3 Manipulation during the financial
crisis
Background
40. In 2007, significant strains began to appear
within the inter-bank funding markets. Table 1, adapted from the
March 2009 Turner Review, highlights the key issues faced by banks
during this period.Table 1: Stages of the
Crisis: 2006-2009
| 2006 - Summer 2007
Localised credit concerns
| Rising defaults in US subprime loans.
Expectations of property prices fall.
|
| Summer - Autumn 2007
Initial crack in confidence and collapse of liquidity
| Failure of 2 large hedge funds. Spreads in inter-bank funding and other credit products rise sharply. Inter-bank funding for second tier banks dries up. Northern Rock faces retail run.
|
| Autumn 2007
- early Summer 2008
Accumulation of losses and
continuation of liquidity strains
| Severe mark-to-market losses in trading books. Collapse of commercial paper markets.
Funding strains in the secured financing market.
Worries about liquidity of major institutions. Government-assisted rescue of Bear Stearns.
|
| Summer 2008
Intensification of losses and
liquidity strains
| Mark-to-market losses and liquidity strains continue to escalate.
Housing market problems recognised as widespread in UK, US and other countries, as house prices fall and supply of credit dries up.
Funding problems of UK mortgage banks intensify.
|
| September 2008
Massive loss of confidence
| Bankruptcy of Lehmans breaks confidence that major institutions are too big to fail. Credit downgrade of AIG triggers rising collateral calls, requiring government rescue.
Mix of credit problems, wholesale deposit runs and incipient retail deposit runs lead to collapse of Washington Mutual, Bradford & Bingley, and Icelandic banks.
Almost total seizure of interbank money markets; major banks significantly reliant on central bank support.
|
| October 2008
Government recapitalisation,
funding guarantees and central bank support
| Exceptional government measures to prevent collapse of major
banks; explicit commitments that systemically important
banks will not be allowed to fail.
|
| November 2008 ?
Feedback loops between banking system and economy.
Further government measures to offset feedback loop risk.
| Impaired bank ability to extend credit to real economy produces major globally synchronised economic downturn.
Recession threatens further credit losses which might further
impair bank capital.
Asset Protection Scheme.
|
Source: Adapted from Financial Services Authority,
The Turner Review, March 2009, Box 1B, p27
41. In the face of these pressures in the inter-bank
lending markets, Mr Tucker, emphasised the importance of LIBOR
to the authorities. He explained that:
[...] what is important from quite early in the
crisis, from the summer of 2007 onwards, is that LIBOR became
increasingly used as a summary statistic of what was going on
in the market. I think there are two reasons. First of all, LIBOR
diverged from the safe rate of interest in a material way for
the first time in living memory. Secondly, we became aware as
the weeks and months passed that less money market activity was
going via the brokers, more was being done bilaterally. Those
are circumstances where everybody has less information about what
is going on, and in those circumstances you place greater weight
on the indicator that is available every day, which was LIBOR.
I think everybody rather slipped into the habit of using LIBOR
as a kind of portmanteau term for money market conditions, bank
funding conditions, actual submissions, the actual LIBOR fix,
and actually I think that is going on today.[67]
42. The individual LIBOR submissions of the banks,
rather than the aggregated headline LIBOR figure, were also becoming
important markers of the health of individual banks. On 3 September
2007, Bloomberg published an article entitled "Barclays Takes
a Money Market Beating".[68]
This article highlighted Barclays' high LIBOR fixing relative
to other banks in the LIBOR panel, and posed the question "So
what the hell is happening at Barclays and its Barclays Capital
securities unit that is prompting its peers to charge it premium
interest rates in the money market?".[69]
43. This article would mark the start of a second
phase of LIBOR manipulation by Barclays. In this phase, Barclays
attempted to manipulate its LIBOR submissions to prevent it being
singled out when compared to other banks in the LIBOR panel. The
FSA's Final Notice stated that "Senior management's concerns
in turn resulted in instructions being given by less senior managers
to Barclays' Submitters to reduce LIBOR submissions in order to
avoid further negative media comment".[70]
Mr Diamond confirmed that these senior management were from Barclays'
Group Treasury.[71] The
FSA's Final Notice said that:
Concerns about the media perception of high LIBOR
submissions continued at intervals for the remainder of 2007 and
throughout 2008. At times of particular market stress this resulted
in instructions being given to Barclays' LIBOR Submitters to reduce
Barclays' submissions such that they did not stand out too far
from the submissions of other contributing banks. This was expressed
by Manager D (in Barclays' Group Treasury) as an instruction that
Barclays should not "stick its head above the parapet"
in terms of its LIBOR submissions.[72]
It should be noted Barclays is not alone. FSA investigations
continue against seven other banks, including some non-British
banks.[73]
Media and academic concern about
LIBOR setting
44. Barclays' continuing manipulation of its own
LIBOR setting took place against a background of media concern
about the LIBOR setting process during the crisis. On 25 September
2007, an article by Gillian Tett in the Financial Times
entitled "Libor's value called into question" noted
the complaint of the Treasurer of one of the largest City banks
that "The Libor rates are a bit of a fiction. The number
on the screen doesn't always match what we see now".[74]
45. On 16 April 2008, the Wall Street Journal
published an article called "Bankers cast doubt on Key Rate
amid crisis" by Carrick Mollenkamp. This noted that:
The concern: Some banks don't want to report
the high rates they're paying for short-term loans because they
don't want to tip off the market that they're desperate for cash.
The Libor system depends on banks to tell the truth about their
borrowing rates.[75]
However, the article also noted that there was no
specific evidence to suggest false submissions were occurring.[76]
On 29 May 2008, another Wall Street Journal article, "Study
casts doubt on key rate", compared LIBOR submissions with
the market for credit default swaps.[77]
It provided the following analysis:
In order to assess the borrowing rates reported
by the 16 banks, the Journal crunched numbers from another market
that provides a window into the financial health of banks: the
default-insurance market. Until recently, the cost of insuring
against banks defaulting on their debts moved largely in tandem
with Libor—both rose when the market thought banks were
in trouble.
But beginning in late January [2008], as fears
grew about possible bank failures, the two measures began to diverge,
with reported Libor rates failing to reflect rising default-insurance
costs, the Journal analysis shows. The gap between the two measures
was wider for Citigroup, Germany's WestLB, the United Kingdom's
HBOS, J.P. Morgan Chase & Co. and Switzerland's UBS than for
the other 11 banks. One possible explanation for the gap is that
banks understated their borrowing rates.[78]
The article noted though that "The Journal's
analysis doesn't prove that banks are lying or manipulating Libor".[79]
On the same day, Bloomberg published an article, "Libor Banks
Misstated Rates, Bond at Barclays Says", which started as
follows:
Banks routinely misstated borrowing costs to
the British Bankers' Association to avoid the perception they
faced difficulty raising funds as credit markets seized up, said
Tim Bond, a strategist at Barclays Capital.
"The rates the banks were posting to the
BBA became a little bit divorced from reality," Bond, head
of asset-allocation research in London, said in a Bloomberg Television
interview. "We had one week in September where our treasurer,
who takes his responsibilities pretty seriously, said: 'right,
I've had enough of this, I'm going to quote the right rates.'
All we got for our pains was a series of media articles saying
that we were having difficulty financing."[80]
46. It was not only in the media where discussion
of the potential for manipulation of LIBOR was occurring, as academics
and international authorities also explored the weakness in the
LIBOR setting process. A paper by Jacob Gyntelberg and Philip
Wooldridge at the Bank for International Settlements (BIS) in
the March 2008 BIS Quarterly Review noted that banks had a reason
to misquote during funding crises:
However, transparency raises questions about
the information signalled by contributing banks through their
quotes. There may be circumstances in which contributing banks
deliberately choose to disclose biased quotes. If there is uncertainty
about the liquidity position of a contributing bank, the bank
will be wary of revealing any information that might add to this
uncertainty for fear of increasing its borrowing costs.[81]
However, the BIS paper played down the possibility
that there was fixing of the LIBOR submissions at work:
In the US dollar market, the widening of Sibor
and H.15 spreads over Libor is consistent with signalling by Libor
contributor banks. However, many of the banks on the US dollar
Libor panel are also on the euro Libor panel, and there are no
signs that signalling distorted the latter fixing.[82]
Meanwhile, a working paper entitled "LIBOR Manipulation?"
from August 2008, and referencing the Wall Street Journal articles,
noted that:
While statistical methods alone do not prove
that manipulation has occurred in a particular market, some questionable
patterns do exist with respect to the banks' daily Libor quotes.
Our analyses of these apparent anomalies within the individual
quotes suggest that the evidence is inconsistent with an effective
manipulation of Libor. Nevertheless, the analyses presented in
this study demonstrate that distinct non-random patterns of reported
borrowing costs did exist during distinct periods of time, patterns
that go beyond the findings that were originally reported by the
Journal. In particular, for the period ending on August 8, 2009,
the intraday variance of individual quotes is not statistically
different from zero, and the banks deciding group for the Libor
includes almost the entirety of the sixteen banks for a period
of over seven months.[83]
In other words, the statistics did not show that
manipulation of LIBOR was successful. But they did show that in
several episodes LIBOR submissions were not behaving as they had
when the market was functioning—they were very steady from
day to day, and the quotes from different banks were very close
together. This could readily be interpreted as the consequence
of an attempt to make up a number that had to be available but
could not be observed.
The role of the authorities
CONCERNS ABOUT LIBOR
47. Given the existence of the concerns over the
LIBOR setting process, both in the media and academe, we asked
why the regulators had not spotted the manipulation of submissions
by Barclays earlier. The Governor of the Bank of England made
the following observations:
I did not say that fraud was restricted just
to the rogue traders. It was also true that there was deliberate
misrepresentation by Barclays in the submissions. On that, we
had no evidence of wrongdoing. None was supplied to us. The evidence
you cite—there were plenty of academic articles that looked
in it and said that they could not see in the data any evidence
of manipulation. I say again, if you go back to the inquiries
that the regulators made, it took them three years to work out
and find the evidence of wrongdoing. If it was so obvious and
all in the newspapers and everyone was talking about it, one might
ask why everybody did not say, "This is wrong." The
reason was that it wasn't wrongdoing. It was a market that was
dysfunctional and was not operating in any effective way.[84]
Paul Tucker noted that:
We didn't see it. I think there were other studies,
including one by the BIS, although I think I am aware of this
after the fact, that didn't conclude that it was a problem. Maybe
we were just too focused on the financial crisis.[85]
THE STERLING MONEY MARKETS LIAISON
GROUP
48. On 15 November 2007, the Bank of England hosted
a meeting of the Sterling Money Markets Liaison Group. Present
at the meeting were Paul Tucker as Chairman, several other representatives
of the Bank of England, Douglas Hull from the FSA, as well as
various representatives of banks, including Simon Chatterton as
an alternate for Barclays. The minutes of that meeting record
that:
Several group members thought that Libor fixings
had been lower than actual traded interbank rates through the
period of stress. Libor indices needed to be of the highest quality
given their important role as a benchmark for corporate lending
and hedging, and as a reference rate for derivatives contracts.
John Ewan (BBA) outlined the quality control
and safeguard measures used by the BBA to ensure the quality of
Libor. Dispersion between panel banks' submissions had increased
during August but had since fallen back, in part reflecting clarification
from the BBA on Libor definitions.[86]
49. In his evidence to us, Mr Tucker claimed that
he had not taken the concerns expressed at the November 2007 Sterling
Money Markets Liaison Group meeting as signs of dishonesty, but
rather as a signal of dysfunction in the market. He explained
that:
[...] less [inter-bank lending] was going through
the brokers, more was being done bilaterally, people did not know
anything very much about each other's transactions at all, and
so I heard this as, "They don't know what each other are
doing." It was questioning the judgments that the different
parties were making, or that they were relying on bilateral private
transactions—I did not read this as cheating. And when John
Ewan responded there was not then a great outcry in the room.
People did not get in touch afterwards and say, "You've missed
the point here."[87]
In Mr Tucker's supplementary evidence to the Committee,
he provided more explanation as to why he did not believe the
discussions noted in the minutes from the 15 November 2007 meeting
indicated dishonesty:
The BBA's rules do not require LIBOR submissions
to be based on actual transactions, but require panel banks to
answer the following question:
"At what rate could you borrow funds,
were you to do so by asking for and then accepting interbank offers
in a reasonable market size just prior to 11am."
The BBA provisions go on: "Therefore,
submissions are based upon the lowest perceived rate at which
it could go into the London interbank market and obtain funding
in reasonable market size, for a given maturity and currency.
BBA LIBOR is not necessarily based on actual transactions ...".
Bearing in mind the definition of LIBOR and the
illiquid, volatile and sometimes dysfunctional conditions generally
prevailing in the money markets after August 2007, there might
legitimately be a difference between actual transactions in the
market and an individual bank's LIBOR submission because:
(i) There was uncertainty as to what constituted
"reasonable size" and increased scope for different
panel banks legitimately to make different judgements on this
point;
(ii) Given the sporadic nature of market liquidity
in this period, there might be a significant difference between
the rate at which a bank could borrow at reasonable size at 11.00
am. and the rate at which it could borrow at other times of the
day, or its average borrowing costs over the course of the day;
(iii) Banks entered into fewer, more sporadic
and on average smaller interbank transactions, particularly at
longer maturities. They therefore had to rely more on judgement
in formulating their LIBOR submissions than pre-crisis, and market
conditions made the exercise of that judgement increasingly difficult;
(iv) There was less transparency of the interbank
market, in all likelihood because of reduced activity at longer
maturities and more bilateral as opposed to brokered transactions.[88]
The Governor of the Bank of England also emphasised
that:
If you go back to the money markets liaison group
meeting, the regulator and the BBA were present at the meeting.
The minutes were published on the website. No journalist interpreted
those remarks as, "Gosh, we have a smoking gun of wrongdoing."
The regulator did not look at it and say, "This is wrongdoing."
There was enormous concern at the time about what the submissions
of LIBOR actually meant in circumstances when the market was dysfunctional,
and indeed I discussed it with this very Committee.[89]
Following our hearing, Lord Turner wrote to the Chairman
of the Treasury Committee, and noted the preliminary findings
of the FSA that:
In relation to any information which flowed to
us from the Bank of England, we are aware that a member of our
staff attended the Bank's Sterling Money Markets Liaison Group
on November 15th 2007.
We are investigating whether there was any report of that meeting
circulated within the FSA which might have raised concerns, but
we are not currently aware that that is the case.[90]
THE US AUTHORITIES
50. On 13 July 2012, the Federal Reserve Bank of
New York released copies of transcripts of calls its analysts
had had with Barclays staff, as part of a release to Congress.[91]
One of those transcripts, of a call between a Barclays staff member,
and Fabiola Ravazzolo (FR), an analyst in the markets group of
the Federal Reserve Bank of New York on 11 April 2008 contained
a seeming admission of dishonesty at Barclays:
[Unknown Barclays staff member]: We were putting
in where we really thought we would be able to borrow cash in
the interbank market and it was
[Unknown Barclays staff member]: Above where
everyone else was publishing rates.
[Unknown Barclays staff member]: And the next
thing we knew, there was um, an article in the Financial Times,
charting our LIBOR contributions and comparing it with other banks
and inferring that this meant that we had a problem raising cash
in the interbank market.
[Unknown Barclays staff member]: And um, our
share price went down.
[Unknown Barclays staff member]: So it's never
supposed to be the prerogative of a, a money market dealer to
affect their company share value.
[Unknown Barclays staff member]: And so we just
fit in with the rest of the crowd, if you like.
[Unknown Barclays staff member]: So, we know
that we're not posting um, an honest LIBOR.
[Unknown Barclays staff member]: And yet and
yet we are doing it, because, um, if we didn't do it
[Unknown Barclays staff member]: It draws, um,
unwanted attention on ourselves.[92]
The release by the Federal Reserve Bank of New York
recorded that "Immediately following this call [noted above],
the analyst notified senior management in the Markets Group that
a contact at Barclays had stated that underreporting of LIBOR
was prevalent in the market, and had occurred at Barclays".[93]
Between the 4-5 May 2008, the Governor of the Bank of England
and Timothy Geithner, at the time President of the Federal Reserve
Bank of New York, had a conversation at Basel about the operation
of LIBOR.[94] Following
discussions with the BBA, on 1 June 2008 Timothy Geithner sent
an email to the Governor of the Bank of England.[95]
The email contained a memorandum entitled "Recommendations
for Enhancing the Credibility of LIBOR".[96]
The memorandum contained the following recommendations:
1. Strengthen governance and establish a credible
reporting procedure
To improve the integrity
and transparency of the rate-setting process, we recommend the
BBA work with LIBOR panel banks to establish and publish best
practices for calculating and reporting rates, including procedures
designed to prevent accidental or deliberate misreporting. The
BBA could require that a reporting bank's internal and external
auditors confirm adherence to these best practices and attest
to the accuracy of banks' LIBOR rates.
To further enhance perceptions of the BBA as
an objective intermediary in the rate-setting process, we recommend
greater transparency with respect to the financial relationships
between the BBA and the panel banks, and around the BBA's financial
interests in LIBOR.
6. Eliminate incentive to misreport
If the combination of best practices and audit
recommendations in (1) above seems unlikely to be sufficiently
effective in ensuring accurate reporting, a complimentary approach
might be to adopt the following process for collecting, calculating,
and publishing LIBOR rates. The BBA could collect quotes from
all members of the expanded panel, and then randomly select a
subset of 16 banks from which the trimmed mean would be calculated.
The names and quotes for the 8 banks whose rates are averaged
to calculate the LIBOR fixing would be published. The banks whose
reports fall above or below the midrange would not be publicly
identified, nor would the level of their outlying rates. This
random sampling from an expanded panel would lessen the likelihood
that the market would draw a negative inference regarding a particular
bank's continued absence from the list of published quotes.[97]
The Governor was keen to emphasise that:
I solicited it [the note described above], which
is the first part. I spoke to Tim Geithner in Basel a few weeks
before. After that, I think it was on 19 May, his deputy, Bill
Dudley, telephoned Paul Tucker and said that Tim Geithner wanted
some advice on feeding views to the BBA, who are responsible for
LIBOR. Should he write to the BBA, copied to me? Or should he
write to me, copied to the BBA? Whatever.
I sent a message back through Paul saying, "Write
to me. We will look at your letter, and if we agree with it, we
will endorse it and send it on to the BBA." So we solicited
that e-mail, which arrived late one evening when I was in Frankfurt.
I sent a message back saying that staff should give a view on
it. I got that the next evening when I was back from Frankfurt,
and the next day we wrote to the BBA, forwarding the e-mail memo
from the New York Fed, saying that we wanted them to take account
of this in their forthcoming consultation.[98]
51. We discussed this memorandum, and the Bank of
England's response, with both the Governor of the Bank of England
and Paul Tucker. We also requested further information on any
Bank of England staff briefing about this note. The Governor of
the Bank of England strongly denied that the Bank had received
evidence of wrong-doing from the Federal Reserve Bank of New York
via the memorandum. He noted that:
[...] we have been through all our records. There
is no evidence of wrongdoing or reporting of wrongdoing to the
Bank. The memo from Mr Geithner that you referred to was, if you
like, a constitution for how LIBOR should operate. It already
had a set of operations. This was a self-reporting scheme. Any
self-reporting scheme has to have a provision about deliberate
misreporting. That is not the same as saying that they believe
that there was deliberate misreporting.[99]
52. Since Mr Tucker had had conversations with the
New York Federal Reserve, we questioned him about whether these
contacts, and the paper from the Federal Reserve Bank of New York,
had elicited any evidence of wrong-doing. He strongly denied that
it had:
Michael Fallon: Mr Tucker, last
week when we asked you specifically about LIBOR integrity, you
said, "We thought the underlying markets were dysfunctional,
sporadically illiquid, much less reliable than normal, but we
did not have suspicions of dishonesty". Yet the paper from
the New York Fed recommends work with LIBOR banks to establish
procedures designed to prevent deliberate misreporting. There
is a whole section in this note on the need to "eliminate
incentives to misreport". They were clearly concerned about
misreporting. Did you really not have any suspicion of dishonesty?
Paul Tucker: In my discussions
with Bill Dudley of the New York Fed, it was not framed in that
way; it was framed as eroding confidence and credibility, particularly
in dollar LIBOR, which was being set lower during London hours
than it was subsequently trading in New York. We were very concerned
about this piece of global infrastructure losing credibility.
As the Governor said, we urged the BBA to review everything, particularly
its governance, and to do so on a global basis. No, the note did
not set off dishonesty alarm bells.
Michael Fallon: The penny didn't
drop that the phrase "deliberate misreporting" might
imply some degree of dishonesty?
Paul Tucker: No, it didn't.
Michael Fallon: Why not? What did
you think "deliberate misreporting" was?
Paul Tucker: I am not sure I addressed
my mind to it.
Michael Fallon: You didn't address
your mind to the note from the New York Fed that we are discussing?
Paul Tucker: We were very focused
on ensuring that there was a completely open-ended review of the
way that LIBOR was run and constructed, and of some technical
issues, as well. We were less interested in the technical issues
than in the overall governance of the process. I think that we
acted pretty firmly to ensure that that review occurred. The annual
review that the BBA published was on which banks would be on the
LIBOR panel, and we had made it clear to the BBA that that regular
review of the LIBOR panel would not be enough.
Michael Fallon: This is not about
credibility. Is "deliberate misreporting" dishonest?
Paul Tucker: Well, it turns out
with hindsight that, yes, it was, but it did not set alarm bells
ringing at the time, I am afraid.
Michael Fallon: But how could "deliberate
misreporting" be honest?
Paul Tucker: I understand the question,
Mr Fallon, but all I can say is that it did not set alarm bells
ringing. We were very concerned about the credibility of LIBOR
as a piece of global infrastructure and we acted.
Michael Fallon: But you must have
realised at the time that there were considerable incentives for
banks to underreport and to protect their positions, given what
was happening to Barclays.
Paul Tucker: As I said last week,
LIBOR seemed to move in a broadly sensible direction, given the
strains in the market. The period that we are discussing now is
one where sterling LIBOR and the LIBOR spread were rising. There
were rumours about HBOS and about it approaching us for funds.
We were very much focused on sterling LIBOR because we are the
sterling lender of last resort. There was then this emerging concern
in particular about dollar LIBOR. We were very concerned about
the loss of credibility, but we did not seize on it in terms of
dishonesty.[100]
The release of further information from the Bank
of England following our oral evidence hearings contained a Bank
of England staff note sent to Mr Tucker on 22 May 2008. That note
contained the following passages:
Fixing process, perception problem
5 The Libor problem has two fundamental sources:
the nature of the fixing process (a survey not a traded rate),
and its transformation from a measure of London money market conditions
to the basis of a global derivatives market.
6 There is a long standing perception
that Libor by virtue of the manner in which it is set is open
to distortion: panel banks have no obligation to trade or to have
traded at the rates that they submit, so it is at least plausible
that these are influenced by commercial incentives. In normal
times these might only have had a marginal effect, and could bias
Libor different ways at different times. But this perception does
mean that confidence in Libor is fragile. And in the extreme
conditions of the last eight months banks have been subject to
the more powerful incentive of avoiding stigma from being
seen to submit high rates reflective of what they are actually
paying.
7 If stigma does influence submitted rates, it
would tend to bias Libor downwards and/or narrow the dispersion
of individual, submissions. But it is not clear why the effect
would be bigger in dollars, so this does not seem to be a good
explanation for the alleged downward bias in $ Libor.
The release to this Committee by the Bank of England
included an email chain between the (unknown) author of the note
above, and Mr Tucker. Following further questions from Mr Tucker,
the author made the following comments:
We're saying that the fact there is a fuss is
a problem, because of (a) the effect on confidence and (b) feedback
from the fuss into real volatility in the fixing (after the April
16 BBA warning). But it is poor governance that allows there to
be a fuss, hence governance needs fixing. We also say that the
difference between Libor and other empirical measures (H15, swaps)
is _not_ itself evidence that Libor is distorted. (The Fed will
know this - our argument is just a small extension of that in
the JPM piece.) So the empirical evidence does not as yet justify
reforming the _definition_ of Libor.[101]
Lord Turner, in a letter to the Chairman of the Treasury
Committee in July 2012, made the following comments about contacts
between the FSA and the Federal Reserve Bank of New York:
In addition it might be helpful to outline our
current state of knowledge in relation to any information that
passed from the Federal Reserve to the FSA. In his testimony to
Congress on 17 July 2012, when referring to a conversation between
a Barclays employee and a Federal Reserve employee on 11 April
2008, Chairman Bernanke stated: 'The Fed, after receiving this
information...informed all the relevant authorities in the UK
and the US. The NY Fed also communicated with the FSA and the
Bank of England in the UK.'
We have since been in touch with the Federal
Reserve to clarify whether they did indeed send this information
to us. They have now confirmed that they do not have any evidence
to suggest that the communication took place. Nor do we currently
have any evidence of such communication in FSA records.
We have also asked the Federal Reserve to let
us know whether they have any evidence to suggest that the email
from Tim Geithner to Mervyn King on 1st June 2008 was
copied to the FSA. They have confirmed that they have no indication
that it was.
It remains of course possible that our Internal
Audit Review will subsequently find examples of communications
between the Federal Reserve and the FSA of which both we and the
Federal Reserve are currently unaware.[102]
THE BRITISH BANKERS ASSOCIATION
REVIEW
53. Much of the contact between the Federal Reserve
Bank of New York and the Bank of England centred on the memorandum
described above, and then the British Bankers Association (BBA)
review of LIBOR setting. This review provided an opportunity for
the BBA, and the authorities, to reform the LIBOR setting process.
The information received by the Treasury Committee after our oral
evidence hearings with the Bank of England provides an insight
into how the authorities acted on their concerns over LIBOR setting.
The British Bankers Association has also provided the Committee
with additional information. The Bank of England's correspondence
contains the following short timeline of its efforts, alongside
those of the Federal Reserve Bank of New York (FRBNY):
· From May 2008, the Bank of England
encourages the BBA to conduct a global review of Libor and banks
to engage with the review at a sufficiently senior level. It also
begins to discuss these issues with the FRBNY.
· The Bank considers the points in the
Geithner memorandum and ensures that those points are taken on
by the BBA.
· The Bank and the Federal Reserve work
closely together behind the scenes to influence the consultation
paper issued by the BBA on 10 June 2008.
· The Bank also continues to work on
influencing the outcomes after the consultation paper is published
until the BBA publishes its final report on 18 December 2008.[103]
54. The additional evidence from the Bank of England
provided a picture of an institution that took a keen interest
in what the BBA review might achieve. An early BBA announcement
on 30 May 2008 was met by the following comment from the Governor
to Bank staff: "This seems wholly inadequate. What should
we do?"[104] After
the Bank had passed on Mr Geithner's memorandum to the BBA, the
Bank engaged with the BBA on various drafts of the BBA consultation
documents.
55. As the consultation continued, another concern
developed at the authorities. They were keen to ensure that they
did not appear to endorse the BBA's proposals and appeared to
wish to maintain their distance. For example, on 5 June 2008,
an email from Michael Cross at the Bank of England to Alex Merriman
at the BBA contained the following comment:
On the Bank's name, we have a clear line that
it should not be used. I understand that the FSA and the Federal
Reserve have the same position. Neither can we accept "relevant
central banks...etc". That will obviously be taken as implying
our endorsement of the proposals you make. Hence our suggestion
that you refer to "all interested parties", as we and
I am sure the far wider community with an interest in Libor would
of course be happy to discuss your ideas on the basis of this
paper.[105]
A paper on LIBOR by Michael Cross on 26 June 2008
noted that:
We do not think that central banks should be
formally involved in the LIBOR panels and processes, but we do
think we should maintain a watching brief. We know the Federal
Reserve and the Swiss National Bank wish, like us, to engage with
the BBA on its review.[106]
The documents show that the Governor of the Bank
of England responded on 2 July 2008 that he was "broadly
content with the approach" described in the 26 June 2008
note above.[107] He
also said though that he "would like Mr Tucker to meet with
Angela Knight to impress on her the need for greater energy in
[the] BBA's response and to make clear that [the Bank] would not
stand in the way of alternative market initiatives to provide
alternatives to LIBOR".[108]
A letter from the Bank to the Treasury Committee, sent on 23 July
2012, summarised the position as follows:
With regard to the Bank's involvement in the
work undertaken by the BBA in 2008 on the scrutiny and governance
of the Libor fixing process, the Bank's preferred approach was
(and is) for there to be a gradual move away from systems based
on self-reporting. And the Bank, having no regulatory authority,
was not prepared to lend its imprimatur to a system that it was
not able to control or enforce. As can be seen from this note
and the papers disclosed on Friday, the BBA did want to use the
Bank's name to bolster confidence in Libor.[109]
When asked whether he thought that the BBA had done
a "good job", the Governor of the Bank of England told
us that "I think they had to be nudged to get into the right
direction, but, once they had been nudged in May 2008, they did
work very hard to make a success of the consultation."[110]
56. In a letter to the Chairman of the Treasury Committee
following our evidence hearings, Lord Turner outlined the FSA
staff's knowledge at the time of the BBA review:
We have identified, however, that some of our
Markets Division staff most directly involved in inputting to
the BBA LIBOR Review during May/June 2008 were sufficiently aware
of market concerns of possible divergence between some LIBOR submissions
and the actual cost of available funding that they identified
this as a crucial issue which needed to be addressed by the Review.
There is for instance, in the documents released last week by
the Bank of England, an email from one of our staff to the BBA
noting that the BBA should examine the 'Scrutiny of Submissions'
since 'the rates submitted must represent the levels the panellists
actually can fund.' This point was also made by the relevant staff
in a memo to the FSA's then Managing Director, Wholesale, which
described the key points we were inputting to the LIBOR review.[111]
57. It should be noted that on 25 April 2008, Angela
Knight is quoted as telling a meeting of senior UK bankers, as
well as representatives of the Bank of England (including the
Deputy Governor at the time, Sir John Gieve) that "Longer
term, [she] thought it would be necessary to explore whether a
trade association was best placed to continue to provide what
represented a key piece of market infrastructure."[112]
BARCLAYS' CONTACT WITH THE REGULATORS
58. We have seen already that the New York Federal
Reserve Bank received direct confirmation from a Barclays source
that manipulation of its submissions was occurring. Barclays'
discussions with UK regulators appear to have been less clear.
The FSA's final notice concluded that:
Barclays did raise concerns externally about
the LIBOR submissions of other banks (which Barclays perceived
to be understated) and on occasion referred to its own approach
to submitting LIBOR. However, these comments did not fully explain
Barclays' approach and were inconsistent.[113]
Barclays provided this Committee with a timeline
of contacts with the FSA, the BBA, the Bank of England and the
US Federal Reserve.[114]
Lord Turner defended the FSA's response to these contacts as follows:
Well, as I said earlier, Barclays had very usefully
identified the 13 instances between September '07 and October
2008, where they feel that in some way they contacted the regulator—the
FSA. The three of those which in the judgment of enforcement and,
so far, in my judgment, looking at the file, were the clearest
or closest to being clearest in suggesting that something was
going on are described in the [FSA's] final notice. They are described
in paragraphs 128 to 130, 131 and 172 to 174.
What two of those illustrate is that Barclays
were actually sort of saying some elliptic things that implied
that some other people might not be playing the game, but behind
that they themselves were saying, "We'd better not tell the
FSA about it", and that is set out in the final notice.
However, when I looked at one of them—paragraph
131—somebody said, "We're being clean in principle,
but we're not being clean clean." The question is why didn't
somebody put up a red flag? Well, the answer is this occurs as
a comment among lots of comments in a large conversation about
liquidity conditions in the marketplace. It occurs at a relatively
junior level, and at that level somebody does not say, "This
is a red flag that I should put up the management chain."
So within the FSA at that time, I can find no
evidence that there were concerns noted at a senior management
level or, for instance, discussed at the ExCo level. Now, in a
perfect world, yes, those would have been spotted. But I return
to the fact that there was simply a mindset that if there were
problems here, it was for the BBA to solve them. Now, maybe that
is a part of the way the world then was—the assumptions
people then had—but that was the assumption that people
were making at that time.[115]
Lord Turner has informed us that the Internal Audit
Department of the FSA is now undertaking a review of how the FSA
dealt with the contacts about LIBOR.[116]
We discuss the Bank of England's contact with Barclays over LIBOR,
and particularly the conversation between Mr Diamond and Mr Tucker,
in the next section of this Report.
THE ROLE OF THE BARCLAYS BOARD
59. We have seen that the crisis in 2007 led to a
close examination of the LIBOR submissions by the media, markets,
and regulators. We questioned Barclays as to why, given both Barclays'
submissions to the authorities that LIBOR submissions were being
manipulated, its own board did not question Barclays' LIBOR submissions:
Mr Love: [...] Mr Diamond, in his
evidence to us, told us that he was continuously trying to alert
others in important positions to the fact that other banks were
manipulating LIBOR and that was the occasion for weakness on behalf
of Barclays. Did it never occur to people at Barclays, particularly
the board of directors, that if that were true—that banks
were manipulating LIBOR—that would apply just as much, perhaps
even more, to Barclays because it was an outlier in this regard?
Did that never occur to the board? Were you being naïve in
not thinking that that might be the case?
Marcus Agius: The concern that
we had was not so much about the actions of LIBOR as such, because
that was indicative of the underlying situation. The concern we
had was that, because our submissions were high, people might
falsely or incorrectly conclude that we were having more trouble
funding than we actually were. And again, to put this into context,
anybody who was not on the bridge of a bank during the financial
crisis—and many others besides—who says it was not
terrifying was not there. These were very difficult times and
we were very nervous that we may be misinterpreted by the market
as to our financial strength. We monitored it—and I know
I did not, because it is not my job—and I know from many
conversations I had with John Varley, with Chris Lucas and other
people inside the bank that we were watching the funding markets
like a hawk, as we should have done.
Mr Love: Let me just take those
facts you have just said: you were watching the markets like a
hawk, and you were terribly concerned about the level of turbulence—and
we do understand that, as it was a significant part of the evidence
that we received yesterday. Did it not occur to anyone that one
of the ways in which you could ease the situation for Barclays
in that particular context was by manipulating LIBOR submissions
on—
Marcus Agius: That was not a consideration.
Mr Love: I am not suggesting for
a moment that you thought this was true, but you may well have
had a conversation that went, "This could be possible. Can
we make sure that we are submitting accurate results to LIBOR
and the BBA?"
Marcus Agius: As I said, our greater
concern was what was actually happening rather than the technicalities
of LIBOR submissions.[117]
Conclusions on LIBOR submissions
during the financial crisis
60. Barclays has
suggested that there were numerous contacts between itself and
the authorities over LIBOR during this period. The clearest message
appears to have been given by Barclays to the Federal Reserve
Bank of New York, rather than to the UK authorities. Lord Turner
described some of Barclays' contact with the FSA as "elliptic".
We have found little evidence that Barclays provided the UK authorities
with a clear signal about dishonesty at other firms, or its own.
We await the outcome of the other regulatory investigations to
see whether other firms provided such a signal, were equally elliptical
or even silent on this problem. The timeline of contacts between
Barclays and regulators provided to the committee by Barclays
is not, of itself, evidence of a proactive approach on trying
to report irregularities in the setting of LIBOR rates.
61. We would have
expected the FSA and the Bank of England to have made efforts
to identify and provide to the Committee documents clearly and
directly relevant to our inquiry, subject to statutory restraints.
62. The financial
crisis, and the serious dysfunctionality of the interbank lending
markets, meant that it was difficult during this period for firms
to estimate their own funding costs. LIBOR submissions were being
used by markets and regulators to assess the financial health
of the institutions involved. The FSA and the Bank of England
were engaged in crisis management, alert to the possibility of
further bank failures, rather than LIBOR manipulation. This is
understandable, given the circumstances of the financial crisis,
but with the advantage of hindsight constitutes a failing by the
authorities.
63. Given the importance
of LIBOR submissions in assessing banks' health, Bank of England
staff were aware of the danger that banks might improperly manipulate
their submissions. They noted that "banks have been subject
to the more powerful incentive of avoiding stigma from being seen
to submit high rates reflective of what they are actually paying".
However, they primarily saw this as a matter for the regulator
rather than the Bank of England. Mr Tucker told us that possible
clues to dishonesty "did not set alarm bells ringing at the
time". The evidence suggests that the Bank of England was
aware of the incentive for banks to behave dishonestly, yet did
not think that dishonesty was occurring. Nor did it appear to
have asked the FSA to check to see if such dishonesty was occurring.
With hindsight this suggests a naivety on the part of the Bank
of England. They were certainly relatively inactive. This confirms
evidence from other Treasury Committee inquiries of the dysfunctional
relationship between the Bank of England and the FSA which existed
at that time to the detriment of the public interest.
64. Unlike the
Bank of England, the Financial Services Authority was the prudential
regulator. Its shortcomings at this time are therefore far more
serious. The Committee is concerned about the FSA's failure to
appreciate the significance of market rumours relating to the
artificial rigging of the LIBOR rate. We therefore look forward
to the result of the FSA's internal investigation, the existence
of which was disclosed in evidence to us. The Committee will want
the findings of that investigation to be published.
65. As we have noted, the US authorities had received
direct notification from Barclays that their LIBOR submissions
were dishonest. In response to this, evidence given to a parallel
inquiry in the US congress by Timothy Geithner revealed a 2008
memorandum provided to the Bank of England by the Federal Reserve
Bank of New York on LIBOR setting. We know that the Bank of England
then forwarded that memorandum to the British Bankers Association
by the Bank of England. The evidence we have received from the
UK authorities claims that they received no direct information
about the evidence the US authorities had received about Barclays'
dishonesty. The evidence
we have received is that there was significant co-operation between
the US and the UK authorities at the time of the 2008 BBA review.
It is understandable that regulators, in response to the LIBOR
crisis, may have placed information in the public domain to demonstrate
their respective assiduity at the time. This release of information
must complement co-operation between regulators. The Chancellor
should stress to his counterparts the need for such co-operation
at the next G20 meeting.
66. The BBA's review
of LIBOR in 2008, given that it focussed on the concerns of the
market over the LIBOR setting process, appears to have been an
opportunity missed to stop the attempted manipulation that was
occurring. The Wheatley review should now look at the role of
the BBA in LIBOR setting at that time in detail and publish its
findings. This is essential if its recommendations for a more
reliable LIBOR setting process are to carry credibility. The review
should include how such systems work during times of financial
crisis, when there may be little or no interbank lending taking
place, and how the authorities should respond to signs of dysfunction.
It should also consider whether a trade association is the appropriate
body to perform that role.
- We have seen no explanation
for the failure, both of Barclays' board and of senior executives,
to question its own firm's LIBOR submissions, when its staff were
complaining about the submissions of other firms, and media and
academic reports questioned the incentives present in LIBOR setting.
There appears to have been enough doubt being spread about the
LIBOR setting process to suggest that a closer examination by
Barclays board of its own practices should have taken place. It
stretches credibility to suggest that Barclays was trying to alert
regulators to inconsistencies in the LIBOR submissions of other
banks yet had no idea about the repeated 'low-balling' of its
own submissions during the financial crisis set out in the FSA
Final Notice. We have found no evidence that the board of Barclays
sought to conduct an investigation. This was one of a number of
failings on the part of Barclays' board. Others can be found in
Sections 5 and 6.
67 Q 354 Back
68
Bloomberg, Barclays Takes a Money-Market Beating: Mark Gilbert
(Update1), 3 September 2007 Back
69
Bloomberg, Barclays Takes a Money-Market Beating: Mark Gilbert
(Update1), 3 September 2007 Back
70
Financial Services Authority, Final Notice, 27 June 2012, Para
112 Back
71
Qq 127, 129 Back
72
Financial Services Authority, Final Notice, 27 June 2012, Para
115 Back
73
Qq 1167-1168 Back
74
Financial Times, Libor's value is called into question, by Gillian
Tett, 25 September 2007 Back
75
Wall Street Journal, Bankers Cast Doubt On Key Rate Amid Crisis
by Carrick Mollenkamp, 16 April 2008 Back
76
Wall Street Journal, Bankers Cast Doubt On Key Rate Amid Crisis
by Carrick Mollenkamp, 16 April 2008 Back
77
Wall Street Journal, Study Casts Doubt on Key Rate, By CARRICK
MOLLENKAMP and MARK WHITEHOUSE, 29 May 2008 Back
78
Wall Street Journal, Study Casts Doubt on Key Rate, By CARRICK
MOLLENKAMP and MARK WHITEHOUSE, 29 May 2008 Back
79
Wall Street Journal, Study Casts Doubt on Key Rate, By CARRICK
MOLLENKAMP and MARK WHITEHOUSE, 29 May 2008 Back
80
Bloomberg, Libor Banks Misstated Rates, Bond at Barclays Says
(Update2), By Gavin Finch and Elliott Gotkine ,May 29, 2008 Back
81
Bank for International Settlements, Interbank rate fixings during
the recent turmoil , Jacob Gyntelberg and Philip Wooldridge ,
March 2008 BIS Quarterly Review ,p 65 Back
82
Bank for International Settlements, Interbank rate fixings during
the recent turmoil , Jacob Gyntelberg and Philip Wooldridge ,
March 2008 BIS Quarterly Review ,p 70 Back
83
Abrantes-Metz, Rosa M., Kraten, Michael, Metz, Albert D. and Seow,
Gim, LIBOR Manipulation? (August 4, 2008). Available at SSRN:
http://ssrn.com/abstract=1201389 or http://dx.doi.org/10.2139/ssrn.1201389 Back
84
HC (2012-13) 535, Q 112 Back
85
Q 460 Back
86
Bank of England, BANK OF ENGLAND STERLING MONEY MARKETS LIAISON
GROUP, Thursday 15 November 2007 Bank of England, MINUTES, Paras
2.1-2.2 Back
87
Q 433 Back
88
Supplementary memorandum to the Treasury Committee by Paul Tucker,
16 July 2012 Back
89
HC (2012-2013) 535, Q 57 Back
90
Letter from Lord Turner to the Chairman of the Treasury Select
Committee, 24 July 2012 Back
91
Federal Reserve Bank of New York, New York Fed Responds to Congressional
Request for Information on Barclays - LIBOR Matter, July 13, 2012
Back
92
Federal Reserve Bank of New York, New York Fed Responds to Congressional
Request for Information on Barclays - LIBOR Matter, July 13, 2012
Back
93
Federal Reserve Bank of New York, New York Fed Responds to Congressional
Request for Information on Barclays - LIBOR Matter, July 13, 2012
Back
94
Bank of England, Timeline of Bank/Federal Reserve/BBA communications
about BBA Libor Review in 2008, 20 July 2012 Back
95
Federal Reserve Bank of New York, New York Fed Responds to Congressional
Request for Information on Barclays - LIBOR Matter, July 13, 2012
Back
96
Federal Reserve Bank of New York, New York Fed Responds to Congressional
Request for Information on Barclays - LIBOR Matter, July 13, 2012
Back
97
FRBNY Markets and Research and Statistics Groups, Recommendations
for Enhancing the Credibility of LIBOR, May 27, 2008. Part of
Federal Reserve Bank of New York, New York Fed Responds to Congressional
Request for Information on Barclays - LIBOR Matter, July 13, 2012 Back
98
HC (2012-13) 535, Q 42 Back
99
HC (2012-13) 535, Q 55 Back
100
HC (2012-13) 535 , Qq 45-51 Back
101
Bank of England, News Release, Further information and correspondence
in relation to the BBA Libor Review in 2008, 20 July 2012 Back
102
Letter from Lord Turner to the Chairman of the Treasury Select
Committee, 24 July 2012 Back
103
Bank of England, News Release, Further information and correspondence
in relation to the BBA Libor Review in 2008, 20 July 2012 Back
104
Bank of England, News Release, Further information and correspondence
in relation to the BBA Libor Review in 2008, 20 July 2012 Back
105
Bank of England, News Release, Further information and correspondence
in relation to the BBA Libor Review in 2008, 20 July 2012 Back
106
Bank of England, News Release, Further information and correspondence
in relation to the BBA Libor Review in 2008, 20 July 2012 Back
107
Bank of England, News Release, Further information and correspondence
in relation to the BBA Libor Review in 2008, 20 July 2012 Back
108
Bank of England, News Release, Further information and correspondence
in relation to the BBA Libor Review in 2008, 20 July 2012 Back
109
Letter from the assistant private secretary to the Governor of
the Bank of England to the Clerk of the Treasury Committee, 23
July 2012 Back
110
HC (2012-13) 535 , Q 90 Back
111
Letter from Lord Turner to the Chairman of the Treasury Select
Committee, 24 July 2012 Back
112
Bank of England, BANK / BBA MEETING, 25 April 2008 Back
113
Financial Services Authority, Final Notice, 27 June 2012, para
145 Back
114
Barclays, Supplementary information regarding Barclays settlement
with the Authorities in respect of their investigations into the
submission of various interbank offered rates (Amended), 3 July
2012 Back
115
Q 1129 Back
116
Q 1087 Back
117
Qq 649-651 Back
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