Libor trial hears of 'bribe' wash trades as Lehman failed

Tom Hayes, the trader on trial for conspiracy to commit fraud as part of the Libor-rigging scandal, hit on the idea of using wash trades to reward the brokers who helped him in September 2008 – which meant his first attempts floundered in the aftermath of the Lehman Brothers collapse, a London court heard today (June 12).

The court was presented with transcripts of Bloomberg instant message conversations and telephone calls between Hayes, his colleagues at UBS, rate-setters and traders at other banks, and employees at two major interdealer brokers, from May to December 2008. Hayes requested shifts in different Libor fixings on eight occasions in June 2008 alone, the court heard.

According to the transcripts, Hayes was open with brokers about his exposure to Libor as a motive for rigging the benchmark rate. On June 8, for example, he told a broker that "each bp [basis point] in 6m [six-month yen Libor] is 750k". Later that month, after receiving a set of detailed requests for Libor moves, a broker told Hayes admiringly: "Want a job? You have the cash market sewn up."

Hayes routinely asked UBS's own Libor submitter to shift submissions to suit his portfolio, the transcripts showed, and on July 1 also asked if UBS could use its own resources to push one-month rates lower. He emailed Panagiotis Koutsogiannis, head of funding for the rates division, to ask "can I use some balance sheet to lend one-month yen in the market?" It would save the bank "about $1m", he added. Koutsogiannis assumed that the request was to cover a Libor position and asked "how much do you want?"

As the summer of 2008 went on, the transcripts showed increasing concerns about the lack of liquidity in the interbank market, with repeated references to an absence of offers. On the morning of September 15, the day that Lehman Brothers filed for bankruptcy, Hayes's broker told him "there's no bloody offers in", and in a later conversation with a trader at another bank, remarked: "Libor might go up – people aren't going to lend again, who are they going to lend to? Everyone's going to go fucking bust."

Hayes, however, was still trying to enlist help in keeping the six-month yen Libor rate down to protect his bottom line and told the broker he would do a "humongous deal" with them if they helped him successfully. This was not the first time that a quid pro quo had been mentioned: on September 10, Hayes had been asked by a different broker whether "[broker] got a big ticket yesterday?" "No, still owe them", Hayes replied, to which the broker responded "[broker] must be due a new car, better hurry up".

But mid-September was, the court heard, the first time that Hayes had suggested using a wash trade to reward his broker. "Whatever the middle of the market is, I'll buy and sell 400 yards [billion]," he suggested. The broker would need to find a willing counterparty to stand on the other side of the trade, but since the trade would go in both directions very rapidly, this would not involve their taking counterparty risk or paying brokers' fees – "you don't charge them bro[kerage] but I'll pay bro both sides obviously".

However, Hayes's broker, left with a sizeable ¥400 billion ($3.2 billion) deal to put through (albeit as a wash) in the turbulence following Lehman's collapse, found it no easy task. Merrill Lynch, recently acquired by the Bank of America, turned it down because "the thing is with Merrills they have to look squeaky clean". Merrill Lynch's trader, contacted by Hayes's broker, had remarked that "it looks a bit dodgy actually" and refused to take part for reputational reasons, pointing out that "these are tough times for bankers". Another bank had also refused, saying they were "not allowed by risk to do it". Citing a "credit issue", JP Morgan's Stuart Wiles agreed to take part – but only for "50 yards". And Neil Danziger at RBS agreed to take "150 yards" in return for the broker providing lunch for the entire desk, the transcripts showed.

With the deal set up for only half the promised amount, Hayes suddenly realised that that would be enough; he had worked out the benefit to the broker without realising that UBS would be paying both brokerage fees, thus doubling the normal benefit to the broker. "What will you get out of it?" he asked the broker. "Well, we get a bonus out of it – we're batting for ourselves here so we get 30% of the net," the broker replied.

Pleased with the success of the wash trade, which eventually netted the broker a total of £32,012 ($49,811) from UBS plus £10,244 from RBS, Hayes concluded that future payoff should take the same form, according to a chat log from September 19. "I think this is the best way for us to do it ... so, going forward, if you can find a counterparty," he told the broker, who agreed: "They don't even realise ... I said he [Hayes] owes me, I gave him good inform, good advice on Libor".

Further wash trades took place later in the year, the court heard.

The trial continues.