Stink from Libor scandal spreads

ANALYSIS:The rate-rigging scandal has called into question the behaviour and reputation of many of the world’s most powerful banks, as well as regulators on both sides of the Atlantic .

FOR SOMEONE favourite to become the next Bank of England governor, things do not get much worse than the publication of chummy emails between yourself and the discredited head of the bank that first admitted fixing Libor interest rates.

Amid many congratulatory emails Paul Tucker, then head of markets at the Bank of England, received on December 10th, 2008, one was from Bob Diamond, then head of Barclays Capital, the investment banking arm of Barclays Bank.

“Paul, Congratulations. Well done, man. I am really, really proud of you. Talk soon. Bob,” Diamond wrote in an email released this week by the Bank of England.

Tucker’s reply was just brief and almost as pally. “Thanks so much Bob. You’ve been an absolute brick through this. Paul.”

This year, Tucker is hoping to get the nod to become Bank of England governor in July 2013, but his association with Diamond, Barclays and Libor are not helping his cause.

It will be little consolation to Tucker as he scrambles to recover position, but he is not alone. The spreading rate-rigging scandal has called into question the behaviour and reputation of more than a dozen of the world’s most powerful banks, as well as regulators on both sides of the Atlantic.

Diamond has had to walk the plank, resigning as chief executive of Barclays after the direct intervention of Bank of England governor Mervyn King.

A performance of bluff and bluster before MPs at the treasury select committee – in which he said regulators were broadly satisfied with the bank and that the rate-rigging was down to a mistaken interpretation of an email – has been undone by contradictory evidence from his former senior colleague at Barclays Jerry Del Missier, the man who relayed his instructions on Libor rate submissions to traders and who subsequently rose to chief operating officer at the bank before resigning the same day as Diamond.

British regulators, in their turn before the committee, accused the former bank chief of being “highly selective” in his testimony.

Andrew Bailey, chief banking regulator of the Financial Services Authority, said “there was a culture of gaming – and gaming us” at Barclays.

Regulators themselves have felt the heat as the scandal unfolds, with the FSA attacked for allowing del Missier be promoted in the role of chief operating officer at the bank just weeks before the fines were imposed.

In the US, treasury secretary Tim Geithner felt obliged this week to defend the actions of US regulators when they first discovered problems with the Libor rate in 2007.

Geithner, who led the Federal Reserve Bank of New York at the time, has come under scrutiny by US lawmakers who claim he knew of potential wrongdoing yet looked the other way.

“We acted very early in response to concerns that the processes that set this rate was impaired and flawed and vulnerable to misrepresentation,” Geithner said in his first public comments on the Libor scandal during a CNBC television interview.

“I took the issue to brief the entire US regulatory committee on this at a very early stage,” he added. “We brought it to the attention of the British and took the exceptional step in putting in writing to them a detailed set of recommendations that revealed the extent of the concerns in that context.”

But despite concerns about the accuracy of Libor, US authorities continued to rely on it. When the US launched the term asset-backed securities loan facility – a bailout programme designed to increase liquidity – it used Libor to help set the interest rate.

Lawmakers on both sides of the Atlantic have questioned whether regulators did enough at the time of the alleged manipulation to curb improper behaviour.

For his part Bank of England governor Mervyn King was quick to distance himself from the affair, telling MPs at the treasury select committee that he had learned details of the rate-rigging exercise just weeks earlier.

To date, the scandal has claimed only the scalps of three of Barclays leading executive – Diamond, Del Missier and chairman Marcus Agius – as well as costing the bank £290 million (€371 million) in a settlement with regulators in the US and Britain. Morgan Stanley has done a back of the envelope calculation suggesting the scandal could cost the 12 banks involved as much as $22 billion by the time it concludes.

It could yet signal the downfall of Libor entirely, further denting the image of London as a financial capital.