As part of the release of data from the New York Federal Reserve Bank yesterday, a phone transcript revealed that a Barclays employee admitted to the regulatory body that their submissions of the interest rate benchmark, Libor, were fraudulent, and that they assumed all other banks engaged in the same practice.
Here’s the transcript of the call, from April 11, 2008, in the midst of the financial crisis, between the Barclays employee and New York Fed official Fabiola Ravazzolo. The relevant portion is excerpted below:
Barclays: Dollar, Dollar LIBORs do not reflect where the market is trading which is you know the same as a lot of other people have said.
FR: Mm hmm.
Barclays: Um, wha-, it depends on which part of the curve you’re looking at.
FR: Mm hmm.
Barclays: Um, currently, we would say that in the three months, um, if we as a prime bank had to go in the interbank market and borrow cash, it’s probably eight to ten basis points above where LIBOR is fixing.
FR: So you’re above ten to fifteen?
Barclays: About eight or ten above. If, if, if we had to go in the market and
Barclays: Properly borrow money, it would be
Barclays: About eight to ten above and in the one year
Barclays: It would probably be about twenty basis points in the market.
FR: 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: 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 [laugher] you know, yeah [inaudible] [laughter]
Barclays: You know, you know we, we went through a period where
Barclays: We were putting in where we really thought we would be able to borrow cash in the interbank market and it was
FR: Mm hmm.
Barclays: Above where everyone else was publishing rates.
FR: Mm hmm.
Barclays: 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.
Barclays: And um, our share price went down.
Barclays: So it’s never supposed to be the prerogative of a, a money market dealer to affect their company share value.
Barclays: And so we just fit in with the rest of the crowd, if you like.
Barclays: So, we know that we’re not posting um, an honest LIBOR.
Barclays: And yet and yet we are doing it, because, um, if we didn’t do it
FR: Mm hmm.
Barclays: It draws, um, unwanted attention on ourselves.
That’s the simplest and most concise explanation of the crisis-era fixing part of the scandal, told from the horse’s mouth. Barclays believed everyone was fixing the Libor, and they didn’t want to attract attention and get beaten down by the market, so they started fixing it themselves.
The employee stressed that this was particular to the Libor market in dollars as opposed to euros or pound sterling, and that the rates were lowered by roughly eight to ten basis points (.08-.1%) in the three-month rate, and maybe twenty basis points (.2%) in the one-year rate. But overall, the consequences are largely the same. Banks artificially lowered the rate supposed to describe their borrowing costs in order to fool the markets into thinking they had a cleaner bill of financial health. And the response from Ravazzolo militates strongly in the direction of understanding Barclays plight, that if everyone is breaking the law by committing fraud on Libor, then they must as well.
Now what we know happened out of this is that Ravazzolo reported to her superiors, and Tim Geithner sent a memo to the Bank of England and the British Bankers Association. What he and his regulatory colleagues did not do, when faced with documentary evidence of fraud, was actually stop it. They relied on the Bank of England and washed their hands of it. Given that the Barclays employee basically said that their bank was going along with the crowd by fixing Libor, they did not, to our current knowledge, approach other banks, including the US banks under their regulatory purview that submit to Libor (including JPMorgan Chase, Citi and Bank of America). In fact, it’s not clear that Geithner, in his dealings with the BoE and the BBA, even mentioned this phone call with the Barclays employee, or that they had evidence, an admission of guilt, on Libor fixing. As the Independent (UK) writes, they all knew and did nothing about it. Dealbook adds:
Although the New York Fed conferred with Britain and American regulators about the problems and recommended reforms, it failed to stop the illegal activity, which persisted through 2009 [...]
The revelations fuel concerns that regulators are ill-equipped to police big banks and that financial institutions can game the system for their own purposes.
This scandal does not only envelop the banking industry now, but the regulatory apparatus as well.