Libor and the Bank

Libor and the Bank

Nearly five years ago, the former CEO of Barclays Bank, Bob Diamond, defended himself against accusations that on his watch, Barclays had deliberately falsified Libor submissions. To no avail: after widespread adverse press coverage, Diamond resigned.

Was this at the instigation of the Governor of the Bank of England and the head of the FSA? We will probably never know. But events yesterday make not only Diamond’s resignation, but also the prosecution and jailing of traders and Libor submitters from Barclays and other banks, look distinctly odd.

The BBC’s Andy Verity has revealed the existence of a recording which appears to indicate that the Bank of England and the Treasury pressured banks to “lowball” their Libor submissions during the financial crisis. According to Verity, the conversation, between a junior Libor submitter (who was subsequently jailed) and his manager, ran like this:

In the recording, a senior Barclays manager, Mark Dearlove, instructs Libor submitter Peter Johnson, to lower his Libor rates. He tells him: “The bottom line is you’re going to absolutely hate this… but we’ve had some very serious pressure from the UK government and the Bank of England about pushing our Libors lower.” 

Mr Johnson objects, saying that this would mean breaking the rules for setting Libor, which required him to put in rates based only on the cost of borrowing cash. Mr Johnson says: “So I’ll push them below a realistic level of where I think I can get money?” His boss Mr Dearlove replies: “The fact of the matter is we’ve got the Bank of England, all sorts of people involved in the whole thing… I am as reluctant as you are… these guys have just turned around and said just do it.”

This is not the first time that Barclays has issued material purporting to show that the Bank of England was influencing Libor rates. Diamond’s submission to the Treasury Select Committee included this file note recording a phone call between Diamond and Paul Tucker, then Deputy Governor of the Bank of England:
Note the last sentence. At the time, this passed largely unremarked – but in the recording reported by the BBC, Mark Dearlove makes a similar comment. Someone very senior in the Treasury seems to have instigated the Bank of England’s request for Libor lowballing. The identity of this individual has not been revealed, though the Telegraph thinks it knows.

Libor manipulation is now a criminal offence – when it is done by banks or traders to boost their own profits. So the growing evidence that the Bank of England was manipulating Libor rates during the financial crisis at the behest of the Treasury raises some very serious questions.

Firstly, why would the Bank and the Treasury have wanted to manipulate Libor? It seems highly unlikely that this “lowballing” request, at the height of a crisis when “market” rates were completely meaningless, would have had anything to do with flattering bank profits. So what might it have been about?

Well, this was during the financial crisis, when banks were dropping like ninepins. Several Libor panel banks, including RBS and HBOS, were already shut out of markets: their Libor submissions in no way reflected the real cost of market funding for them (which was effectively infinite). And market rates were heading for the moon, as suspicious market participants looked for the next domino to fall. It seems entirely reasonable to me that the Bank of England, prompted by a worried Treasury, would have intervened to lower Libor to something more sensible than panicky banks would charge to lend to other banks they feared could collapse at any second.

Secondly, the note from Tucker shows that Barclays’s Libor submissions were among the highest at that time. Normally, high funding costs indicate that the market thinks the bank is a poor risk: Norther Rock’s funding costs rose dramatically in the months before its collapse. So Barclays submitting higher Libors than other banks could have signalled to the market that it was next in line for a bailout.

We now know that Barclays was indeed in trouble at that time. To avoid the same fate as RBS, it went cap in hand to Qatar. The Serious Fraud Office is now investigating the shady equity-for-loan deal Barclays did with the Qataris. According to the Independent’s Ben Chu, the SFO’s findings are due in about a month. If the SFO decides that the deal was fraudulent, criminal prosecutions will follow. The timing is exquisite….

Did the Bank of England – or the Treasury – know Barclays was in trouble? Or did they merely suspect it was? Either way, did they pressure Barclays to reduce Libor submissions in order to ward off a market attack on a bank perceived as vulnerable, thus buying time for Barclays to find additional funds to beef up its dwindling equity?

This raises further questions. If the source of the new recording was Barclays, why wasn’t it released five years ago along with the Tucker file note? Why has Barclays been sitting on this evidence? Why did Bob Diamond take the fall for Libor manipulation that appears to have been instigated by public officials?

And if the source was one of the participants, not Barclays itself, why did that person sit on the recording for five years? One of the people in that conversation was jailed. This evidence could have exonerated him, and others.

I think we need to know why this evidence was withheld for so long, and by whom. And we also need to know why it has now been revealed. Please don’t tell me the old team had hidden it in a vault and the new team have only just found it. I don’t believe it.

There are serious questions for the Bank of England, too. Why did Paul Tucker deny knowing anything about lowballing, despite the existence of the file note implicating him? His involvement in this matter destroyed his chances of becoming Governor. Why did he sacrifice his career at the Bank? Who was he protecting – and why?

I have previously asked why the FSA went ahead with fines and censure for Barclays and, subsequently, other banks when it appears they were acting at the behest of the Bank of England. The FSA must have seen the evidence Barclays presented to the Treasury Select Committee, though it may not have been aware of the recording. It therefore knew the Bank of England was possibly implicated. Hanging Barclays out to dry for an offence possibly committed at the behest of the Bank of England and the Treasury is hardly presenting a united front. Was the FSA distracting attention from its own failures by shafting other public institutions?

There is another matter, too. Back in 2012, Joseph Cotterill reported that the Bank of England was also suspected of Libor manipulation prior to the financial crisis, between 2005-2007. This is an entirely different – and potentially much more serious – matter than attempting to cap Libor to prevent bank meltdown in the financial crisis. It suggests that the Bank may have been treating Libor as a shadow policy rate. There is some justification for this: if the main monetary policy rate and Libor become significantly decoupled, monetary policy loses traction. So it may be that the Bank leaned on panel banks to adjust their Libor submissions if Libor appeared to be becoming unanchored from the policy rate. But the problem is that if this is what the Bank was doing, it didn’t tell anyone.

The Bank of England may or may not have had good reasons for manipulating Libor. But its officials had no reason whatsoever to conceal the Bank’s actions. Lying to Parliament is totally unjustifiable – as is allowing people to be prosecuted, and serve jail time, for offences they may not have committed. The real disgrace is the web of lies that seems to have been woven by both Barclays and the Bank of England.

We may never get to the bottom of this sorry mess. But we should give it a damn good try. Five years ago, I called for an independent judicial enquiry into the role of public institutions in Libor manipulation . I repeat that call now. Let those who really made the Libor decisions, both before and during the financial crisis, be brought to account.

Related reading:

Libor rigging and double standards
So whose fault is it, then?

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