Bank of England implicated in Libor scandal

Was Mervyn King aware of Libor rate-rigging and if not why not?

Scottish news: Bank of England implicated in Libor scandal

by Jamie Mann

The Bank of England (BoE) may have been complicit in the Libor rate-rigging scandal it has been revealed. 

According to an internal memo sent by Bob Diamond, the now resigned Barclays chief, the BoE deputy governor Paul Tucker indicated to Barclays that it did not have to submit its Libor interest rates as high as it had done in October 2008. 

The memo, which is a note of a telephone call from Mr Tucker, sent by Mr Diamond to Barclays then CEO, John Varley states they “were not having to ‘pay up’ for money at all”.

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After Mr Diamond spoke to Mr Tucker, it appears that Barclays employees worked on the assumption that the BoE wanted them to falsify data used to calculate Libor - the interest rate that banks pay to each other.

Dated October 29, 2008, the memo said: "Further to our last call, Mr Tucker reiterated that he had received calls from a number of senior figures within Whitehall to question why Barclays was always toward the top end of the Libor pricing.

"Mr Tucker stated the levels of calls he was receiving from Whitehall were senior and that, while he was certain that we did not need advice, that it did not always need to be the case that we appeared as high as we have recently".

‘Lie-borgate’ has exploded since Barclays chief executive Bob Diamond was forced to resign after the bank was found guilty of manipulating Libor rates and fined £290 by both UK and US regulators.

However, Diamond and Barclays seem to be the tip of the iceberg as bankers, regulators and politicians appear to be caught up in a web of deceit on an unfathomable scale.

Diamond, who is set to face a parliamentary hearing on Wednesday, threatens to blow the scandal wide open as sources close to the former CEO told the Financial Times: “If he is attacked, he will fight back”.

Pressure is also piling on politicians, particularly former Labour Ministers, who were in office during the period that the Libor fixing took grip.

The former Prime Minister Gordon Brown and his successor Ed Miliband will be among the politicians to face scrutiny following David Cameron’s instituting a cross-party inquiry to take place before the end of the year.

The banking inquiry will assess the UK banking culture and the roles of politicians in its regulation. However, Mr Miliband has called for an independent inquiry. This is despite Miliband himself now facing parliamentary investigation alongside Gordon Brown, who was both Chancellor of the Exchequer and Prime Minister during the period of Libor fixing.

Eminent economist Ann Pettifor, a director of Policy Research in Macroeconomics (PRIME) and a fellow and the New Economics Foundation, is calling for a judicial inquiry into the revelations. Speaking to Scottish Times, Ms Pettifor said: "It is clear that Britain's politicians got just too close to both bankers and media moguls.

"That is why we need a judicial, not a politicians' inquiry into the conduct and ethics of Britain's banks. So please sign the petition on the Government's website. Only massive public pressure will ensure that we clean up the banking system, and restore it to its original purpose."

Ms Pettifor's petition states: “We the undersigned call for an independent, judicial public enquiry into fraud, wrongdoing and ethics of British banks, their management and their staff, and the role of the British Bankers Association."

Many MPs have challenged the politician-led inquiry, arguing that the public would not trust MPs to investigate bankers as politicians are themselves implicated in the scandal. 

The SNP have also opted for a full public inquiry into banking ethics and have set out 10 questions Labour must answer about the Libor scandal (see below). Stewart Hosie MP, a member of the SNP Treasury Select Committee, said:

“The FSA report into Barclays highlights a staggering litany of prolonged manipulation of the Libor. A parliamentary inquiry is a welcome step, but a full, open independent inquiry will help all of us understand how banks, regulators and politicians failed to notice and act at the time this was going on.

“We must have full transparency from not only the banks but also the Labour members who were Ministers at the time, and the financial regulators that reported to them.

“Alistair Darling was Chancellor, Gordon Brown was Chancellor and Prime Minister and Ed Balls was Economic Secretary to the Treasury when Libor fixing was going on. Were Darling and his colleagues asleep at the wheel or did they know what was going on yet fail to take any action?”

Alastair Darling, who was recently accused of losing a potential one million UK jobs by ignoring advice to act on Northern Rock by Bank of England Governor Mervyn King, has come under scrutiny as he was Chancellor when much of the Libor rigging was taking place.

Gordon Brown also faces scrutiny along with Ed Balls who was Economic Secretary to the Treasury during the same period of Libor fixing.

An air of mistrust from the public has shrouded politicians and the banking sector long before the Libor scandal emerged.  Questions into economic fairness have arisen following revelations about MP expenses, banker bonuses and an ever-expanding wealth gap.

Scottish independenence angle

Given that the entire regulatory apparatus now appears to be implicated in the Libor scandal there will now be pressure on the SNP to set up seperate Scottish institutions to regulate an independent Scotland's banks and currency.

As reported by ST today, it is untenable for the SNP to argue that the UK regulatory regime has completely failed whilst arguing that the same regime should oversee and independent Scotland's institutions and currency.

The SNP has set out 10 questions they say Labour must answer about the Libor scandal

1. During the former Chancellor's discussions with various banks including Barclays and RBS, did the subject of funding rates for RBS arise and did Mr Darling receive a briefing on this subject from officials?

2. Did the former Prime Minister or Chancellor ask whether there was oversight of the arrangements around LIBOR given the increasing relevance of liquidity and the obvious self-interest of banks during the financial crisis?

3. When was the former Chancellor first informed of the LIBOR fixing allegations and by whom? What was his immediate response?

4. Do the former Prime Minister, Chancellor and UK Economic Secretary consider the fixing of LIBOR to have potentially impacted the ability of UK banks to remain solvent during the financial crisis? If so, was this a consideration in their silence on the matter?

5. Did they receive official advice on the relevance of transparency around such a serious investigation in the context of wider allegations of malpractice and mismanagement in UK banking?

6. Why did the former Chancellor not make a statement to Parliament on these serious allegations as soon as they became known or at least at some point during his tenure in office?

7. Does the former Chancellor believe it would have been appropriate in the context of substantial malpractice in the banking sector to at least make Parliament aware of the LIBOR fixing investigation?

8. Do the former Prime Minister, Chancellor and Economic Secretary believe it was appropriate for such an important financial rate to be set by the banks without proper supervision particularly in the context of a banking crisis?

9. The Economic Secretary is responsible within HMT for banking, finance and financial regulation. Did the former Economic Secretary attend any discussions or briefings with regulators, officials or banking representatives which covered the subject of LIBOR?

10. Will Ed Miliband compel the former Labour ministers to give come clean on what they knew and when?



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commented 2012-07-04 12:15:36 +0100 · Flag
As a student of banking since the 1960’s I came to the conclusion many years ago that banking was not complicated – only bad banking. The latest LIBOR scandal is a case in point. Banks lend to each other for the simple reason that even with today’s ‘light touch regulation’ they are not permitted to create credit directly for their own accounts, so they borrow from one another to fund their ‘investment banking’ arms.

Do not be misled that this is anything to do with the overnight accommodation required by the clearing system – that is peanuts and nothing to do with LIBOR.

The elaborate recommendations of the Vickers Inquiry recommended that the big banks’ investment arms be ring fenced by separation from retail banking. When you read between the lines they will still be able to access this same source of funding – the only difference being that they will be required to have a ‘reconstruction plan’ if anything goes wrong.

It is the fractional reserve system which is the rotten core of banking and for as long as it remains legal there will be those happy to exploit it for personal gain at everyone else’s expense.
published this page in News 2012-07-03 19:36:12 +0100