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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
FR: Yeah.
Barclays: Properly borrow money, it would be
FR: Yeah.
Barclays: About eight to ten above and in the one year
FR: Okay.
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
FR: Hmm.
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.
FR: Yeah.
Barclays: And um, our share price went down.
FR: Yes.
Barclays: So it’s never supposed to be the prerogative of a, a money market dealer to affect their company share value.
FR: Okay.
Barclays: And so we just fit in with the rest of the crowd, if you like.
FR: Okay.
Barclays: So, we know that we’re not posting um, an honest LIBOR.
FR: Okay.
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.
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Mm hmmm …
DW
The Fed tries to fine tune the economy by manipulating the Federal funds rate.
Similarly, the TBTF MOTU try to fine tune their bonuses by manipulating LIBOR.
It’s a thankless
taskGod’s work, but somebody has to do it.The NY Fed didn’t say or do anything during the housing bubble. Why would Li(e)bor be any different?
Whores, worthless whores.
I’ve been trying very, very hard to come up with any justification at all for the entire enterprise of for-profit banking. Very hard.
So far I’ve only been able to surmise that its whole purpose is just to place a parasite on an otherwise active economy for its own sake.
Bankers are nothing more than Welfare Kings. They live off of and gorge themselves on explicit government largesse (their charters, government funding facilities, etc.) and do exactly nothing useful.
Demand deposits could be easily handled by governmental or non-profit institutions. Loans, likewise. Real investment capital almost entirely comes from angel and venture capital anyway, so that’s not even a function banks handle much already.
If they can fix the interest rates, what the fuck can’t they fix? I mean, WTF??
So even a classic ‘smoking gun’ isn’t enough to embarrass the justice defartment into doing anything.
Smoking gun, indeed.
The game is rigged and there is apparently no evidence that can be presented tha will move the outrage to action.
Thank you very much, David. This is what I took from your earlier diary, and I am very glad you have spelled it out in this fashion. It strikes me that the positions the big banks have taken with respect to finance are an exact parallel to the positions of the administration’s insistence in having for profit insurance companies be the middlemen in the healthcare scenario. The banks recently became for profit, corporations divested of regulation became for profit, the military became for profit – the privatization and commodification of everything under the sun has become the outflow of evils once pandora’s box was opened, and nobody is in control.
Thanks David for keeping up on this topic.
Not getting my hopes up on it amounting to any actual action, but it is angle contained in the quoted language that has the potential to engage the principled conservative/libertarian types.
Unfortunately, it doesn’t even move the left since they have an administration to protect.
I was reading our statewide rag the other day about the negotiations for the contract at Sandia National Laboratory. The Los Alamos Lab has been run into the ground by Bechtel to the tune of $100 million a year for the last number of years.
I am not defending the work of these places, though it appears that Lockheed Martin, for a third of the cost, has managed to diversify the work of Sandia, which manages to do some interesting things besides weapons. Bechtel has been paid a bonus to shut down work that may have had some benefit to the planet.
Los Alamos was called “the wealthiest county in the US” earlier this year. For better or worse it is becoming the Flint, MI of the nuclear age.