Regulatory Capture - The Bank of England knew of LIBOR rigging but did nothing

Ben Chu in The Independent

Regulators on both sides of the Atlantic failed to act on clear warnings that the Libor interest rate was being falsely reported by banks during the financial crisis, it emerged last night. 

A cache of documents released yesterday by the New York Federal Reserve showed that US officials had evidence from April 2008 that Barclays was knowingly posting false reports about the rate at which it could borrow in order to assuage market concerns about its solvency.

An unnamed Barclays employee told a New York Fed analyst, Fabiola Ravazzolo, on 11 April 2008: "So we know that we're not posting, um, an honest Libor." He said Barclays started under-reporting Libor because graphs showing the relatively high rates at which the bank had to borrow attracted "unwanted attention" and the "share price went down".

The verbatim note of the call released by the Fed represents the starkest evidence yet that Libor-fiddling was discussed in high regulatory circles years before Barclays' recent £290m fine.

The New York Fed said that, immediately after the call, Ms Ravazzolo informed her superiors of the information, who then passed on her concerns to Tim Geithner, who was head of the New York Fed at the time. Mr Geithner investigated and drew up a six-point proposal for ensuring the integrity of Libor which he presented to the British Bankers Association, which is responsible for producing the Libor rate daily.

Mr Geithner, who is now US Treasury Secretary, also forwarded the six-point plan to the Governor of the Bank of England, Sir Mervyn King. The Bank pointed out last night that there was no evidence in the Geithner letter of banks actually making false submissions – although then note did allude to "incentives to misreport".

It was unclear last night whether Mr Geithner informed Sir Mervyn about the testimony of the Barclays employee who said that the bank was being dishonest in its submissions.

If it turned out that he did, that would be highly damaging for the Bank since it has always claimed that it never saw or heard any evidence that private banks were deliberately making false reports about their borrowing costs. Sir Mervyn is due to be questioned by the House of Commons Treasury Select Committee next Tuesday, where MPs are likely to put this question to the Governor.

The Bank's Deputy Governor, Paul Tucker, went before the Treasury committee last week to answer allegations that he had put pressure on Barclays to misreport its borrowing rates in 2008 while attempting to promote financial stability. Mr Tucker denied that he had done so and said he only found out that Barclays had been deliberately submitting dishonest Libor submissions recently.

The New York Fed released its cache of documents in response to a request from the chairman of Congress's Committee on Financial Services on Oversight and Investigation, Randy Neugebauer, who has been investigating how much US regulators knew about the rate-fixing scandal, in which 11 other banks around the world have been implicated.

A separate email released by the Bank of England yesterday shows that Mr Tucker forwarded the Geithner email to Angela Knight, the former chief executive of the British Bankers Association. She responded saying that "changes had been made to incorporate the views of the Fed".

While the BBA is understood to have acted on two of Mr Geithner's proposals, the other four were not adopted.

Before hearing from Sir Mervyn on Tuesday, the Treasury Select Committee is set to take evidence on Monday afternoon from Jerry del Missier, the former chief operating officer at Barclays, who gave the green light for traders to submit false Libor submissions during the crisis. He will be asked about whether he thought the order to do so had come down from the Bank of England.

Last month Barclays was fined £290m for rigging Libor between 2005 and 2008. The regulators found that Barclays traders had initially submitted false reports to make profits for its traders, but subsequently to allay concerns about the bank's health. Barclays' chief executive Bob Diamond resigned on 3 July. The Libor rate is used to fix the cost of borrowing on mortgages, loans and derivatives worth more than $450 trillion (£288 trillion) globally.

The missed warnings: ‘So we know that we’re not posting, um an honest Libor

One document released yesterday by the Fed detailed a conversation between staffer Fabiola Ravazzolo and an unnamed Barclays employee in April 2008, including the following edited extract:

Fabiola Ravazzolo: And, and why do you think that there is this, this discrepancy? Is it because banks maybe they are not reporting what they should or is it um…

Barclays employee: Well, let's, let's put it like this and I'm gonna be really frank and honest with you.

FR: No that's why I am asking you [laughter] you know, yeah [inaudible] [laughter]

BE: You know, you know we, we went through a period where we were putting in where we really thought we would be able to borrow cash in the interbank market and it was above where everyone else was publishing rates.

FR: Mm hmm.

BE: And the next thing we knew, there was um, an article in the Financial Times, charting our LIBOR contributions... and inferring that this meant that we had a problem... and um, our share price went down... So it's never supposed to be the prerogative of a, a money market dealer to affect their company share value.

FR: Okay.

BE: And so we just fit in with the rest of the crowd, if you like... So, we know that we're not posting um, an honest LIBOR. And yet and yet we are doing it, because, um, if we didn't do it it draws, um, unwanted attention on ourselves.

FR: Okay, I got you then.

BE: And at a time when the market is so um, gossipy... it was not a useful thing for us as an organization.

Banking keeps getting away with it, just as the unions did

Heads will probably roll for the Libor scandal, but this crisis won't end until the profession's link with politicians is severed

• 
• • Simon Jenkins
  • guardian.co.uk, Thursday 28 June 2012 20.30 BST

Banking first refused regulation and now welcomes it, because only thus can it be protected from the consequences of its own greed. Illustration: Simon Pemberton

 

Too big to fail … now too big to jail? There seems no end to the immunity – moral, political, fiscal and possibly legal – claimed by the present masters of the universe, the bankers. In a side-splitting, coffee-spluttering radio interview today, Sir Martin Taylor, the former chief executive of Barclays, mused that his old board might consider the best person to "turn the page" on the bank's latest scandal might be none other than its author and present chief executive, Bob Diamond. That is presumably despite the bank being fined £290m and pending possible charges of fraud.

Diamond has "taken responsibility" for the division that from 2005 onwards manipulated inter-bank loans so as to disguise the bank's vulnerability in the runup to the 2008 credit crunch. The clear intention was to mislead the market and enrich bank staff with bonuses. Responsibility apparently means Diamond "giving up" a bonus which, surely, he has yet to earn.

A year ago the Barclays chief dazzled the BBC into letting him give a lecture on banking and citizenship, a lecture now sodden with irony. He spoke of the importance of an organisation's culture, of "how people behave when no one is watching", and how "our culture must be one where the interests of customers and clients are at the very heart of every decision we make". Bankers must be good citizens, said Diamond,, or there would be social unrest.

At the time Diamond was demanding his own shareholders pay him not just a salary, but the tax on that salary and then the tax on that taxable benefit. It is not clear who paid the tax in this spiral of greed. Diamond must also have known his colleagues were then being investigated by the Financial Services Authority for irregularities in the bank's trading. Diamond's entire reputation was built on his banking culture, one of bonus-hunting, offshore tax avoidance and killer-takes-all rivalry. For him to give a lecture on ethics invited cliches about Jack the Ripper and door-to-door salesmanship.
The Barclays affair should be a sideshow to our present discontents. The world currently faces the greatest collapse in western statecraft since the second world war. Economists, officials, politicians, even commentators, seem gripped by professional and intellectual rigor mortis, one horribly reminiscent of the 1930s. All experience tells them that a collapse in global demand needs monetary injection, not contraction. Yet they deny it, and bankers lie about it. In Britain we all parrot that £325bn has been "pumped into the economy" by the Bank of England. It has not. The money is nowhere to be seen. It is a device, a headline, a sick joke.

At such times it is comforting to turn from the murky failures of the present to the clear ones of the past. The snoozing Commons Treasury committee is yet again "to call Mr Diamond the account", so it can show off its interrogatory machismo. Lord Myners, formerly of the Guardian, won himself plaudits today by calling Barclays "the most corrosive failure of moral behaviour that I have seen in a major financial institution". But he was a worldly banker himself, and City minister in 2008-9, when the whole house of cards was collapsing amid media reports of "something fishy" in the Libor market. Labour was putty in the hands of the bankers.

From the credit crisis to the present day, the one profession with open access to Downing Street is banking. It lobbies successfully on everything from bailouts to bonuses, non-doms to Tobin taxes, euro regulation to "quantitative easing". When told to lend to small businesses, it refuses. When given money to do so, it buries the money. When ministers plead for lower salaries, it increases them. The government takes over a bank, RBS, and its computers crash. Bankers get ribbed in the press – but so what, when the bonus is in the safe and few are ever called to account, banned from trading, or sent to jail?

Banking gets away with all this because it enjoys the same unaccounted access to power that trade unions enjoyed in the bad old days. It first refused regulation and now welcomes it, because only thus can it be protected from the consequences of its own greed. It preaches the nobility of the markets and then rigs them. We should listen every day to Adam Smith's maxim, that "people of the same trade seldom meet together … but the conversation ends in a conspiracy against the public or in some contrivance to raise prices".

Most running controversies today reflect deep confusion in corporate ethics and accountability. Barclays traders, News of the World reporters, immigration office officials, even drone bombers, turn instinctively to the excuse that they were "just obeying orders". Thus is moral responsibility dispersed and blame passed upwards to the boss, the board, the regulator, the government, ultimately democracy. The great let-out is that "we are all to blame". As the philosopher Reinhold Niebuhr remarked, moral individuals can still constitute an immoral society. Guilt is diffused in a crowd.
Failure of regulation has become a catch-all to sanitise personal and corporate misbehaviour in large organisations. This merely means that, when an outrage has been detected, and a feeding frenzy begins there are howls for heads to roll. Certainly at Barclays public decency, if nothing else, demands some sacrifice. But the real fault lies in bigness, in the ease with which corporations can fall victim to ethical compromise and pretend it is not their fault but the regulator's.

There must surely be a reckoning one day for the loss and agony that the credit crunch has inflicted – and is still inflicting – on millions of innocent victims. But as we seek out the guilty men, we should know that as long as banking retains its stranglehold on policy, the disaster will continue.

Phone hacking: how News of the World's story unravelled

Tabloid's publisher aggressively denied scandal – until the latest revelations

• Dan Sabbagh
• guardian.co.uk, Friday 8 July 2011 20.47 BST
• larger | smaller

News of the World will print its last ever edition on Sunday July 10, 2011 – the phone-hacking scandal has forced the tabloid's closure. Photograph: Adrian Dennis/AFP/Getty Images
It was a strategy of cover-up, quarter-admission, and foot dragging that took years to unravel – beginning with the first court case brought in the wake of jailing of the News of the World's former royal editor Clive Goodman and the newspaper's £100,000-a-year private investigator Glenn Mulcaire. At the trial it emerged that five others had their phones or messages hacked into – none of whom were members of the Royal family, subjects of Goodman's work – but prominent individuals Simon Hughes, Elle Macpherson, Max Clifford, football agent Sky Andrew and Gordon Taylor, the chief executive of the Professional Footballer's Association. Nevertheless, News International chose to gloss over the glaring contradiction of a court case that prompted the resignation of Andy Coulson, as editor, taking the "ultimate sacrifice" for activities he said he was unaware of. In March 2007, the company's then executive chairman Les Hinton was clear that the hacking scandal was narrow in scope. Giving evidence to MPs on the culture media and sport select committee Hinton said, when asked if Goodman was the only person who knew about phone hacking, he replied that "I believe he was the only person" who was aware of the practice and "I believe absolutely that Andy did not have knowledge of what was going on". Despite that, though, it was Gordon Taylor's legal team pursued a court case on his behalf. News International offered Taylor £250,000 to quietly settle the case, but he fought on and as his lawyers obtained evidence from Mulcaire's notebooks and tapes seized by the Metropolitan Police, there was early evidence that hacking practice may have spread wider. Mark Lewis, who was Taylor's solicitor, recalls that it was shortly after the legal team obtained a tape of Mulcaire talking to another journalist (a tape later leaked to the New York Times), that the company's lawyer Tom Crone offered to settle at a higher price. This time Taylor won a massive £700,000 out-of-court settlement. Crucially, though, News International wanted it to remain confidential – which Taylor had little choice but to agree to, given the amount of money on offer. Documents relating to the case were sealed, and the matter would never have become public until the existence of the settlement – signed off by James Murdoch on the recommendation of News of the World editor Colin Myler and Crone – was revealed in July 2009 by the Guardian. That Guardian's report was accompanied by the revelation that private investigators had hacked into "two or three thousand" mobile phones – and the suggestion that MPs from all three parties and cabinet ministers, including former deputy prime minister John Prescott and ex-culture secretary Tessa Jowell, were among the targets. Two days later, News International responded late on a Friday afternoon with an aggressive denial, authored it is believed by Crone, with some help from Myler, and corporate communications head Matthew Anderson. It concluded there was no evidence to support the contention that "News of the World or its journalists have instructed private investigators or other third parties to access the voicemails of any individuals" or that "there was systemic corporate illegality by News International to suppress evidence". In reaching the conclusion, News International had two seeming allies. John Yates, the assistant commissioner at the Met, refused to reopen the original investigation into phone hacking, saying that "potential targets may have run into hundreds of people, but our inquiries showed that they only used the tactic against a far smaller number of individuals". Meanwhile, the regulator also chose to take News International's evidence at face value, concluding in its own enquiry in November 2009 it had "seen no new evidence to suggest that the practice of phone message tapping was undertaken by others beyond Goodman and Mulcaire, or evidence that News of the World executives knew about Goodman and Mulcaire's activities". Not everybody was so convinced. A growing number of angry celebrities and politicians began to initiate their own lawsuits in the belief their phones had been hacked. Legal actions gathered momentum in 2010, but News International fought every step of the way, while the Met was slow to share evidence with the claimants and key witnesses like Glenn Mulcaire refused to testify. It was not until December 2010 that Sienna Miller's legal action that alleged that hacking was almost certainly initiated by at least one other journalist – Ian Edmondson, then still employed by the Sunday tabloid. Even then some appeared in denial. In October 2010, Rupert Murdoch, speaking at News Corp's annual meeting, said "there was one incident more than five years ago" before taking aim at the Guardian. "If anything was to come to light, and we have challenged those people who have made allegations to provide evidence … we would take immediate action". Andy Coulson, by now working in Number 10 for David Cameron, said as recently as December of last year in the Tommy Sheridan perjury trial that: "I don't accept there was a culture of phone hacking at the News of the World.". It was not until 2011 – some say at the urging of former Daily Telegraph editor and News International's group general manager Will Lewis – that News International began gradually to soften its stance. Edmondson was dismissed, as it appeared that some of the newspaper's upper-middle ranks could also be under threat. The company stopped contesting the civil cases in April, reaching a £100,000 settlement with Sienna Miller, although that meant News International would avoid the embarassment of court cases were all sorts of additional evidence could have emerged. However, it was not until the Met chose to reopen the criminal enquiry after five years of refusal, handing the job to deputy assistant commissioner Sue Akers rather than John Yates, that News Corp had to admit more. With the police trawling over 11,000 pages of notes, suddenly officers found allegations that the phone of murdered schoolgirl Milly Dowler had been targeted by the newspaper, prompting James Murdoch to concede on Thursday that unnamed "wrongdoers turned a good newsroom bad" and that "this was not fully understood or adequately pursued" by those in charge.

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