On Monday 9 June, 2008, a disgraced Wall Street hedge-fund trader named Samuel Israel III decided to end it all. Given the desperation of his circumstances, the only way out seemed to be suicide – or at least the appearance of it. For nearly a decade, Israel had been the mastermind of a $450 million hedge-fund fraud. The implosion of Bayou Funds had robbed Israel of his reputation, his fortune, and he faced the prospect of 20 years in prison.

Driving on to Bear Mountain Bridge in upstate New York, Israel pulled to the side and climbed over a railing. 'Suicide is Painless' was written on the dust on the side of his vehicle. He stared down from the suspension bridge at the Hudson River. He took a deep breath. He leapt...

Sam Israel had been born into one of the leading commodity trading families in the world. Raised in privilege in the wealthy suburbs of New York City, he'd been sent to the best schools and smoked weed and chased girls with the children of Wall Street's elite.

When Israel came of age, it was expected he would take the path of least resistance and join the family business. But Israel wanted to be his own man. He didn't want to trade commodities. He wanted to go to Wall Street and match wits with the best and the brightest by trading stocks – come what may.

Apprenticed into a hedge fund run by a legendary trader, Freddy Graber, Israel was taught the black arts of making money on Wall Street. Graber became a father-figure to Israel, as the latter learnt the reality of insider trading, front running, and the secret array of scams to scalp points from every trade.

"I became an asshole," Israel recalled. "I went from being a low-key considerate kid to a complete jerk. All of a sudden I had to have the best cars. If it wasn't first class I wasn't fucking going. My moral education consisted of learning how to keep secrets and spend money. My ego was out of control."

On the eve of Israel's marriage to his teenage sweetheart, a working-class girl who'd earnt an accounting degree, Graber took him to a high-end whorehouse, offering his pupil two or three woman – whatever he wanted. Out carousing in Manhattan every night with his fellow Wall Street traders, Israel developed an alter ego he called Captain Proton, a coke-fuelled superhero who turned an umbrella into a sword and curtains into a cape.

"Under Graber, I learnt that Wall Street was an illusion," Israel said. "There were different magicians using different tricks in different ways. But everyone cheated. It shocked me so much in the beginning. I admired these people. And they cheated."

By the time Israel started his own company, Bayou, in 1996, he was determined to run an honest fund, free of the temptations of easy money. In the first year, Bayou was able to attract just under $1 million in investments. After a few excellent months, a string of bad luck forced Israel to confront the prospect of humiliating failure – so he fudged the numbers. As the fund grew, Bayou's accountant proved incredibly adept at fooling the auditors. Incredibly, the entire fraud was hidden in a line in Bayou's profit report that stated the money 'Due from Brokers'. No one ever questioned what the term meant, or how much was actually on deposit with the division of Goldman Sachs that acted as Bayou's clearinghouse – not the regulators, the fund's investors, or law enforcement.

For all his failings as a trader, Israel proved to be a masterful fraudster, presenting himself as a modern-day necromancer able to conjure money out of thin air. He was known to be flamboyant, extremely likeable, funny, a prankster incapable of taking himself or anything else seriously. A bachelor millionaire like Bruce Wayne, Israel lived in a mansion outside New York he rented from Donald Trump, drove a fleet of Porsches, and signed personal cheques with the likeness of SpongeBob Squarepants.

Despite the bravado, the fraud was killing Israel emotionally, physically, spiritually. Going through a brutal divorce, repeated operations on his back, and open-heart surgery had left him in ruins. Diagnosed as bipolar, he'd been prescribed a bewildering regime of drugs, a cocktail he washed down with a fistful of painkilling opiates.

By the spring of 2004, the sum in the 'Due from Brokers' line had grown to more than $300 million – a total that was nearly entirely invented profit. Israel tried desperately to find a way to solve what he secretly called 'The Problem'.

"There was a black hole in my heart," Israel told me in a prison interview years later. "It weighed on me all the time – on my shoulders, my heart, my mind. I was always surrounded by blackness."

Late one evening, Israel was eating Chinese food in the Trump mansion with a small-time movie actor who had played the villain, Non, in Superman II. Jack O'Halloran, a gigantic man with a loud roar of a laugh, had been a heavyweight boxer, professional American football player, and now presented himself as a venture capitalist. Beyond all else, though, O'Halloran was a teller of tall tales.

It was a story about a CIA operative named Robert Booth Nichols that captured Israel's attention. According to O'Halloran, Nichols was a stone-cold killer, a real-life Jason Bourne who functioned at the absolutely highest levels of government.

Later that evening, Israel typed 'Robert Booth Nichols' into his search engine. Hundreds of links popped up. Nichols was a superstar of the conspiracy theory world, it appeared. Israel read how Nichols had allegedly been involved in virtually every nefarious American covert operation of the past three decades. Iran-Contra, the MK Ultra mind control experiment, the October Surprise – Nichols was everywhere.

Reading with saucer eyes deep into the night, Israel encountered reports on a covert computer operation. The CIA had installed a program called Promis in the computers of the world's leading financial institutions, Israel read. This enabled the spies to secretly survey the global movement of money through a 'trap door'. Israel believed that if he had Promis, he'd be able to watch the flow of money into and out of the Federal Reserve in real time and thus trade ahead of the market. He'd make billions.

Aiming to obtain the program, Israel arranged through O'Halloran to meet Nichols at the Dorchester Hotel in London. In person, the spy was sly, as Israel expected, with the old Hollywood appearance of Clark Gable. He was in his sixties, with the sallow skin of a lifelong smoker and heavy drinker. As he sat, Israel caught a glimpse of the gun he had tucked in a holster – a highly unusual sight in London. The pretext for the meeting was to hire Nichols to assist in acquiring the CIA's secret biometric technology for a company O'Halloran was promoting. While the meeting droned on, Israel leaned over to whisper in Nichols's ear.

"I need to talk to you privately," Israel said.

"Aren't you part of this group?"

"This has nothing to do with them," Israel said. "I run a fund called Bayou. I'm a Wall Street trader. I want Promis."

Nichols was surprised, but he nodded in acknowledgement. Convening privately in a taxi five minutes later, Israel told Nichols he wanted Promis, no matter the price. Nichols's cell phone rang. Signalling that the call would take a minute, Nichols removed a document from his briefcase and talked in hushed tones about a "program" and a "payout". When he hung up, Israel asked what the call was about. Nichols was reluctant to say – it was a confidential matter. Nichols' phone rang again. He retrieved the document and talked in a clipped voice, swiftly returning the paper to his briefcase. But in a split second, Israel caught sight of columns of numbers.

"What is that?" Israel asked.

"Nothing," Nichols said.

"Let me see it," Israel said.

Reluctantly, Nichols clicked open his briefcase and handed over the paper. "It's a payout sheet," Nichols said. "From a trading program."

On the left side of the page were sums in the millions. On the right the numbers were quadrupled in a matter of days. "These are the returns?" Israel asked, incredulous.

"This is something that can benefit you greatly," Nichols said. "But it is very difficult to get into this market. Nearly impossible."

"What market?"

"High-yield, buy-sell trading programs," Nichols said. "The market is only open to the biggest players."

"So how do I get in?" Israel asked. "I know how to trade anything."

"Do you have $100 million?" Nichols asked.

"I do," Israel replied.

"Do you have $150 million?"

"Yes."

"$200 million?"

"That's pushing it," Israel said.

"You should forget about Promis," Nichols said. "I know how to put your money to work."

Arriving at Claridge's and heading for Israel's five-star suite, Nichols explained how the shadow market worked. The Federal Reserve was running a Ponzi scheme, Nichols said. The entire global economy was based on deception. The large banks that were designated primary dealers by the Federal Reserve – Goldman Sachs, Deutsche Bank, Union Bank of Switzerland – operated the shadow market. The public had no idea of the underlying reality of the marketplace.

Nichols said the risks were huge. Not financially. Nichols assured Israel that the money wouldn'tf be at risk. Israel would make 100 per cent profit every 10 days, sums that would soon add up to billions. But there was a serious chance that Israel would be attacked for attempting to enter the clandestine world of the shadow market. Rival factions, ruthless operatives from intelligence agencies, were all vying to trade the Fed's bonds.

Israel listened carefully, disbelief turning to excitement. Nichols story was incredible – but also credible, at least to Israel. As a child of wealth, Israel had grown up watching the most powerful men on Wall Street manipulate events to their own advantage. The deceit that had overwhelmed Israel's reality made him susceptible to believing there were far larger deceptions – lies that went to the heart of capitalism. Years of lying had also made it difficult for him to tell when others might be lying. At heart, Israel now faced a choice: he could return to New York and the dire certainty that his fraud would be discovered, or he could suspend his disbelief and try to gain entrée to the shadow market.

The next day, Israel wired $150,999,847.42 million to an account in Barclay's Bank in London.

The con man was about to be conned – a Hollywood-worthy twist of the tale. But it was only the beginning as Israel entered the lunatic, upside-down fantasy constructed for him by Nichols. It was a parallel dimension that Israel came to call the "Octopus" for the way its tentacles were wrapped around the world – and his imagination.

Under the sway of Nichols, Israel spent a year trying to trade in the shadow market. He travelled to the financial capitals of Europe. His companions were a cast of masters of high finance, European royalty, spies and scammers. Israel's guide and constant companion – his "handler", in the parlance of the long con – was Nichols.

Over time, Israel discovered it was maddeningly difficult to trade the mythical bonds. It was also dangerous. Israel was chased through the streets of London, he told me, assaulted in Amsterdam, and nearly kidnapped in Zurich. But the weeks continued to pass without a single trade. Nichols told Israel the market schedule was limited and the "paper" was scarce.

Finally, hoping to force some action by creating leverage, Israel wired his $150,999,847.42 back to Bayou's Citibank account in New York. He may even have begun to doubt that Nichols could pull it off.

Weeks later, Nichols announced that he had found a tranche of bonds in Germany. Israel had to act immediately, Nichols said, if he was going to cash in on the trade with Postbank in Hamburg.

Before Israel was willing to send the money back to Europe, where Nichols and his cronies could once again try to pilfer it, he insisted on meeting an official at Postbank. Israel wanted to be assured that the trade was real. Following Nichols' instructions, Israel flew to Hamburg, rendezvousing at an airport hotel with a man he was told was Pakistani intelligence. Israel was handed a bag containing two 9mm Beretta handguns, each equipped with a silencer.

Nichols arrived the next morning, in full black-ops mode: hundreds of operatives had descended on Hamburg to try to stop them from making a trade, Nichols told Israel, and urban combat was highly likely.

The meeting was scheduled for Saturday morning, in the business district a short walk from the hotel. As Israel and Nichols cautiously made their way, weapons tucked in the small of their backs, the streets of Hamburg seemed eerily empty. Israel and Nichols were greeted by a German banker at the rear entrance to a nondescript building and ushered through into the office – completely deserted, aside from two cleaners vacuuming. The banker explained that the transaction involved $2 billion in medium-term-note prime-bank debentures.

To perform final due diligence, Nichols borrowed a phone to call a man named Phil Severt, whom he claimed was a former Reagan official. Israel had talked to Severt once before – it was a conversation that had made a strong impression on him.

"When we spoke, Severt repeatedly told me he had what he called a stupid face," Israel told me. "He said he had the kind of face that was instantly forgettable. He could vanish into crowds. He said he was invisible because his face was so average – so stupid."

Severt assured the men that the trade was kosher. All that remained was for Israel to transfer $120 million to a "non-depletion" account in Postbank.

For security purposes, Israel left the meeting ahead of Nichols, walking out the back door.

"Across the street there was a man standing next to a telephone pole," Israel recalled. "He was short, maybe 5ft 5in, wearing a turban. He appeared to be Pakistani. He started to walk toward me. As I got near him, he passed by and he said – I swear to God – he said, 'You have a really smart face'. I stopped dead. I knew it was Severt telling me he'd sent people to watch us in Hamburg. So I threw the guy against the wall and asked what the fuck was going on. He wouldn't talk to me, not in English. All of a sudden he could only speak Urdu. He kept saying the same thing – 'No, sahib, no, sahib'.

"I let him go. I walked a couple more steps, and then I turned around to see if Bob [Nichols] was behind me. As I turned, I saw the guy reach into his jacket and pull out a gun. Now Bob was coming out of the building. The guy was taking aim to shoot Bob. I pulled my Beretta out, and I shot at the guy. I hit him in the left hip. Everything was moving in slow motion. The guy dropped the gun and fell to the ground. By that time, Bob had pulled out his gun and he plugged the guy in the right shoulder. I walked over and shot him in the head. Point-blank. Killing him. His head exploded all over the sidewalk. Blood and brains were everywhere.

"There were no cars. No witnesses. Nobody was there. The silencers worked, so the shots didn't make any sound. No one had seen what happened. Bob grabbed me. He took the gun from my hand, and we ran for our lives. When we got back to the hotel, I didn't know what to do. We went to Bob's room. I was crying. I was devastated. I threw up. Bob said I was the craziest person he'd ever met. But I'd saved his life. He told me he'd take care of it. Bob started to make calls. He got rid of the body. He had cleaners to take care of that kind of thing – to make a body disappear before the police were alerted. He got rid of the guns, too. He made it so there were no traces of the crime."

The next day, Israel wired $120 million to Germany.

Had Israel really killed a man? Or was it a piece of theatre choreographed by Nichols? Was Nichols a con man, hit man, mad man, or all three? Staging a murder is one of the oldest ruses of grifters. Blood, guts, guns, the frisson of extreme danger, the need to flee before the law arrives – the elements are eternal. And of course, Postbank had no knowledge of the elaborate con: it was just one rogue employee working alone.

Nichols had decided to take a final step to put Israel's money back in play. For all his emotional investment in the shadow market, Israel's millions had been sitting back in New York, and Nichols had apparently concluded that Israel needed a "convincer": an event to eliminate any lingering doubts, to prove that everything he said was true. Nichols wanted Israel to see that the Octopus was real. Terrifyingly real.

But by the time Israel's fraud at Bayou finally exploded, in the summer of 2005, the truth about the shoot-out no longer mattered to Israel. Prosecutors had no idea about the murder in Hamburg; the first time he talked about the incident was for my book. Given time by the judge to get his medications in order before reporting to prison, Israel used his connections to the Bush family to try to get the President to commute his sentence. But the ploy didn't work.

So, it came to pass that on Monday 9 June, 2008, in an act of desperation, he decided to end it all. Israel took a deep breath and leapt…

And landed. Two feet below the ledge, there was a platform that a construction crew was using to repair the bridge. Or so he told me. He escaped undetected to a camper he had parked at a rest area nearby. So it was that Israel became the subject of an international manhunt, a fugitive from justice who had made the entire international financial system appear ridiculous.E

Sam Israel gave himself up in July 2008 and is currently serving out a 22-year prison sentence for fraud. Robert Booth Nichols is dead.

The Secret Market & the World's Wildest Con', by Guy Lawson, published by Oneworld. To order a copy at the special price of £11.69, including p&p, call Independent Books Direct on 0843 0600 030