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Libor: They all knew – and no one acted
Regulator’s claim it knew nothing thrown into doubt as documents show authorities were told of rate-rigging in 2008
14
July, 2012
Regulators
on both sides of the Atlantic failed to act on clear warnings that
the Libor interest rate was being falsely reported by banks during
the financial crisis, it emerged last night.
A
cache of documents released yesterday by the New York Federal Reserve
showed that US officials had evidence from April 2008 that Barclays
was knowingly posting false reports about the rate at which it could
borrow in order to assuage market concerns about its solvency.
An
unnamed Barclays employee told a New York Fed analyst, Fabiola
Ravazzolo, on 11 April 2008: "So we know that we're not posting,
um, an honest Libor." He said Barclays started under-reporting
Libor because graphs showing the relatively high rates at which the
bank had to borrow attracted "unwanted attention" and the
"share price went down".
The
verbatim note of the call released by the Fed represents the starkest
evidence yet that Libor-fiddling was discussed in high regulatory
circles years before Barclays' recent £290m fine.
The
New York Fed said that, immediately after the call, Ms Ravazzolo
informed her superiors of the information, who then passed on her
concerns to Tim Geithner, who was head of the New York Fed at the
time. Mr Geithner investigated and drew up a six-point proposal for
ensuring the integrity of Libor which he presented to the British
Bankers Association, which is responsible for producing the Libor
rate daily.
Mr
Geithner, who is now US Treasury Secretary, also forwarded the
six-point plan to the Governor of the Bank of England, Sir Mervyn
King. The Bank pointed out last night that there was no evidence in
the Geithner letter of banks actually making false submissions –
although then note did allude to "incentives to misreport".
It
was unclear last night whether Mr Geithner informed Sir Mervyn about
the testimony of the Barclays employee who said that the bank was
being dishonest in its submissions.
If
it turned out that he did, that would be highly damaging for the Bank
since it has always claimed that it never saw or heard any evidence
that private banks were deliberately making false reports about their
borrowing costs. Sir Mervyn is due to be questioned by the House of
Commons Treasury Select Committee next Tuesday, where MPs are likely
to put this question to the Governor.
The
Bank's Deputy Governor, Paul Tucker, went before the Treasury
committee last week to answer allegations that he had put pressure on
Barclays to misreport its borrowing rates in 2008 while attempting to
promote financial stability. Mr Tucker denied that he had done so and
said he only found out that Barclays had been deliberately submitting
dishonest Libor submissions recently.
The
New York Fed released its cache of documents in response to a request
from the chairman of Congress's Committee on Financial Services on
Oversight and Investigation, Randy Neugebauer, who has been
investigating how much US regulators knew about the rate-fixing
scandal, in which 11 other banks around the world have been
implicated.
A
separate email released by the Bank of England yesterday shows that
Mr Tucker forwarded the Geithner email to Angela Knight, the former
chief executive of the British Bankers Association. She responded
saying that "changes had been made to incorporate the views of
the Fed".
While
the BBA is understood to have acted on two of Mr Geithner's
proposals, the other four were not adopted.
Before
hearing from Sir Mervyn on Tuesday, the Treasury Select Committee is
set to take evidence on Monday afternoon from Jerry del Missier, the
former chief operating officer at Barclays, who gave the green light
for traders to submit false Libor submissions during the crisis. He
will be asked about whether he thought the order to do so had come
down from the Bank of England.
Last
month Barclays was fined £290m for rigging Libor between 2005 and
2008. The regulators found that Barclays traders had initially
submitted false reports to make profits for its traders, but
subsequently to allay concerns about the bank's health. Barclays'
chief executive Bob Diamond resigned on 3 July. The Libor rate is
used to fix the cost of borrowing on mortgages, loans and derivatives
worth more than $450 trillion (£288 trillion) globally.
The
missed warnings: ‘So we know that we’re not posting, um an honest
Libor
One
document released yesterday by the Fed detailed a conversation
between staffer Fabiola Ravazzolo and an unnamed Barclays employee in
April 2008, including the following edited extract:
Fabiola
Ravazzolo:
And, and why do you think that there is this, this discrepancy? Is it
because banks maybe they are not reporting what they should or is it
um…
Barclays
employee:
Well, let's, let's put it like this and I'm gonna be really frank and
honest with you.
FR:
No that's why I am asking you [laughter] you know, yeah [inaudible]
[laughter]
BE:
You know, you know we, we went through a period where we were putting
in where we really thought we would be able to borrow cash in the
interbank market and it was above where everyone else was publishing
rates.
FR:
Mm hmm.
BE:
And the next thing we knew, there was um, an article in the Financial
Times, charting our LIBOR contributions... and inferring that this
meant that we had a problem... and um, our share price went down...
So it's never supposed to be the prerogative of a, a money market
dealer to affect their company share value.
FR:
Okay.
BE:
And so we just fit in with the rest of the crowd, if you like... So,
we know that we're not posting um, an honest LIBOR. And yet and yet
we are doing it, because, um, if we didn't do it it draws, um,
unwanted attention on ourselves.
FR:
Okay, I got you then.
BE:
And at a time when the market is so um, gossipy... it was not a
useful thing for us as an organization.
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