The scandal over the attempts to manipulate Libor looks like one of those stories that just runs and runs. For now we’re getting into the fun and joy of discussing who knew what and when. It’s all looking quite Nixonian.
To start from the beginning: there have been two different sets of allegations against Barclays. In the first, that traders within the bank would try and get those who reported rates to the BBA, and thus influenced Libor, to report false rates so that their trading books would benefit. This is clearly wrong, unethical, immoral and we’ll find out soon enough whether it is in fact criminal. What it isn’t though is a huge thing for the wider economy. Firstly, such manipulations would have been up or down depending upon where the specific book was on any one day: it did not lead to continual over or under statement of Libor. Secondly, the amounts by which it was moved, if it ever was, were pretty small, One of two basis points at most is the generally accepted number. Thirdly, it is becoming clearer that Barclays are just the first to get caught, not the only ones indulging in this behaviour. Given that derivatives markets are zero sum, anything gained by Barclays from a rate manipulation was a loss to some other bank. And if other banks are similarly attempting to manipulate Libor there is the delicious possibility that they were all being crooked without actually managing to achieve anything: their various attempts cancelling each other out.
The second set of allegations is that in the depths of the Crash, Barclays deliberately tries to influence Libor down so as to make themselves look less risky. This is where the who knew what when thing comes in. For it’s beginning to look like the regulatory authorities knew very well what was going on:
The 2011 report by the Financial Services Authority into the collapse of Royal Bank of Scotland in early October 2008, three weeks before Tucker’s call with Diamond, makes clear the lender had lost its access to the money markets, noting that the “liquidity run reached extreme proportions”.
“On 7 October, 2008, RBS’s wholesale counterparties, as well as, to a lesser extent, retail depositors, were simply not prepared to meet its funding needs and RBS was left reliant on ELA from the Bank of England,” wrote the FSA.
The reference to ELA, or Emergency Liquidity Assistance, is important as Tucker, unlike the rest of the market at that stage, would have known that the Bank of England had begun providing secret loans, first to crisis-ridden HBOS and then to RBS, that totalled nearly £62bn.
Speaking to the Treasury Select Committee in November 2009, Tucker told the MPs that without the emergency loans it “would have been a lot worse than it would have been” otherwise. “This was a classic lender of last resort operation,” he said.
Records of historic Libor submissions available on Bloomberg show that despite HBOS and RBS being on emergency life support they were both submitting Libor figures that appeared to show they could borrow at cheaper rates in dollars and sterling than Barclays throughout the months leading up to the collapse of Lehman Brothers in September 2008, and in the period afterwards.
To any expert looking at the figures this would have appeared ridiculous, as it suggested banks that were on the brink of bankruptcy were in better shape than banks such as Barclays that insisted they did not have a liquidity problem and were about to raise billions of pounds of funding from Qatari investors.
That’s the heart of it: during the Crash the authorities knew that everyone was lying through their teeth about what the real Libor rate was. The reason being that the rates being reported were not including the perceived credit worthiness of some, if not all of the participants. It absolutely was a false market and Barclays were by no means the only ones falsifying it.
Quite what this means for the future is harder to determine. Libor itself as a reference rate would seem to be on its way out. It might take a long time to die but a global benchmark built on manipulable opinions rather than actual reported trades looks unlikely to survive. Other than that, if the authorities, as they obviously did, knew that reported Libor in that depth of the crash was a false market then it does seem very odd that they’re being so hard on everyone now.
Just to emphasise, there are two entirely separate sets of allegations here. The first set, obviously wrong actions but not much greater market impact, the second set, the mutual and consistent downward manipulation, this was hugely important to the wider markets but it’s less obvious that it was the wrong thing to do.
To start from the beginning: there have been two different sets of allegations against Barclays. In the first, that traders within the bank would try and get those who reported rates to the BBA, and thus influenced Libor, to report false rates so that their trading books would benefit. This is clearly wrong, unethical, immoral and we’ll find out soon enough whether it is in fact criminal. What it isn’t though is a huge thing for the wider economy. Firstly, such manipulations would have been up or down depending upon where the specific book was on any one day: it did not lead to continual over or under statement of Libor. Secondly, the amounts by which it was moved, if it ever was, were pretty small, One of two basis points at most is the generally accepted number. Thirdly, it is becoming clearer that Barclays are just the first to get caught, not the only ones indulging in this behaviour. Given that derivatives markets are zero sum, anything gained by Barclays from a rate manipulation was a loss to some other bank. And if other banks are similarly attempting to manipulate Libor there is the delicious possibility that they were all being crooked without actually managing to achieve anything: their various attempts cancelling each other out.
The second set of allegations is that in the depths of the Crash, Barclays deliberately tries to influence Libor down so as to make themselves look less risky. This is where the who knew what when thing comes in. For it’s beginning to look like the regulatory authorities knew very well what was going on:
The 2011 report by the Financial Services Authority into the collapse of Royal Bank of Scotland in early October 2008, three weeks before Tucker’s call with Diamond, makes clear the lender had lost its access to the money markets, noting that the “liquidity run reached extreme proportions”.
“On 7 October, 2008, RBS’s wholesale counterparties, as well as, to a lesser extent, retail depositors, were simply not prepared to meet its funding needs and RBS was left reliant on ELA from the Bank of England,” wrote the FSA.
The reference to ELA, or Emergency Liquidity Assistance, is important as Tucker, unlike the rest of the market at that stage, would have known that the Bank of England had begun providing secret loans, first to crisis-ridden HBOS and then to RBS, that totalled nearly £62bn.
Speaking to the Treasury Select Committee in November 2009, Tucker told the MPs that without the emergency loans it “would have been a lot worse than it would have been” otherwise. “This was a classic lender of last resort operation,” he said.
Records of historic Libor submissions available on Bloomberg show that despite HBOS and RBS being on emergency life support they were both submitting Libor figures that appeared to show they could borrow at cheaper rates in dollars and sterling than Barclays throughout the months leading up to the collapse of Lehman Brothers in September 2008, and in the period afterwards.
To any expert looking at the figures this would have appeared ridiculous, as it suggested banks that were on the brink of bankruptcy were in better shape than banks such as Barclays that insisted they did not have a liquidity problem and were about to raise billions of pounds of funding from Qatari investors.
That’s the heart of it: during the Crash the authorities knew that everyone was lying through their teeth about what the real Libor rate was. The reason being that the rates being reported were not including the perceived credit worthiness of some, if not all of the participants. It absolutely was a false market and Barclays were by no means the only ones falsifying it.
Quite what this means for the future is harder to determine. Libor itself as a reference rate would seem to be on its way out. It might take a long time to die but a global benchmark built on manipulable opinions rather than actual reported trades looks unlikely to survive. Other than that, if the authorities, as they obviously did, knew that reported Libor in that depth of the crash was a false market then it does seem very odd that they’re being so hard on everyone now.
Just to emphasise, there are two entirely separate sets of allegations here. The first set, obviously wrong actions but not much greater market impact, the second set, the mutual and consistent downward manipulation, this was hugely important to the wider markets but it’s less obvious that it was the wrong thing to do.
