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2 years, 11 months ago
Note of the translator: In our blog on Geektimes we tell about work in stock market, we describe how it is influenced by different technologies, and also we sort situations which help to understand the device of the industry of finance better. Today we present to yours the first part of adapted translation of a longrid of Bloomberg about Tom Heys's stories, the former trader of UBS bank, successful "Rain man" of stock market which appeared in the center of scandal and got 14-year prison penal for a manipulation LIBOR rate. Important: material rather volume therefore on its reading certain time will leave.

Investigation: Whether the trader of UBS directed the financial plot largest in the history

In a deserted trading floor in the building of the Tokyo branch of the bank of UBS Tom Heys sat, having stared in one of eight monitors opposite to it. The crumpled collar, the pale tired face and hair tousled from a habit to finger them during reflections – the British trader was disheveled stronger than normal. On a calendar was on September 15, 2008, and as he remembered later, all looked so as if there came the doomsday.

At Heys's dawn the call from his chief who asked it to be immediately in office woke. The New York financial Lehman Brothers conglomerate was close to bankruptcy. Sitting at the table, Heys watched how the world learns about these news and gradually panics. At such moments of Heys plunged into a semiconscious status, quickly processing a flow of the arriving information in the head and thinking of how it is better to get out of current situation.

Heys it was known in UBS as the person phenomenon: it was one of the best in trade in derivatives. The whole year financial crisis played into the hands of it only. The arisen confusion allowed it to buy securities at low price from those who desperately tried to bowl off and to sell them at high price to that unfortunate who was forced to continue trade. While most of dealers in fear stopped the activity, Heys with the never-ending aspiration to risk continued to trade. He then was 28 years old, and for that year he earned more than 70 million dollars.

Investigation: Whether the trader of UBS directed the financial plot largest in the history

Bloomberg Businessweek cover, on September 21-27, 2015

Now all its money appeared under the threat. Heysu not only was necessary to leave each bargain concluded with Lehman Brothers: shortly before the incident he put a large amount of money on the fact that interest rates will remain stable in the next few days. Bankruptcy of investment bank of the USA, the fourth on value, would lead to sharp jump of these rates which in itself were only the risk indicator. Studying different types of rates on the treydbuk [English tradebook – the notebook with the special hardware necessary for conducting electronic trading], Heys especially selected one of them – the London interbank rate of the sentence [English London Interbank Offered Rate], or LIBOR. It is a reference rate on which securities worldwide in 350 trillion dollars depend in the total cost. For such traders as Heys, this indicator was a subject long searches, and in two years prior to the incident it found a method not bad to earn from it.

LIBOR was set by the self-elected and self-regulating committee which part representatives of the largest banks of the world are. The size of a rate indicated the value of loans which these banks granted each other. Every morning each of the banks entering into this committee gave the assessment to this indicator. After that the average value of these estimates was calculated, and at midday the final value of a rate was published. This process repeated for each separate currency. When Heys worked as the junior trader in London, he managed to get acquainted with several of those sixteen people that were responsible for the daily publication of an interest rate in yens on behalf of the bank. Then Heys understood that these people often relied on interdealer brokers – the convincing intermediaries who were taking part in each transaction then to transfer information on what rate should be published in this or that day.

Heys saw what did not see others because it was special. Close connection of Heys with digits, its cool attitude towards risk and strange habits were not an effect of its work: all this is a sign that it was not such as everything, since the birth. "Asperger's syndrome" only in 2015 at the age of 35 years, and his colleagues made to Heys the diagnosis, many of which were experienced players at the exchange and graduates of prestigious educational institutions, often remembered that Heys strongly differed from them. They called him "Rain man".

Most of traders looked down on brokers, as on second-grade people. But Heys perfectly understood their importance and paid them for that those lay as well as it.

By the time of opening of the London market bankruptcy of Lehman Brothers already became official news. Heys managed to send the message to one of the brokers in Great Britain by then, having specified in what direction LIBOR has to move. "The friend, force down a rate", – he wrote, lowering courtesies. – "How many it makes?" The broker sent it confirmation and several hours later worked according to already checked scheme. When one of the banks defining LIBOR assessment asked opinion of the broker, that reported improbable, awful news, that the rate, most likely, will fall. LIBOR often called "the most important indicator in the world": in practice this rate depended on opinion of people who depending on mood were indifferent, optimistical or frightened. Later in the same evening when Heys checked LIBOR value, he, to the happiness, found out that LIBOR in yens fell off.

Nevertheless, Heys still did not consider himself in perfect security. During the next three days it almost did not leave office and fell down for three hours a day. While the market fluctuated, the balance of its account managed to be replaced from 20 million dollars of losses to 8 million net profit. In the middle of all this disorder of LIBOR was the only indicator which Heys could control somehow. He used all the communications, offering the brokers additional fee for the help and assistance in work with banks worldwide. By Thursday, September 18, Heys became exhausted. It was that day for the sake of which it so worked all week. If LIBOR then jumped up, all his efforts would be vain. The movement LIBOR happens small short steps which are usually called in basis points. Each of them makes the 100-th share of percent, and any shift could cost Heysu about 750 thousand dollars.

After ruin of Lehman Brothers of Heys already for the 100-th time dialed number of one of the most reliable brokers in London. "It is necessary for me that the rate remained minimum", – wrote Heys. – "To crying, say, fifty, hundred thousand, not very well. How many you will ask, well?"

"Well", – the broker answered.

"I am man of his word", – declared Heys.

"I know, do not worry. You can rely on me", – the broker assured it.

In midday of the same day when in London published data on a rate of LIBOR, Heys still was in the office. The rate of yen dropped by one basis point while rates continued to grow in other currencies. Crisis avoided Heys. Using the communications, he alone managed to arrange under himself all world financial infrastructure. He removed earphones and went home. And this person slept under a blanket with superheroes to whom he took cover since eight years.

Thomas William Alexander Jeys was always an outsider. In the 1980th years it grew in city line of Hammersmit in the Western London and was very smart child, but it constantly had difficulties in communication with other children. His parents divorced when he still studied at elementary school. When his mother married again, it moved to the prosperous "green" town the Winchester. At Heys the London accent remained, and on days off it was selected to the capital to look at games of the soccer team Queens Park Rangers, eternal outsiders of league.

Most of the British boys were inveterate football fans, but Heys's interest was more similar to obsession. Existence of obsessions is one of symptoms of a syndrome of Asperger along with problems in communication, tendency to a stress and preference of digits to words. Because of it children in the Winchester often scoffed at it. Heys continued to remain aloof and at the following stage of education at University of Nottingham. When his peers left on summer vacation, it washed and dragged the dishes for 2 pounds and 70 pence per hour to pay for study.

Trying to find more highly paid work, Heys received training at office of UBS in London. After the termination of university in 2001 it was arranged in Royal Bank of Scotland (RBS) and worked at the trainee's position in department of derivatives on interest rates. For the fact that he made another tea and took away someone else's clothes from a dry-cleaner, traders permited it for twenty minutes a day to ask them about everything that it was interesting to it. It was revelation for Heys. Unlike social interactions and the hidden motives, unclear for it, in communication which it had to face in everyday life the formula of success in a finance for it was simple: make money, and other is formed. This formula became the main rule for Heys, and he began to read greedy about the markets, models of an assessment of options, curve interest rates and other hidden financial knowledge.

Investigation: Whether the trader of UBS directed the financial plot largest in the history

June 20, 2013. Tom Heys leaves the building of Westminster court

In the free and hedonistic environment of the monetary markets the clumsy twenty-one-year young man was selected from the environment. Occasionally it joined other bankers when those organized parties. Still he loved hot chocolate for what he was nicknamed "Chocolate Tommie" and when Heys went on a trading floor, colleagues cried out quotes from the movie "Rain man", for example: "The Quantas airplanes never fall". He did not understand jokes, attaching them too much significance. Its children's blanket with superheroes was especially popular laughing stock. Heys considered that its bed linen regularly executes the function, and did not see sense to buy new.

Not all financiers were such impudent fellows. Heys had several friends, and still he found out that its method of extremely fast writing of messages and exposure of commercial transactions made him the favourite among brokers whom did not interest what the trader had an education if he was able to conclude bargains. As a result of Heys ceased to turn attention to all sneers as his obsession disturbing it in communication with people turned into supercapability at the moments when it was connected to the trade terminal. Despite of sneers of people around, Heys after all managed to find the place in life. He got up early, worked for 12 hours a day and seldom was awake after ten in the evening. Often Heys rose in the middle of night to check a status of the trade positions.

In particular, Heys took part in trade in percentage swaps. The swaps which are originally conceived as a security feature of the company from interest rate fluctuations, were bought and on sale professional traders from banks and hedge funds now. They became also new type of securities on the basis of which it was possible to stake. The market of swaps grew with an improbable speed. In 2000 the volume of operations with use of this financial instrument was estimated at 50 trillion dollars. In 2010 this indicator grew to 500 trillion. For Heys difficult calculations and permanent intellectual loads did not make special work, and he understood that he possesses even more unique capability: he with ease took the risk. While other young traders aimed at receipt of the guaranteed profit and fast reduction of losses, Heys successfully performed the operations, despite sharp fluctuations in the market. First its income was unstable, however its administration already then made out in it huge talent. In 2004 he was enticed to itself by less large organization, Royal Bank of Canada where Heys could hold higher position. At its order there was a separate trade portfolio oriented to the market of derivatives in yens.

Traders of the largest organizations noticed at once that the modest bank RBC began to take part in large deals. Perhaps, it was heavy to Heys to enter the relations with colleagues, but when he saw a complex array of derivatives in yens, without effort understood its sense. "The understanding of a situation, detection of weak places in structure of the market, search of new opportunities and their use are similar to a solution of the equations, – told Heys later. – You either earn money, or lose them. Everything is extremely simple".

In the summer of 2006 Heys replaced the place of work again, having got over in UBS. RBS, RBC, UBS – the company name had no value for Heys while it had phone, several monitors and the bank account allowing it to take a certain risk. Later he received serious increase, and it was sent to Tokyo. Soon after this event the strange young man drinking cocoa and who was taking cover a children's blanket according to many, turned into the aggressive and dangerous trader.

In poker players are divided into two types: the meek creature who wait that to them good cards will come then do large rates and hope to earn from it, and daredevils who cannot but play in each distribution, irritating at the same time the rivals and forcing to give in players with weak nerves. Heys, without doubts, could be carried to the second type. Continuous trade, collecting of scrappy data from different sources, increase in the commission at positions of the market maker and creation of an image of the large player willingly taking the risk were its main methods.

Heys moved to Japan while the government for the first time for long time decided to raise interest rates, having activated thereby the market volume in several trillion dollars, till this time being in rest. The majority of securities in which he traded was anyway connected with LIBOR. Rates of LIBOR are published for all main currencies of the world and for the different periods – from several hours to 12 months. In any transaction the rate of LIBOR was the most important indicator determining the size of profit or losses. Heys understood that art of trading consists in ability to predict future on the basis of the incomplete and continuously renewed information. Nobody knew what will be LIBOR rate size at each next moment. Heys set to himself the object to take the chaos surrounding it under control and to find out everything that to it it was unclear. "I dreamed about LIBOR even, – told Heys several years later. – This rate was for me everything. It was the tool on which all my trade activity was based. I was simply mad about it".

Heys loved the work, but when something was contrary to its plans, he also passionately hated it. On the fifth floor of headquarters of UBS in Tokyo he with rage watched the events on the monitors. Outside there was an October, 2006. Heys worked in bank some weeks, and already managed to wallow in problems: it lost a lot of money on short-term interest rates. LIBOR in yens refused to move in the necessary direction, and it angered Heys even more.

If the world of finance for the last quarter of the century was reversed with implementation of new technologies, then LIBOR remained in a former status. Every day the London banks reported to the British association of bankers [English British Bankers’ Association, BBA] about that how many money they can lose if they put in different currencies and for different term: in total there are 150 such combinations. In each of them four upper and lower assessment clean up, and the average of the remained estimates is published as LIBOR for the present day. Here, actually, and all. LIBOR influenced the most different indicators – from the size of loans for the American students and to the cost of futures for the Kazakh gas – and at the same time its value formed group of people who constantly distract and do inaccurate forecasts.

Later on the same day in Tokyo Heys told about the difficult situation to one of the London brokers to whom he trusted. This broker suggested it to talk to his colleague who was responsible for daily mailing of letters with an estimated assessment of LIBOR to small group of the bankers who were engaged in calculation of the actual value LIBOR. This mailing played a large role in spite of the fact that it was carried out unofficial (the British court urged not to disclose names of two of these people as at present they appear before the court). Information in letters had to be objective, however the broker told that at the request of Heys he can lower the indicators mentioned in letters. There is a probability that the laziest of those who set rate value are less familiar with the foreign exchange market and will just believe what is told in the letter.

And here dawned on Heys. He already knew that banks always adjust the final calculations of LIBOR for the sake of own benefit a little, and still the system did not allow to put external pressure upon itself: any organization will not be able strongly to influence the final value of a rate when 15 other banks do same. But Heys managed to work in several banks, and he had communications with such large number of brokers that it could influence several people who were engaged in calculation of a rate at once. He could walk all over from them while those suspected nothing. Besides, Heys was in very good relations with the brokers than very few people could brag. Being a graduate of normal English school with accent of the cockney, it was close to them on spirit.

Tom Heys does the last unsuccessful rate

The broker made everything in accuracy as he was asked by Heys. Later in the same month Heys contacted it again and offered quite good remuneration. This time, Heys wanted that six-months LIBOR began to grow in yens. About 400 billion yens (3,3 billion dollars) were already held by it, and each increase on the 100-th share of percent (one basis point) was equivalent to receipt of several hundred thousands of dollars. Heys exasperated the brokers with messages and phone calls, and for several days the rate increased almost by three basis points. Heys wrote the message to the chief, Mike Pierri to share the pleasure from the fact that its plan worked – at first emotionally, and then when the actual sum of a prize became known, also it is material. Later on the same week Heys wrote to the broker: "I pay any money, only call the sum".

Heys found out that it is easy to manipulate a rate of LIBOR not only, but also not so costly: the London broker forced the colleague to cooperation, having treated him with a free portion of sauce of a curry. Heys began to call up to familiar traders from other banks and to ask them to affect a rate. To spring of 2007 traders of RBS and JPMorgan Chase already entered a network of its contacts. One of his assistants, Peter O'Leary who passed training in the London branch of the bank of HSBC was his stepbrother.

In April after friendly correspondence of Heys asked it: "You know the guy from the work who sets LIBOR in yens? He trades in yens and the Scandinavian currencies. If I am not mistaken, his name is Chris Darci".

"Of course, I know", – O'Leary answered. – "In my opinion, after all his name – Chris Porter. But all call him Darci because he talks as a major".

Heys O'Leary asked to persuade the colleague to lower an indicator of three-months LIBOR. Each basis point, by its estimates, cost one million dollars. In phone conversations of Heys explained to the stepbrother as it is better to approach a problem: he suggested to sit with this person behind a glass of beer and to ingratiate with it. O'Leary treated it with a reluctance. Especially as the person setting the value LIBOR worked at other floor and in other department. Heys insisted on the, and after a while O'Leary already thanked the colleague for the help. Chocolate Tommie did a great job. After Heys will apologize to O'Leary for the fact that involved it in this business, and any more never asked it about the favor anyway connected with LIBOR.

In UBS of Heys performed all tasks in time. At regular morning meetings he told about the current provision and explained to colleagues and the manual as it was going to influence the movement of a rate. That summer Heys issued the agreement with one of the mezhdilersy brokers. Over the fixed monthly payment which UBS listed to brokers for their services Heys offered additional 15 thousand pounds a month for the help in the shift of a reference rate, five of which were personally given to the broker responsible for mailing of forecasts of LIBOR.

The press secretary of UBS declared later: "It is silly to assume that the idea of manipulation with LIBOR rate came to UBS to Heys. Neither Heys, nor UBS were inventors of a method of management of a rate and were the first who put it into practice. Responsibility for an event is born by all financial industry, including a set of the banks and brokers acting both separately, and together throughout a progressive tense".

Investigation: Whether the trader of UBS directed the financial plot largest in the history August 3. The former trader Tom Heys and his wife Sara arrived to Royal Court of Sautvork in London

Heys never thought of what it is capable to control. It could not predict future, but could set for it the necessary direction. Later he found out that its capability to the shift of this rate brought it only about ten percent from all its income, however even in such cruel business of it there was quite enough to be ahead of rivals and to become a star of UBS which earned for bank of 50 million dollars. In September of the same year in one of swimming pools of Tokyo he got acquainted with the corporate lawyer Sara Tye who, also as well as Heys, grew up in Great Britain. A time later Tye already listened to the incoherent speech of Heys how he earned from crash of the British bank Northern Rock, and after this meeting wanted to meet it again. It strongly became attached to Heys and considered features of its character lovely, and his commitment – attractive. Unlike the chaos reigning at its work, Heys found harmony in private life.

This article is based on more than 200 interviews with traders, brokers, regulators, lawyers, heads of the companies, and also one thousand documents and e-mails shown on final judicial proceedings.

In the cold April morning 2008 Vince Makgonagl was closed at the office in the Commission on trade in commodity futures [English Commodity Futures Trading Commission, CFTC] located in Washington and began to read morning papers. Makgonagl, low, sinewy, similar to the criminal, was engaged in law-enforcement activity in CFTC for 12 years for which his red hair managed to turn gray slightly. At that time he held a position of the senior manager. The heading on the first Wall Street Journal page said: "Bankers drop a hint of doubt in key rates in connection with the come crisis".

Article began so: "One of the most important indicators indicating a financial situation in the world can deceive us. Development of the situation exerting impact on borrowers worldwide – from the Russian oil industry workers to house owners from Detroit – forces bankers and traders to be afraid that the London interbank course known as LIBOR, can be unreliable".

Follows from history that banks intentionally underestimated an assessment of percent on loans that "the market did not learn how strongly they need money". At the beginning of 2007, still before the financial sector began to show signs of the weakness, only the few from Makgonagl's environment considered LIBOR indicators. This reference rate was important, but predictable part of a financial system which almost imperceptibly changed of one week to another, or from bank to bank. Today many can determine strength level by LIBOR in the markets.

At the time of a freezing of the credits LIBOR indicators for all currency types flew up up. Banks with the highest rates were noted as the experiencing difficulties. All were involved in this game: the manual adjusted those who defined LIBOR, and the last tried to foretell what value will be published by their rivals that their rate was slightly lower. Low intensity of trade in the cash market did not allow to be convinced of reliability of the published data. By estimates of analysts, the published indicators were on 40 basis points below that mark on which they had to be. The reason of such decrease in indicators consisted not in personal benefit: all essence consisted in a survival. Principal bankers and investors tried to find out who after Bear Stearns can sink into the abyss of bankruptcy.

Makgonagl knew not so much about LIBOR, but one of the articles Wall Street Journal drew its attention to this rate. In 1996 shortly after he settled in CFTC, Makgonagl got to command of lawyers which charged to study activity of the Texas energy company Dynegy. By hearsay, the company provided the false information on volume of the natural gas sold and purchased by it to affect reference rates on these goods. CFTC and other organizations showed to Dynegy and twenty more other companies, including Enron, a penalty in the amount of more than 300 million dollars.

In the spring of 2008 of strong indications of the fact that traders manipulate LIBOR rate for the purpose of increase of the income it was not observed, however too large number of coincidence confused Makgonagl: the value of a reference rate depends on honesty of traders, and those, in turn, are interested in its shift. Unlike rates on natural gas which were formed the private companies LIBOR was regulated by the British association of bankers, the group of lobbyists from London having reputation of the inspirer of the financial industry. In either case the body which was responsible for regulation of a rate had no powers on imposing of penalties therefore little prevented the companies to resort to deception.

Being a true Catholic, Makgonagl received the lawyer's degree at Pepperdayn's University, Christian school in California where it with complete gravity treated the vital principles including "existence of the purpose, service to people and development of leadership skills". While his peers held highly paid positions in lawyer offices where they protected interests of the companies and frequent persons accused of corruption, Makgonagl moved ahead up a career ladder, initiating against them lawsuits.

That week it brought together the closest colleagues to discuss whether it it is worth investigating case of manipulations of LIBOR. The problems connected with jurisdiction were the heaviest obstacle to start investigation. In 1975 when CFTC was based, the commission issued the directive allowing it to regulate the market of futures and options in which farmers and corporations dominated and to influence the cost of goods. In the years ahead the size of the market of derivatives flew up to several million dollars whereas the size of the commission and volume of resources grew slightly.

The regulator possessed big powers and could interfere with activity of the financial markets, but difficult financial affairs automatically fell under competence of the Commission on securities and the exchanges [English Securities and Exchange Commission, SEC] or the Federal Reserve System of the USA. Harvey Pitt, the chairman of SEC in 2001-2002, known for the rough manners, somehow brought up a question of the one who exactly controls this or that product together with the colleague from CFTC. Having lost patience, he shouted: "Everything is simple! Everything that belongs to securities or financial instruments, belongs to us. Everything that has four legs, belongs to you". Such view of things of many irritated. In the middle of financial crisis CFTC had an opportunity to expand the activity.

Also it was necessary to consider actions of the British authorities: after all it was talked of the London interbank rate of the sentence. Makgonagl contacted the colleagues from Management on financial regulation and supervision [English Financial Services Authority, FSA] in Great Britain to learn about the course of investigation of manipulations of LIBOR. Representatives of regulator in it were not interested and expressed the disapproval in connection with invasion on their territory. (FSA refused to comment on this situation).

It did not stop Makgonagl, and he ordered to the command to continue collecting of data. For the last several weeks his employees found out that LIBOR was a standard for rates of future contracts for the sum of several billion dollars which were trading at the Chicago commodity exchange [English Chicago Mercantile Exchange, CME]. CME fell under competence CFTC: it what was necessary for Makgonagl. That summer CFTC contacted six banks and requested information on how actually LIBOR forms. It was the first careful step which result was the largest business in the history of this organization.

To be continued...

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