Bank of England Deputy Governor Paul Tucker said the Libor investigation unveiled a “cesspit” in the City of London and called for regulators to scrutinize all benchmarks that aren’t based on real transactions.
“I can’t be confident about anything after learning about this, this cesspit,” Tucker told British lawmakers in the House of Commons Treasury Select Committee today.
Tucker’s testimony follows the record 290 million-pound ($450 million) fine imposed on Barclays Plc last month for the attempted manipulation of the London interbank offered rate, the benchmark for more than $360 trillion of securities. The scandal has cost the jobs of three top Barclays executives, including Chief Executive Officer Robert Diamond, and risked Tucker’s position as the front-runner to replace Mervyn King as governor of the Bank of England.
“As well as looking at Libor, they should look at every single index that isn’t based on real transactions, where participants in the market have to self-certify,” Tucker said. “That plainly doesn’t work.”
Tucker said he was unaware that banks may have been manipulating the benchmark before 2008. Barclays said in its settlement with regulators last month that its traders rigged Libor as early as 2005.
“We were not aware of allegations of dishonesty,” he said. He thought “these money markets are not working, they are dysfunctional,” Tucker said.
The Bank of England used Libor to price fees for its Special Liquidity Scheme in 2008, something he “would not have dreamed of” doing “had we doubts about lowballing,” he said. The Bank of England’s Special Liquidity Scheme was introduced at the peak of the credit crisis to allow banks to swap hard-to-trade mortgage-backed securities for government bonds.
“Even if they have been completely clean over that period, self-certification is plainly open to abuse and so it could occur elsewhere,” he said.