13 Jul 2012

US warned Bank of England about Libor fixing in 2008

The US pressed the Bank of England to improve the Libor system before Lehman Bros collapsed in 2008 amid reports that Barclays and other global banks were rate rigging, newly released e-mails show.

Investment banks were accused of fixing key Libor interest rates in anecdotal evidence from Barclays‘ bankers passed to the Federal Reserve Bank of New York as far back as 2007, the Fed said in a statement. The Libor rates provide a benchmark for trillions of dollars in mortgages and other financial products, and the rigging helped improve bank profits and banker bonuses.

The Fed investigated and shared its concerns with the Bank of England in June 2008, three months before Lehman Bros spectacularly collapsed and dragged the world economy down with it. Little was done at the time, however, and Europe, Canada, Japan and the United States are all now probing how investment banks could have misrepresented the global borrowing cost benchmark for years.

Timothy Geithner, US treasury secretary, pushed Bank of England Governor Sir Mervyn King in 2008 to “eliminate incentives to misreport” Libor rates and increase the benchmark’s accuracy, according to a 1 June 2008 e-mail sent from Mr Geithner to the Bank of England governor and his deputy Paul Tucker.

England urged to act on Libor in 2008

The UK should “strengthen governance and establish a credible reporting procedure” to prevent accidental or deliberate misreporting, Mr Geithner told Sir Mervyn and Mr Tucker. At the time, Mr Geithner ran the Federal Reserve Bank of New York.

The Bank of England governor replied two days later saying he considered the suggestions “sensible” and asked Mr Tucker and the British Bankers Association to pursue further action.

“Concerns about difficulties in setting Libor in the stressed market conditions of late 2007 and 2008 were widely expressed, including in the media, although no evidence of deliberate wrongdoing had been cited,” Sir Mervyn said in a statement on Friday.

The BAA, responsible for setting up and governing Libor, reviewed the process in June 2008, Sir Mervyn also noted.

Angela Knight, the chief executive of the BBA, in an e-mail to Mr Tucker on 3 June 2008, referred to Mr Geithner’s e-mail as “no show stopper”. But a week later, the BBA published a consultation paper incorporating the thoughts of, amongst others, the New York Federal Reserve.

International investigations under way

Authorities around the world are now investigating Barclays and more than 10 other banking giants including JPMorgan, Citigroup, and UBS in relation to Libor rate rigging.

Barclays is the only bank so far to admit any wrongdoing in giving false information as part of the complex process of setting Libor to influence the pricing of derivatives. Barclays paid nearly £300m in fines to settle with US and British officials, but that doesn’t preclude further sanctions internationally.

The US was expected to release transcripts late on Friday of phone calls involving Barclays executives at the height of the 2008 banking crisis that saw numerous UK banks propped up or nationalised including most notably HBOS.

Central bankers were not the only regulators who knew of potential problems with Libor, however. In April 2008, a Barclays employee had also told the UK’s Financial Services Authority that the bank was lowering its Libor submissions, raising questions about what regulators were doing for years while rates were being rigged under their noses.

Barclays made similar comments to the New York Fed, according to documents seen by The New York Times. But Barclays did not explicitly tell regulators they were reporting false interest rates that amounted to manipulation, according to regulatory documents.