Former Barclays CEO Drops A Bombshell When He Reports He Was Encouraged By Government Official To Fix Libor Rate
I was listening to more about this Libor scandal on Sam Seder yesterday, and Taibbi was talking to Sam about a meeting with Hank Paulson and the heads of all the other banks (except Bear Stearns) meeting in Moscow in 2008. As Taibbi points out, it's a little strange and certainly makes you wonder if Libor rates weren't being manipulated here in the U.S. as well. However, if all of them were in on it, that would mean our only recourse is to either nationalize all the banks, or hit them with huge fines - neither of which would benefit the economy (see "too big too fail"). But no matter how this turns out, this story is a really big deal:
Former Barclays CEO Bob Diamond is testifying before parliament in London today, and that's sure to bring some shocking moments. But there's already been one huge stunner. In advance of that testimony, Barclays released an email from October 29, 2008, written by Diamond to then-Chairman John Varley and COO Jerry del Messier (who also stepped down yesterday). The email from the CEO to the other two senior Barclays execs purports to detail the content of the conversation Diamond had with Bank of England deputy governor Paul Tucker that same day.
In the email, Diamond essentially tells the other two execs that he has been given permission by Tucker – encouraged, actually – to rig Libor rates downward. What’s even worse is that Diamond’s email suggests that Tucker was only following orders, i.e. that Tucker had received phone calls from "a number of senior figures within Whitehall" – that is, the British government – expressing concern about Barclays' high Libor rates. Tucker in this version of events was acting as a middleman for the British government, telling Diamond to fake his borrowing rates in order to preserve the appearance of financial stability, for the good of Queen and country as it were.
Again: Libor, the London Interbank Exchange Rate, is the rate at which banks borrow from each other. A huge percentage of the world’s variable-rate investments are pegged to Libor. When Libor rates are high, it suggests that the banks’ confidence in each other is low, and high Libor rates are generally an indicator of shaky financial health among the banks. If the banks manipulated Libor, they did it to make themselves look healthier, but this had the consequence of affecting hundreds of trillions of dollars’ worth of financial products worldwide.
During the crash of 2008, governments understandably would have been concerned about high Libor rates – high rates and a lack of confidence in banks threatened economic stability – but the notion that governments would have encouraged banks to fake those rates would have been beyond unthinkable even a decade ago.
Back to the email. Diamond’s version of the conversation with Tucker, if true, is mind-blowing. To paraphrase, Diamond said that Tucker started off by asking Diamond why other banks were reporting such low borrowing rates relative to Barclays.
Diamond apparently deadpanned that his bank’s problem was that it was reporting the real numbers, while all the other banks were lying. "I asked [Tucker] if he could relay the reality, that not all banks were providing quotes at the levels that represented real transaction," Diamond wrote.
Tucker then steered Diamond to crime using the painfully oblique manner of an English gentleman trying to engage a prostitute without using any dirty words. He told Diamond that "while he was certain [Barclays] did not need advice,” the bank did not necessarily need to report such high rates all the time. Tucker put it this way: “It did not always need to be the case that [Barclays] appeared as high as [it has] recently."
This email amazes for a few reasons. One, it suggests that Barclays, which is currently carrying the standard in the LIBOR-manipulation scandal, was actually bringing up the rear -- that all of the other banks were in on it, and Barclays only attracted the government's notice because they were last.
The second is the apparent revelation that Tucker was acting on orders, or at least suggestions, from Whitehall. If nothing else, this is an awesome piece of political jungle defense by Diamond, tossing a hand-grenade into the seat of Her Majesty's government minutes before he's supposed to be grilled by parliament. This revelation is almost certain to inspire an Aldrich-Ames-style manhunt for the Whitehall figures responsible for this alleged communication to Tucker. And if this turns out to be true? Wow.