The Libor Scandal Is Becoming a Central Bankers’ Scandal

17 Jul 2012

The Libor/Liebor scandal is gradually becoming a central bankers’ scandal, which is as it should be.

Relatedly, much of what we know so far about Libor lies also sheds a new light on the frightening days of the autumn of 2008 as seen from London, Washington, and Wall Street: and it doesn’t illuminate anything very flattering for anyone involved.

The Missives of October

On October 21, 2008, then Prime Minister Gordon Brown emailed Paul Tucker, then the head of markets at the Bank of England, asking why the UK Libor spreads weren’t falling.

The next day, Tucker sent emails to the CEO of Barclays, John Varley, and the head of its investment banking, Bob Diamond. “Cld I talk to one or other of you about libor pl.”

Four days after that, October 26, Tucker emailed Barclays again to say that he was “struck that your govt gnteed bond was issued at around 140 over gilts. That’s a lot.” His problem, then, was that Barclays had to pay more for its funding, even with a government guarantee, than Tucker or Downing Street expected. This wasn’t helping the powers that be, which were eager to restore an atmosphere of something-like-normalcy to banking. (The following March, Tucker would be elevated to his current position at the BoE, Deputy Governor, Financial Stability.)

Tucker’s email about the “140 over gilts” reached the in-box of one Bob Diamond, in October 2008 a rising star in Barclays’ executive ranks, credited with just having snagged the best assets of Lehmann Brothers out of the bankruptcy court.

Diamond replied, “I’m abroad. So can’t meet I’m afraid. But cld talk by phone in about an hour.”

Tucker did talk to Diamond on the phone three days later, although it isn’t clear that this was exactly the follow-up Diamond had had in mind.  After that October 29 discussion, Diamond wrote a note for the file saying that Tucker had said that “it did not always need to be the case that we appeared as high as we have recently” in connection with Barclays Libor submissions.

Tucker himself says he didn’t make any corresponding note of the same phone call. He was too busy. But in his own testimony to a committee of Parliament he doesn’t really contest the accuracy of Diamond’s note, beyond saying rather lamely that it “gives the wrong impression.”

The Right Impression

Actually, the impression that one would get from hearing a Bank of England official say it does not always need to be the case that you report numbers as high as you’ve been reporting them, just three days after he had said much the same thing, more explicitly, in connection with the “140 over gilts,” is pretty clear.

The impression I would get, certainly, is that “our regulators want us to pretend that funding is easier for us to get than it now is.” Further, in the circumstances of October 2008 (anyone remember?) – One could be forgiven for thinking it one’s patriotic duty to go along with such an appeal!

Tucker was a central banker, and manipulating interest rates is what central bankers do. A little friendly suasion in an email exchange or a telephone call doesn’t seem an extraordinary way to go about achieving that ordinary goal.

If all this publicity starts making people wonder whether any central authority (public, private, or on the borderline of the two) ought to be manipulating interest rates, whether indeed rates and indexes ought to be left to market forces in ways and to a degree that has not been the case in the developed world since roughly the time of the first world war … those thoughts are healthy, and I for one wish to encourage them.

Lilacs Out of the Dead Land

But let us move back in time a bit, before the Lehman bankruptcy in September, even before the U.S. Congress voted, in July, to give the Treasury authority to backstop Fannie and Freddie. It was on April 11th of 2008, less than a month after the disappearance of Bear Stearns from the Wall Street forest that someone from Barclays spoke to Fabiola Ravazzolo, of the Federal Reserve (Ravazzolo has, for this purpose, a usefully unambiguous set of initials).

FR asked her Barclays’ contact (after a good deal of friendly chit-chat about British versus American English accents, vocabulary, etc.), why it was that LIBORs weren’t reflecting actual market trading, “why do you think that there is this, this discrepancy?”

After some hemming and hawing, her (unnamed) contact gets to the gist of the answer: “So, we know that we’re not posting, um, an honest LIBOR.”

Does FR respond to this with indignation?  No. She replies, “Okay.”

His interlocutor continues, “And yet and yet we are doing it, because, um, if we didn’t do it…”

If essence of what follows is that if they didn’t do it they would draw unwanted attention. In other words, they manipulated their LIBOR numbers because everyone else was, and not doing so would have put them out of line. FR found this perfectly reasonable.

The New York Times made this a front page story Saturday, July 14, 2012. This Bastille Day news helped close a circle.

Yes, the numbers were phony. They were, it appears, known to be phony in the relevant circles, and quite openly spoken of as such, to and without shocking regulators. And when those regulators saw fit, they took advantage of that phoniness for their own ends.

As I say, no one comes out of this looking good. Yet we might all come out of it a little bit more world weary.

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