Did Mervyn King know about Libor rigging in 2008?

mervyn-king.jpg
Who knew what? Bank of England Governor, Mervyn King, knew about Libor
problems in 2008 according to US Treasury Tim Geithner

Scottish news: Did Mervyn King know about Libor rigging in 2008?

It has been revealed that the Governor of the Bank of England, Sir Mervyn King, was sent a private memo by Timothy Geithner regarding the credibility and integrity of the Libor (London interbank offered rate) in 2008.

Mr Geithner, who was at that time president of the Federal Reserve Bank of New York made recommendations including the elimination of incentives to manipulate the Libor rate and establishing a "credible reporting procedure." Mr Geithner is now US Treasury Secretary.

Earlier this week a spokesman for the New York Federal Reserve Bank confirmed that they had contacted the "relevant authorities in the UK" over Libor problems. A spokesman for the Fed said: "In the Spring of 2008, following the failure of Bear Stearns and shortly before the first media report on the subject, we made further inquiry of Barclays as to how Libor submissions were being conducted. We subsequently shared our analysis and suggestions for reform of Libor with the relevant authorities in the UK."

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The news comes only days after Bank of England Deputy Governor Paul Tucker denied any blame over the Libor scandal after facing allegations that he encouraged banks to post artificially low Libor rates. Mr Tucker claims he was unaware that some lenders had been involved in Libor rigging.

During a cross-examination by the Treasury Select Committee, Mr Tucker contested the contents of a note, which Barclays published last week, that seemed to indicate that he was tacitly encouraging the bank to post lower rates.

Could legal action over Libor destroy the UK financial system?

Potentially. The Libor rate affects about $800 trillion dollars (£518tn) of contracts and all sorts if financial instruments globally, according to expert estimates. Those affected include homeowners' mortgages, consumers’ credit cards and even local authorities around the world use derivatives contracts tied to Libor when issuing some bonds. The Libor scandal then could engulf the banks in millions of lawsuits internationally.

Former Barclays chief executive Bob Diamond, who was reportedly forced to resign by Mervyn King, has hired top white-collar lawyer Andrew Levander in relation to the widening Libor scandal, according to Reuters.

Analysts now estimate that legal action against the major banks will cost £22bn related to regulatory penalties and damages to investors and counterparties. However, in terms of European Commission alone, investigations into the forming of cartels can take years to complete and the costs related to litigation could result in fines of up to 10 percent of turnover.

Impact on Scotland

Apart from the losses directly incurred by private individuals, local authorities and businesses there is a very real political impact on Scotland. The SNP Government has a policy to have UK financial bodies continue to regulate Scotland's currency and financial institutions post-independence. As court cases loom the SNP will likely feel justified in changing policy and promoting a fresh start for Scotland's financial system after independence.

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published this page in News 2012-07-13 11:34:31 +0100