered is because on any given day some banks don't have enough cash and other banks have too much cash and the system is there to allow banks to get the so-called liquidity or cash they need at an interest rate that is set by the market. Yeah, I mean, like any bank has to balance their books at the end of the day or if they fail to, they can go to the emergency window at the central bank.

5:45But what LIBOR was basically saying is, you're a bank, how much is it costing you to borrow money from other banks at 11am? It's a survey of 16 banks. Four of the highest rate, the four highest submitted estimates are removed. The four lowest are also removed. The middle eight, you then average out and that's your published libel rate. And that is effectively reflective, if you like, in a particular currency for a particular period of a survey of banks and a submission of estimates that create that rate. And that rate is reflective of the cost of money for a prime bank in the city at that time.

6:25So just to summarise, what it shows is the interest rate that a bank has to pay to borrow from another bank. So just explain to me why this interest rate, what is the interest rate on loans between banks, why does it matter to a trader like you? Well, I trade a product called a derivative and I market made, which basically a market maker is I basically provide liquidity. So I buy and sell continually. It's a bit like, you know, being a used car dealer. You're constantly buying and selling used cars. You buy low, you sell high. Now, it's obviously not a used car. It's a it's a it's a derivative.

7:05And a derivative is a financial contract that derives its value from an underlying asset. And so people wouldn't really necessarily recognize their own involvement in the derivatives market. But a classic example would be, say, a fixed rate mortgage. So if someone takes a fixed rate mortgage and a time when interest rates, the prevailing interest rates and anticipated interest rates are very low, they might get a 10 year fix for, say, 2%, which if they held that now, they'd be extremely happy about. And if you wanted to take it off them, they'd say, no way, you've got to pay me some money to take that off me.

7:39So that contract that they entered into where they decided to not pay a floating rate, but pay a fixed rate instead, has some value for them. Equally, if someone took out a 10 year fixed rate mortgage now, you know, five or six percent and interest rates were to plummet, then that self-same person would want to give up that contract because they would be paying five or six percent when interest rates plummeted. So those are two scenarios where one person has benefited from having it and one person has lost. And that fixed rate mortgage is, in effect, a derivative contract because it's a contract that retains some value based on the prevailing interest rate currently and the anticipated interest rates in the future.

8:15And so I'm just going to summarize what I think this means in respect of your own business. On any day, the libel rate tells you the value of what you've just described as the underlying asset. and therefore that LIBOR rate tells you effectively on any particular day the profit or loss on the particular derivative product that you are trading. So the movement in the LIBOR rate does affect your ability to generate profits and losses on the assets in your book. So if I did, say, a two-year interest rate swap, which is like a fixed rate mortgage where I say right I'm going to pay a fixed rate and instead I'm going to and in return I will pay you that fixed rate and in return I'm going to receive a variable rate and that variable rate will be referencing libel reference that variable rate will occur every three months say so every three months I'm going to receive the interest rate from you on three month libel and then in return I'm going to pay you this fixed rate so if I just have one derivatives contract which is one interest rate swap and I look at that and I'm sitting there and it comes to the day where the reference date occurs for that three-month rate do I if I'm if I'm paying that three-month rate I'm going to prefer the published rate to be lower if I'm receiving it I'm being paid it I would prefer that published rate to be higher so I have I automatically have an interest in where that rate is going to be set and so that is effectively I I have, as a bank, as an individual, as a trader, I have a commercial interest in where that rate's going to be published.

10:01And on the back of that, because my bank is a contributor bank to the panel, to the survey, they have a conflict of interest, if you like, because that's what did exist at the time, where they were submitting a rate that affected their own commercial outcome. This is where your judge said you were manipulating your own book by the way that you were essentially telling your bank about what the LIBOR rate should be. He said that was just straightforwardly wrong and illegal. Did you have a trading book and a profit and loss account that theoretically could have swung from profit to loss depending on the LIBOR rate setting?

10:44Yeah, I mean, absolutely. I axiomatically had something to lose or to win on the basis of where that benchmark was published on a daily basis. I mean, it's sort of ironic because if you did a proper deep dive into where my requests were, because I didn't set LIBOR, I just traded products attached to it. you'll find that you know there's a good 30 % of the time I'm making requests that go against my own personal book that I run for the bank because the desk position as a whole is the other way around from my book so my my book is a small part of the desk position the allegation of the judge is that you were making references that the allegation was that I had made an agreement with the person who made the decision who was never interviewed and never charged that they would set it in a particular way in a way based on your ref on your well i mean there was no analytical analysis needed because the judge decided as a matter of law if you made a request for a higher or lower figure it didn't matter if the rate didn't even change so i mean in theory i you know could have ended up or i did end up in prison on the basis that i would make a request that made absolutely no numerical difference to the final published rate he just said it's been polluted by this sort of commerciality.

12:02But the bloke who was setting it within UBS, he could just ignore you. As he frequently did. And actually, if they'd done some proper statistical analysis, they would have seen that of all of the counts on my indictment, none of them... But that bloke was never charged? Never even interviewed. There's no submitter, in my case, interviewed or charged. But it doesn't make any sense. No, of course it doesn't make any sense, because supposedly I'm in an agreement with somebody that they will do something that is not their genuine, honest opinion and yet they're not interviewed or charged. But my jury were told that I was the first and all these other people would be coming after me.

12:37I was tried alone. You thought that what you were doing was you were essentially, you know, you were in the marketplace, you had a sense of what the price was, what the LIBOR rate was, and you were just telling the rate setter at UBS what you thought the rate was. Is that what you thought you were doing? No, I mean, it's not even as complicated as that. I didn't even ask for any figures. all I'd say to anybody on a daily basis was I either need the rate high or I need the rate low. You weren't telling them what the market rate was. You were just saying what you needed. Yeah, I was just saying what the desk needed, in fact, because often it actually didn't align with what I needed sometimes.

13:11Now I really am a bit confused. This was presumably custom and practice everywhere. So what was it that you were doing that the judge thought, because you were not formally submitting the rate. I wasn't personally, no. No, you weren't formally submitting the rate. everybody knew that you had a, what, what, I still, it's so confusing. What did the judge think was wrong? Well, I ended up in a morality trial. That's what happened. I mean, we veered from criminality to morality. The point is, is that if any, if you ask any sensible person, what rate they can borrow money at. So it's a personal loan or a credit card or a mortgage.

13:50Any person knows that they will get a number of different potential rates that they can, they can borrow at. Yeah. And LIBOR was a question where you made the submission before 10.45am. And the question was, at what rate could you borrow money? At 11am. That was an estimate. And it was only at the Supreme Court that I finally found the judge who actually got that it was an estimate. But it was always ever a benchmark. It didn't actually tell you what you were going to be able to borrow at in any given day anyway. Well, like I said, it was an estimate. And so I would just say to anybody who would listen, I need the rate high or I need the rate low in those terms.

14:25and basically that is if you've got five different rates because it's the way of the world that you've got five things that are all equally valid. You could roll a dice, you could toss a coin or you could go, you know what, I've got a fiduciary duty to my employer as an employee and I will choose the rate that suits my employer. It was a system that was set up by banks, for banks, run by a trade association, the British Bankers Association. Every trader... Hang on, but I really do feel stupid now because I thought the whole point of LIBOR was that it was supposed to tell you the rate that suited a particular bank.

14:59I thought that was the point of it. So if it's not that, what was the point of it? Well, I mean, what it says is it says where my bank can borrow, where are the offers in the market. So you are right. When libels go up relative to, you know, if so, all else stays equal and libels go up, then that's indicating credit stress in the market. But obviously they can go up for other reasons. if the Bank of England or the Federal Reserve moves base rates up or down. If official rates go up, obviously it has an immediate impact on LIBOR. But I thought the whole point of LIBOR was it was supposed to tell you what was going on in the market and what was going on in the market will always reflect the different needs of different banks.

15:43So if you're saying I need my rate lower or I need my rate high, I thought that's what the whole system was supposed to be based on. Whereas all the sort of essentially description of why you were singled out is somehow you're saying that was breaking the rules. Well, I mean, it's really interesting because the Second Circuit, which overturned my indictment and all the guilty pleas and convictions in America, called the system inherently unfair. And it was inherently unfair. It was a conflicted system. The rate was set up to be chosen by banks for banks. You know, so some banks would be putting in a higher end of the estimate.

16:21Some banks would be putting a lower end of the estimate. And for broadly, in broad terms, that system worked perfectly for 20 years plus. And then what basically in the financial crisis, that's when banks actually lied about their borrowing costs. And so that's when libel rates were false and misleading because they were basically trying to borrow cash in the market at 6%, but submitting 5 % as their libel figure. So clearly those two things are not compatible. No, no, I remember this very well. So during the financial crisis, which is separate from what happened to you, I absolutely remember.

16:54I mean, look, there was that famous case, notorious case, where the deputy governor of the Bank of England, Paul Tucker, had to go and explain himself to Parliament because of a note that he wrote to Bob Diamond, worrying about the high libel rate that he thought that Barclays was submitting, which he thought would cause people worry that, you know, that Barclays was in trouble. And then there was an issue about whether or not he was encouraging Barclays to manipulate the rate. In the end, he got off because basically MPs agreed that in some way this was all a big misunderstanding. but you know there you have essentially a classic example of the point that you are making here which is so much of this is about confidence in a sense therefore what a nonsense the whole thing was well there's so i mean i think that you have to there's a sort of separation if you like between what the traders did which was you know which was asking for a submission to move around by one hundredth of a percentage point that would affect the rate by one thousandth of a percentage point.

18:07And that made a difference to our books and that's why we did it. And every bank did it. And it's important. Can I just ask you a question here? Because it wasn't a transparent system. It wasn't a firm rate. It was obviously, I'm not now talking about your case, but it was obviously capable of being manipulated. In broad terms, let's just take you out of it and whether or not you should have gone to prison. I have to say, looking back on it, the whole system seems incredibly dodgy because basically it was plainly open to individual institutions to manipulate the rate, to either offset losses they were facing or to generate unfair profits.

18:50That must have been something that the system was vulnerable to. Well, I mean, I think that's why the Second Circuit described it as inherently unfair. But actually, if the evidence from the guy who wrote the rules to set up your LIBOR, which is based on LIBOR, is we always, it was never against the rules to consider your commercial position as long as the rate was accurate. But what does that mean even? Well, what does accurate mean in the circumstances where it's all about perception? Well, I mean, well, what accurate would mean in terms of lowballing, if a bank is trying actively to borrow money in the market at 6 % and cannot find an off bank, is not getting any money at 6%, if they then submit a liable rate of 5%, then that's clearly inaccurate and it doesn't fit with the definition of what you should be doing.

19:36Now, that was the thing that triggered the investigations. That was the thing that started this whole thing off. And then everybody said, oh, oh, dear, this is going into Whitehall. This is going up to the Bank of England. And we don't really want to look into that. So we've got these emails from these other traders to do with their positions that are maybe, you know, like are still genuine, still accurate, still truthful submissions, but nonetheless are commercially favorable. And because they couldn't prove that we'd ever lied about the rate because we didn't lie about the rate, unlike lowballing, they decided to create some law 10 years after the event.

20:11And that law was that if you considered your commercial position, you had made a fraudulent misrepresentation. And even if the rate was identical to what it otherwise would have been, i.e. unchanged, you had basically broken the law. So my jury were told, well, this is the law. That law was made up 10 years after the event. And by the way, this thing that this guy did 10 years ago in a different continent, in a different currency for a foreign bank dealing with foreign clients, he's broken the law. And that's effectively how my trials run. Tom, there's so much more I need to ask you. Don't go away.

21:08look at winners and losers of this system. I'm assuming that all of your customers were institutional customers. So for UBS, there was 28 ,000 libel trades, all but 40 or 50 of them were with banks. And most of them were with panel banks, 24 ,000 of them were panel banks. So why didn't caveat emptor apply? Because these people all knew what the system was. Well, there weren't any victims in my trial. So none of them came forward as victims. So nobody came over and said, by the way, I lost an absolute fortune because Tom A's manipulated the rape that's a very strange fraud trial because i had no victims in my trial and i had no money in my trial because i wasn't no money the prosecution refused to disclose to me the profit and loss of my trading book so this thing that i was supposedly had done to like benefit my trading book i wasn't allowed my profit and loss because they just said it didn't matter they said that it wasn't material and then i actually was a point of appeal for me in 2015 and the court of appeal said it's not material either so it was a it was like i was in this sort of like Kafkaesque situation where I'm in a fraud trial there's no victims and there's no profit and loss and there's no money and they've got a bunch of emails and they're being told that if I've made a request that's commercial which clearly I have based on a rule and a law that was made 10 years after the event then I've committed a crime.

22:26Do you think it was just a bad system? It was set up by banks for banks run by banks governed by banks the British Bankers Association a trade association governed it. The biggest conflict, and I say this right from the start, is the person who chose the rate every day for the bank, known as the submitter. Who is not you. No, he's not me. He also traded products attached to the rate. He did as well? Yeah. So why wasn't he prosecuted? Well, because he can't have a thought crime. If he's looking at his book and thinking, well, actually, I need it higher, I need it low today, there's no email, there's no phone call, there's no trail of evidence.

23:00So you were just dumb because you happened to tell him that you wanted it high or low and there was an email trial. So he gets away with it because there's no email trial. Well, I'd say I hate the words get away with it, but the system was what the system was and it worked for 20 years because some banks would choose a higher estimate and some banks would choose a lower estimate. And it would all come out in the wash. And the lowest 25 % kicked out, the highest 25 % kicked out, the middle eight taken and the published rate was broadly correct and it worked fine for 20 years in that process. Was the system conflicted?

23:32Yes. Was it a bad system? Yes. Was there a conflict of interest? Yes. And is it good that it's been scrapped? Because it has. It's gone. I actually think what they, I think scrapping LIBOR completely was a bad idea because we now have a new benchmark rate, which is based on overnight interest rates, which are actual transactions. But we've removed the credit element that was inherent with interbank lending. So you now can't tell whether a bank is bust or not? Well, it's much harder. You can't see that so much. you can in the credit derivatives market a bit, but in terms of interbank lending, you don't get that visibility.

24:06And what they did straight after what happened with us, they actually, all banks were then told that they had to put, employ submitters and those submitters had to be behind Chinese walls and they had no idea of the bank's commercial interest. And actually that was a perfect system because then those people were submitting with no knowledge of the bank's positions. And so that really broadly worked. And then they scrapped that. I mean, it was sort of understandable. Well, the US wanted their benchmark rate to be set in New York. They wanted it out of London's hands. They hated the fact that dollar libel was such a big benchmark and it was being set out of London.

24:40But I think that some of the measures that they took were not necessary. I mean, but what you should have had in this situation is them say, you know what, this system's really conflicted. We don't like the way it's run. We don't like the fact, you know, it's not regulated. We don't like the fact there's no real rules here. Let's just change the system. And instead, what they did was they then said, we hate the system. We hate the morality of it. And by the way, we're going to lock you up using law that we've just created and retrospectively applied to you. So Supreme Court overturns the guilty verdict.

25:10Yeah. Will you get compensation? I'll get nothing from the government. Nothing. Why? 93 % of people who are wrongfully convicted in Britain don't get any compensation. But I thought there was a compensation scheme for unsafe. well 2014 Chris Grayling along with banning books in prison and some of his other like brilliant decisions decided that he was going to change the compensation scheme for wrongly for wrong incorrect convictions and that decision's actually been taken right up to Strasbourg and was was lost on majority and his new rule is that if you were wrongfully convicted you now have to prove beyond reasonable doubt that you were innocent um and so if in a DNA case like Andy Malkinson he'll be he won't say he'll be fine that's the wrong expression the poor guy was in prison for 17 years but you know but I mean the amount's capped um so Peter Sullivan who was in prison for 38 years will get 70 pounds a day compensation for the time he was in prison but for most of other people they will get zero because it's like trying to prove a negative so mine's a state of mind offense um so I am never ever going to be able to approve so it's So none says conviction, but under the law, you would have to prove your innocence.

26:24Beyond the way. To a criminal standard. Beyond reasonable doubt, to get a penny of compensation. Yeah, not even to a civil standard. So in a civil court, I'm being asked to prove to a criminal standard that I'm innocent. So that whole sort of innocent until proven guilty, and unless you're convicted, you're innocent. Chris Grayling got rid of all that. And Jacob Rees-Mogg, I did a GB News interview with him recently. and afterwards he apologised to me he said I just want to say sorry about that legislation because I was part of the government at the time and it's a disgusting piece of legislation and it really is I know guys who have been wrongfully convicted had a retrial and been acquitted at retrial and still get no compensation even though they've been acquitted at retrial because all that being acquitted at a retrial shows is that they can't be sure beyond reasonable doubt that you were guilty so you know it's an absolutely shocking piece of legislation.

27:19That's the end of the first part of my interview with Tom Hayes. But believe me, you want to tune in for part two because this is such a gripping and powerful story and you ain't heard half of it. Goodbye.