Lie-bor, We Knew This Years Ago

The Wall Street Journal – Barclays Notes Suggest Government Pressure on Libor
The unfolding rate-fixing scandal at Barclays PLC took an unexpected turn on Tuesday when the British bank made public 2008 notes by now-resigned Chief Executive Robert Diamond suggesting that an official from the Bank of England, under pressure from the U.K. government, may have set off the chain of events that led the bank to lower its submission for calculating an important benchmark lending rate. Barclays published a raft of documents on its web site in advance of a Parliamentary hearing scheduled for Wednesday on the rate-manipulation scandal. One of the documents is Mr. Diamond’s Oct. 29, 2008 notes of a call between himself and Paul Tucker, a Bank of England financial stability official, in which the men discuss Barclays’ relatively high submissions of the bank’s borrowing rate, one figure used to calculated the key benchmark London Interbank Offered Rate, or Libor…By Mr. Diamond’s account, Mr. Tucker told him 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.” After Mr. Diamond explained the bank’s pricing, he says Mr. Tucker reiterated that the calls he was receiving from the government were “senior” and added that “while [Mr. Tucker] 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.”

The Wall Street Journal – Rate Scandal Set to Spread
Former Barclays CEO Lambasted in Parliament as Other Banks Brace for Fallout
A day after abruptly resigning amid a mushrooming scandal over interest-rate manipulation, former Barclays PLC chief Robert Diamond on Wednesday was assailed by British lawmakers for the bank’s actions, in a preview of the scrutiny likely to lie ahead for other big lenders that are under investigation. Barclays last week agreed to pay $453 million to settle U.S. and British authorities’ allegations that the British bank tried to manipulate the London interbank offered rate, or Libor, which is the benchmark for interest rates on trillions of dollars of loans to individuals and businesses around the world.

The New York Times – Barclays Not Alone in Making Claims on Rate, Diamond Says
The former boss of Barclays, who lost his job over a financial market-fixing scandal, said Wednesday that a Bank of England official had not encouraged him to report false data at the height of the credit crunch in 2008. Bob Diamond, who resigned as chief executive a day earlier, was grilled by a parliamentary committee about his conversation with Paul Tucker, deputy governor of the Bank of England, on Oct. 29, 2008. That conversation, disclosed Tuesday by Barclays, has become the focus of questions about the false data submitted by Barclays between 2005 and 2009 which last week drew a fine of $453 million by U.S. and British agencies.

The Daily Mail (UK) – The phone-call that ‘led to rate-rigging’: Barclays release details of conversation with Bank of England man
The email is dated 30 October 2008 and was sent by Mr Diamond to then Chairman John Varley and Jerry del Messier, who today stepped down from the position of chief operating officer. In it, Mr Diamond explains that Mr Tucker had told him that he had received calls from ‘senior figures within Whitehall’ who had expressed concern about the high rates being reported by Barclays and wanted them lowered. The email reports that Mr Diamond asked Mr Tucker to explain to the Whitehall figures his belief that other banks were submitting Libor rates lower than their actual transactions, which had the effect of making Barclays appear out of step.

Reuters – Hugh Dixon:  What if Barclays hadn’t lowered Libor submissions?
What if Barclays hadn’t lowered Libor submissions? The bank certainly reduced its vulnerability by submitting lower rates in the midst of the crisis. But what would honesty have cost? Would Barclays have secured funds from Middle East investors, avoided nationalisation and protected its bosses’ bonuses? No one knows, but the timeline is suggestive. After Lehman Brothers went bust in September 2008, most smart market participants realised that the published Libor rate was not giving an accurate picture of borrowing costs. The UK government also knew this and was keeping a tab on the health of Britain’s banks by looking at other measures. So it’s possible that Barclays’ decision to cut its Libor submissions at three key moments in the autumn of 2008 had no effect on the course of history. However, it is clear that Barclays was worried about being seen to be an outlier – as a result of submitting rates at which it thought it could borrow that were higher than the competition’s. The government also appears to have asked questions about this, indicating that it might have been concerned. What’s more, there were good reasons for anxiety. The whole financial world was blowing up while Barclays itself was gobbling up part of the Lehman Brothers carcass.

Bloomberg.com – Diamond Says Rivals Lowballed Libor, Blames Regulators
Robert Diamond, who quit this week as chief executive officer of Barclays Plc (BARC), sought to blame other banks for misleading markets about their ability to borrow and regulators for turning a blind eye. Ordered to testify to British lawmakers after Barclays agreed to pay a record 290-million-pound ($455 million) fine for rigging the London interbank offered rate, Diamond said yesterday he was “disappointed” regulators failed to act on repeated warnings from Barclays that competitors had lowballed their submissions. Legislators challenged him on why he took so long to uncover his own firm’s attempts to manipulate the rate. “This isn’t just Barclays,” Diamond, 60, told lawmakers at a three-hour hearing of Parliament’s Treasury Select Committee. “Throughout 2007 and 2008, no institution of the 16 banks reporting three-month dollar Libor was at the higher end more consistently than Barclays. Barclays was getting questions about why it was always high and we were saying, ‘We are high because we were reporting at where we were borrowing money.”’

Comment

Over the last week the the market has been stunned by news that Barclays rigged LIBOR.  Further, traders are shocked that others might have done the same with the approval of regulators.

None of this is new:

September 26, 2007:  The Financial Times – Gillian Tett: Libor’s value is called into question
One of these is a growing divergence in the rates that different banks have been quoting to borrow and lend money between themselves. For although the banks used to move in a pack, quoting rates that were almost identical, this pattern broke down a couple of months ago – and by the middle of this month the gap between these quotes had sometimes risen to almost 10 basis points for three month sterling funds. Moreover, this pattern is not confined to the dollar market alone: in the yen, euro and sterling markets a similar dispersion has emerged. However, the second, more pernicious trend is that as banks have hoarded liquidity this summer, some have been refusing to conduct trades at all at the official, “posted” rates, even when these rates have been displayed on Reuters.

April 16, 2008:  The Wall Street Journal – Bankers Cast Doubt On Key Rate Amid Crisis
The concern: Some banks don’t want to report the high rates they’re paying for short-term loans because they don’t want to tip off the market that they’re desperate for cash. The Libor system depends on banks to tell the truth about their borrowing rates. Fibbing by banks could mean that millions of borrowers around the world are paying artificially low rates on their loans. That’s good for borrowers, but could be very bad for the banks and other financial institutions that lend to them.

May 2, 2008:  The Wall Street Journal – Libor’s Guardian Bristles At Bid for Alternative Rate
The group that oversees a widely used interest rate fired back Thursday at an effort to introduce an alternative to the rate, known as the London interbank offered rate, or Libor. In recent weeks, the British Bankers’ Association, which calculates Libor, has faced questions about the accuracy of the rates that a 16-bank panel submits to reflect their dollar-denominated borrowing costs. The group said a review of how Libor is calculated “is due to report shortly,” though it declined to offer an exact date. It also noted that any substitute for Libor — which is supposed to reflect the rates at which banks make short-term loans to one another — would have to meet high standards to “win the market’s confidence.” On Wednesday, ICAP PLC, a London broker-dealer with offices in New York, said it plans to launch a new measure of the rates at which banks borrow dollars. ICAP expects to begin publishing the rate, known as the New York Funding Rate, or NYFR, as soon as next week, said Lou Crandall, chief economist at Wrightson ICAP, a New Jersey research firm that is part of the ICAP group. Mr. Crandall said NYFR isn’t intended to replace Libor.

September 24, 2008The Wall Street Journal:  Libor’s Accuracy Becomes Issue Again
Questions on Reliability of Interest Rate Rise Amid Central Banks’ Liquidity Push
Earlier this year, Libor appeared to be sending false signals. Banks complained to the BBA that rival banks might not be reporting their true borrowing costs because they didn’t want to admit that others were treating them as if they had troubles. That led to a BBA review and the pledge that the rates banks contribute would be better policed. Every morning, 16 banks submit borrowing rates in a process that produces Libor rates at lunchtime in London.

October 20, 2008:  The Wall Street Journal – Bank-Lending Boost Could Spur Thaw
On Friday, three big banks led by J.P. Morgan Chase & Co. made multibillion-dollar offers of three-month funds to European counterparts, causing an immediate stir in the shriveled markets for unsecured lending. That raised expectations that lenders would finally open their doors and businesses would be able to borrow again, removing one of the biggest stresses on the global economy.

In the story above (October 20, 2008), JP Morgan, a two trillion dollar bank, made $10 to $15 billion of LIBOR loans to other multi-trillion dollar banks and then proudly announced that LIBOR rates had fallen, the market was thawing and the credit crisis was easing.  As we wrote in 2008, this was nothing short of rigging the market.

Sum it up and all the revelations we are reading about this week were already evident about four years ago.  None of should be surprising.  As Jean-Claude Juncker told us last year, “when it becomes serious, you have to lie.”

As a result of years of lying, inter-bank lending, as the chart below shows, is disappearing.  To be clear, the chart below is not a chart of LIBOR volume.  It is a chart of U.S.-based inter-bank lending.  Because it is similar to LIBOR, which measures London-based unsecured inter-bank lending, we believe it is a good proxy for LIBOR volumes.

Without a vibrant inter-bank market, the financial system cannot return to normal. How does the inter-bank market come back short of central banks cutting off the banks from liquidity and forcing these loans back in a chaotic way?

Click to enlarge:

Source: Bianco Research

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