“The world’s most important number”! “The Greatest scam in financial history”! Books about Libor rigging such as “The Fix” or “The Spider Network” try hard – maybe too hard – as they ram home the message of the benchmark’s importance.
Yet the real story about Libor in the criminal courts has been what wasn’t discussed. At the behest of prosecutors, the period over which the crimes occurred cuts off just before things got interesting in the financial crisis. Before summer 2007, Libor rigging was virtually inconsequential. Despite the best efforts of civil lawyers, no victims could be identified.
The alleged criminals – traders, submitters and brokers – were easy to identify because of their copious self-incriminating messages. Yet the senior bankers who set up the system where it was acceptable for swaps desks to pepper submitters with requests remained invisible, other than when they claimed ignorance in court.
Remarkably, this is a period in which the ‘greatest scams in financial history’ were really taking place: the subprime bubble, an orgy of mis-selling of structured products and derivatives, and banks misstating their financial health to investors. Almost no-one was prosecuted for this, so Libor rigging conveniently filled a gap.
Fining banks $9.5 billion for Libor misconduct was one thing. But here were bankers like former UBS trader Tom Hayes who admitted their dishonesty! As Hayes showed, the UK Serious Fraud Office had a good strategy, if you ignored a few things.
There were Hayes’ catastrophic legal blunders, admitting guilt in a crime that had not yet been tested legally. There was a ‘hanging judge’, willing to put his thumb on the scale and prevent the jury from hearing perfectly sound arguments. David Enrich’s ‘The Spider Network’ is particularly good on this.
It worked up to the point of Hayes conviction, became suspect after the broker trial collapsed, and after the recent acquittals of Barclays traders looks completely threadbare.
But it took the BBC’s Panorama documentary to show things in the correct light. Libor became interesting after the onset of the crisis. Taken at face value, it was the unsecured borrowing rate between banks and suddenly became a key bellwether of systemic health.
For the Bank of England’s Paul Tucker, whose knowledge of market mechanisms was particularly deep, Libor’s subjectivity provided an opening. Since a bank’s submitted Libor rate was only an opinion about where it thought it could borrow, the submission was really a question of optimism or pessimism.
In the same way that central banks attempt to guide peoples’ expectations of future inflation without actually having to change bank rates, Tucker saw Libor as a way of improving perceptions of UK bank health without the need for emergency measures. Court documents suggest he was asking banks to ‘lowball’ as early as September 2007.
Now fast forward to the 29th October 2008, when Tucker phoned Bob Diamond at Barclays. As Panorama revealed, his request to Barclays to lower its Libor submissions had a dramatic effect. Recordings show that senior bankers ordered submitters to manipulate the rate, and also that Barclays made a killing by front-running the move using an internal hedge fund.
In my work for the programme, I looked at three-month sterling Libor in 2008. Before Tucker’s call, Barclays submission was the third highest among the 16 panel banks, as measured by deviation from the average Libor rate. After the call, Barclays was the third lowest (see chart).
While we don’t know which other banks Tucker phoned around that time, the context suggests he may have been uniquely interested in Barclays. The call happened just two weeks after the UK government pumped £37 billion of equity into RBS and Lloyds Banking Group. The Bank of England was providing hundreds of billions of emergency liquidity and credit guarantees.
At this point, Barclays was deeply undercapitalised, and the UK Treasury was putting the bank under pressure to accept a bailout. In the same way that JP Morgan and Wells Fargo agreed to accept US bailout money that they didn’t really need, this would shift the focus away from the weakest institutions.
Within the Bank of England, this HM Treasury pressure was the latest offensive in a longstanding turf war. Ever since Northern Rock, governor Mervyn King had a testy relationship with Gordon Brown and Alistair Darling, and was fiercely opposed to attempts to curtail the Bank’s supervisory role.
Tucker’s call to Diamond may have been a warning that unless Barclays lowered its Libor rate, its independence would be curtailed, and the Bank of England’s independence too. Whether Tucker was conveying a message from King, or elsewhere in government, the move worked. Barclays’ abruptly lower Libor rate bought it time to line up its controversial capital-raising in the Gulf a month later.
In the ‘whatever it takes’ mood of the time, the possibility that this would be perceived as dishonest by outsiders was swept aside. But what seemed expedient in October 2008 looks grave now that junior bankers are being imprisoned for far more trivial degrees of market manipulation. And can senior bankers be prosecuted for doing the bidding of the Bank of England? How could the government pay the SFO to prosecute these people, when its own role in manipulating Libor had never been discussed?
