Did Bank of England Have a Hand in Libor Fixing?

Econintersect:  Barclays Bank (NYSE:BCS) has been caught with their hand in the cookie jar and executives, including CEO Robert Diamond, are gone.  The scandal involves the bank reporting manipulated interest rates upon which the LIBOR (London Interbank Overnight Rate) was calculated.  This reference interest rate is one upon which rates are based in much of the world.  Barclays Bank, and possibly up to 16 major global banks altogether, has regularly submitted statements of their borrowing interest rates biased to create larger profit margins for their traders.  The effect over the years was much larger trading profits accumulated by the banks’ at the expense of their trading partners.

[LIBOR is]An interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market. The LIBOR is fixed on a daily basis by the British Bankers’ Association. The LIBOR is derived from a filtered average of the world’s most creditworthy banks’ interbank deposit rates for larger loans with maturities between overnight and one full year.

There are now indications that the Bank of England (the UK central bank) may have had some hand in the manipulation.  On July 1 an article in the Financial Times indicated that in 2008 Barclays “mistakenly” believed they had been granted permission to submit false interest estimates during discussion between Bob Diamond and a deputy governor of the Bank of England (BOE), Paul Tucker.  Tucker is a leading candidate to become the new head of the BOE.

A new article from the Financial Times appearing late in the day July 3 contained the following:

The bank released Mr. Diamond’s contemporaneous notes of a 2008 conversation – one of only three “notes to file” he has written in his career – in which he wrote that Mr. Tucker had passed on concerns from Whitehall about Barclays’ Libor submissions, adding that “it did not always need to be the case that we appeared as high as we have recently”.

The day after the conversation, the Libor borrowing rates submitted by Barclays fell sharply.

This latest disclosure gives cause to question the use of the word “mistakenly” in the July 1 article.

Confidence in the LIBOR has been shaken dramatically and the latest added details about the nature of the interaction between Barclays and the BOE four years ago could change the characterization from shaken confidence to shattered credibility.  According to Bloomberg:

Diamond’s exit shows LIBOR is only what each bank says it is.

The further this goes one has to wonder how far the criminality might extend if prosecution does follow.  Shah Gilani (GEI Opinion) has suggested that criminal prosecutions is overdue.

John Lounsbury

Sources:

• Barclays boss discussed Libor with BOE (Brooke Masters and Kara Scannell, Financial Times, 01 July 2012)

• Diamond lets loose over Libor (Brooke Masters, George Parker and Kate Burgess, Financial Times, 03 July 2012)

• Diamond’s Exit Shows Libor Only What each Bank Says It Is (Paul Armstrong, Bloomberg, 03 July 2012)

• Why Aren’t LIBOR Manipulating Banksters in Prison? (Shah Gilani, GEI Opinion, 03 July 2012)