Monday, 9 July 2012

LIBOR-rigging and double standards

This afternoon, Paul Tucker, Deputy Governor of the Bank of England, appears before the Treasury Select Committee (TSC) to explain the Bank of England's role in the LIBOR-rigging scandal.

And boy does he have some explaining to do. As Tim Worstall pointed out the other day, the Bank of England must have known that LIBOR submissions from HBOS and RBS both before and after the failure of Lehman in September 2008 were far lower than the rates they would realistically pay if they were to attempt to borrow in the interbank market. Both were shut out of the markets at the time and dependent on Emergency Liquidity Assistance (ELA) from the Bank of England.  This crisis funding was not declared to the public, and it seems that in order to keep it quiet, the Bank of England accepted much lower LIBOR submissions so that HBOS and RBS gave the impression of being solvent when they were actually at death's door.

Of course, HBOS and RBS actually had no way of establishing what a realistic interbank borrowing rate would have been for them - "infinite" is the closest we can get, since no-one would lend them money at any price. And there were other panel banks in the same sort of mess, such as WestLB and UBS. So there was no way that LIBOR could be allowed to represent the reality in the marketplace: the consequences for the billions of loan and derivative contracts priced off LIBOR would have been horrific. Therefore the actions of the regulators in accepting, and maybe even encouraging, unrealistic LIBOR submissions at this time were reasonable and may have prevented a bad situation from becoming much worse.

Barclays' LIBOR submissions were higher than other banks' throughout this time despite the fact that other banks were clearly in much worse shape: even after the famous Tucker/Diamond phone call, when Barclays admits it reduced its submissions, they were STILL higher than other banks, because it seems other banks reduced theirs further. Barclays says it repeatedly pointed out this discrepancy to regulators on both sides of the Atlantic, but regulators did nothing - which supports the argument that regulators knew perfectly well the rate was being manipulated.

The picture that is emerging is collusion among regulators and panel banks to maintain LIBOR at a sensible rate at a time of market turmoil. So far so good. I don't, personally, have a problem with this as an emergency strategy. What I do have an issue with is the fact that Barclays has now been fined for manipulating its LIBOR submissions at this time. Admittedly that is not the only reason for its fine, as I noted in a previous post. But it is a significant part of the FSA's censure.

To me it is unacceptable that the FSA fined Barclays for behaviour that the Bank of England condoned, and may have encouraged, in other banks at the same time. This is the worst kind of double standards. I am struggling to understand the FSA's motives in exposing the Bank of England, and possibly the Treasury, in this way. The cynical part of me remembers that the FSA is about to be disbanded and its bank regulatory functions transferred to the Bank of England. Surely this isn't the FSA lashing out at its rival?

Whatever the reason, it leaves a problem. If the FSA's censure of Barclays for LIBOR manipulation during the financial crisis is allowed to stand, then the Bank of England's behaviour in allowing other banks to manipulate their submissions must be criticised - along with the BBA, the Treasury and even the NY Fed. The alternative is that the real drivers of LIBOR manipulation during this time declare their hand, which would allow the FSA to recant without losing face. But if this second course of action is followed, then the world must accept that LIBOR is not, and never will be, a market-determined rate. It is open to political manipulation when circumstances dictate.

The Treasury Select Committee is currently responsible for getting to the bottom of this unholy mess. I do hope that at least one member is on the ball. Their performance in Diamond's interrogation doesn't fill me with hope, frankly. And I am astounded that the Government thinks a parliamentary inquiry will be sufficient. Unless the TSC does very much better today than it did last week, there will be far too many questions left unanswered. The case for an independent judicial inquiry is becoming overwhelming.


  1. Interesting post.

    But is it really reasonable to suggest that this might be "lashing out" on behalf of a lame-duck institution? Surely the demise of the FSA is barely going to register for the staff; as they'll just be transferred to new offices and get to use a new name, but the job and people will remain more-or-less the same?

    I mean, the whole "kill the FSA" thing was always more of a political stragem than a thing of substance, no?

  2. But isn't the manipulation of LIBOR alleged to have started in 2005, long before the collapse of Lehman, and therefore presumably before any intervention from the Bank of England etc ?

    1. As I explained in my first post on this subject, there are two distinct types of LIBOR-rigging. The first was attempts by TRADERS to manipulate LIBOR for personal advantage. This started in 2005 and ended in 2010, according to the FSA report. The second was deliberate reduction of LIBOR submissions to improve the apparent financial strength of the bank during the financial crisis 2007-2008. It is that second type of LIBOR-rigging that is the subject of this post, not the first. I did comment in this post that there are other reasons for the fine.

  3. “And I am astounded that the Government thinks a parliamentary inquiry will be sufficient.” I’d re-phrase that just a little bit – something like: “The Government knows perfectly well that a parliamentary inquiry is insufficient, but it wants to protect Tory party donors in the City.”

  4. "Therefore the actions of the regulators in accepting, and maybe even encouraging, unrealistic LIBOR submissions at this time were reasonable and may have prevented a bad situation from becoming much worse." Or allwowed the market to find the right prices of everything.

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