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.
The fallout from regulators’ deepening probe of attempted manipulation of benchmark interest rates continued yesterday as the UK markets watchdog stepped up its lines of inquiry. The move came as employers of the traders connected to the investigation responded to news of their alleged involvement.
The Financial Times on Wednesday revealed the identity of four more banks suspected of being connected to attempts by former Barclays trader Philippe Moryoussef to manipulate the Euribor rate, the continental European equivalent of the Libor benchmark for inter-bank borrowing costs.
The FT also named three traders being investigated over the issue – Michael Zrihen, formerly employed by Credit Agricole, Didier Sander, formerly of HSBC, and Christian Bittar, who used to work for Deutsche Bank.
Yesterday, Swiss private bank Lombard Odier, Zrihen’s current employer, said he had been suspended from trading pending an internal investigation. “We are actively investigating the issues raised in the article in order to fully understand the situation. We have not been contacted by a regulator and have now reached out to the regulators to learn more,” Lombard Odier Investment Managers said in a statement.
Zrihen himself did not respond to attempts to contact him.
Blue Crest, the hedge fund that now employs Bittar, declined to comment. However, the firm is standing by the former Deutsche trader in the absence of any evidence of wrongdoing, according to one person familiar with the matter. Bittar was also unavailable to comment and his lawyer declined to do so. Mr Sander denied any wrongdoing.
The developments came as it emerged that the UK’s Financial Services Authority is gearing up to enlarge its investigation, which has until now focused on seven financial institutions.
Central bankers and regulators will hold talks in September on whether the troubled global Libor interest rate can be reformed or whether it is so damaged that the benchmark of borrowing costs should be scrapped.
Bank of England governor King told fellow central bankers in a letter that it was “very clear that radical reforms of the Libor system are needed”.
Fed chairman Ben Bernanke and global financial regulator Mark Carney, who is also governor of the Bank of Canada, have floated possible alternatives to the London interbank offered rate, which some bankers manipulated in the 2007-2009 financial crisis.
“There are different alternatives if Libor cannot be fixed,” Carney told a news conference in Ottawa on Wednesday. “If it’s structurally flawed and can’t be fixed – which is a possibility – there may need to be different types of approaches, and we need to think that through.”
The concerns over Libor prompted scrutiny of lending benchmarks elsewhere. The European Central Bank (ECB) is putting pressure on the organisers of Euribor to shore up faith in the euro benchmark, according to sources familiar with the matter. Singapore, Hong Kong and Japan announced reviews of the way interbank benchmark rates were set in the Asian financial centres, while, in South Korea, the anti-trust agency widened an investigation into possible rate-fixing.
King put the Libor issue on the agenda of the Economic Consultative Committee of global central bankers, which will meet in Basel, Switzerland, on September 9th, a central bank source said. The discussions will continue there the following week at the Financial Stability Board’s steering committee, which is chaired by Carney and which also includes financial regulators.
“There is an attraction to moving to obviously more market-based rates if possible,” Carney said in his news conference. Libor is used for $550 trillion of interest rate derivatives contracts and influences a wide array of financial products from mortgages to credit cards, and Carney said it was crucial that markets be able to have “absolute confidence” in it.
Dozens of banks, including JPMorgan Chase and Deutsche Bank, are under investigation in the rate-rigging scandal, where banks low-balled the rate to profit on trades and hide their own borrowing costs during the 2007-2009 financial crisis.
Goldman Sachs chief executive Lloyd Blankfein said in Washington the scandal only built on the American public’s mistrust of the industry after the 2007-2009 financial crisis.
“There was this huge hole to dig out of in terms of getting the trust back, and now it’s just that much deeper,” he said.
Libor is calculated daily in London for the dollar and other currencies when panels of banks submit estimates of how much it costs them to borrow from each other. It is thus a subjective call, as opposed to basing benchmarks more objectively so less manipulation is possible.
The Australian Bank Bill Swaps Reference Rates, for example, are based on where paper is actually traded on the market. The issue is similar for Euribor – launched with the single currency in 1999 – prompting the ECB to call for a rethink, including possibly shifting the basis of the calculation to actual lending rates.
“The big choice one has to make is whether you want posted rates or actual rates . . . so at the end of the day, banks say what transaction they had at which price,” said one central bank source. If you use actual transactions you would have solved the problem.”
Carney highlighted the Canadian Dealer Offered Rate because it is a committed rate: “It’s actually a borrowing rate that is used by banks on a regular basis, almost daily basis when they take down syndicated BAs (banker acceptances).
“So we may end up, we may – I don’t want to prescribe, it’s very early days – but we may end up with different types of rates used in different currencies, he said.
It is not a forgone conclusion that Libor will be abandoned, even if membership on Libor panels is voluntary.
Asked what would happen if banks pulled out, Carney said: “The best institutions recognise that they have a responsibility to remain in these panels and continue to post their estimates of where they can borrow.”
He added: “To continue to do so . . . isn’t asking much.” He said most banks have posted figures accurately and “we should be a little careful not to tar all institutions in the panel with the actions of some”.
But wrongdoers “need to substantially raise their game” to levels of conduct expected in any other aspect of life.
(Reuters, The Financial Times)
WHAT IS LIBOR? WHY IT'S IN THE NEWS:
THE LONDON interbank offered rate, more commonly known as Libor, is one of the most important numbers in the financial world. But until the Barclays scandal, it received scant public attention. Here is a primer.
Q. What is Libor?
A. Libor is the average interest rate at which banks can borrow from each other. London is mentioned in its name because the benchmark is set in that city. Essentially, Libor is one of the main rates used to determine the borrowing costs for trillions of dollars in loans.
Q. Why was Libor created, and by whom?
A. In the early 1980s, banks started looking for a standard benchmark to calculate the prices on an array of financial products, and the British Bankers Association, an industry trade group, began publishing Libor in 1986. The idea was that instead of constantly haggling over the interest rates that would be charged for different types of loans, banks would have a uniform benchmark. There are actually 150 Libor rates published every day. They cover 10 currencies and 15 maturities.
Q. How is Libor calculated?
A. For dollar-denominated Libor, for instance, more than a dozen major international banks estimate how much interest they would pay to borrow money on a short-term basis from other institutions. While the process is still overseen by the British Bankers Association, the calculations are now performed by Thomson Reuters. Thomson Reuters discards the four highest and four lowest submissions as outliers, and averages the remaining ones. The data-provider then publishes its calculations, generally at about 11.30am London time, along with each bank's submissions.
Q. What are examples of how Libor is used?
A. Banks often ask borrowers to pay Libor plus an added amount of interest, reflecting the credit risk of the borrower.
Q. How has Libor's use evolved over time?
A. Libor was primarily created as a benchmark for banks to determine borrowing costs – and it is largely used in the same manner today, albeit for a broader group of financial products. For instance, many banks now use Libor to set the prices on derivatives, the complicated financial instruments tied to commodities, interest rates, currencies and other assets.
Q. Why is Libor important?
A. After more than two decades, Libor still remains one of the most-cited benchmarks in the financial world. The British Bankers Association has promoted the rate-setting process as highly transparent and impartial, making Libor a good benchmark for various financial products. The group has argued that no one institution can single-handedly alter the calculations behind the rate.
But amid the rate-manipulation scandal, the integrity of Libor has been called into question.
Q. Is Libor changing as a result of the rate-manipulation scandal?
A. It's unclear at the moment. Central bankers have agreed to discuss the system at a meeting in September.
( New York Times service)
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