The Federal Reserve Bank of New York became aware that Barclays Plc was underreporting borrowing costs for the London interbank offered rate in April 2008, according to documents released after U.S. lawmakers demanded information about the rate-rigging scandal.
A Barclays employee explained to a New York Fed staff member that the bank “was underreporting its rate to avoid the stigma associated with being an outlier with respect to its LIBOR submissions, relative to other participating banks,” the New York Fed said in a statement posted today on its website. The person “also stated that in his opinion other participating banks were also under-reporting their LIBOR submissions.”
Members of Congress are seeking information from U.S. regulators about the scandal that led to Barclays being fined a record 290 million pounds ($451 million) and cost Chief Executive Officer Robert Diamond his job. At least a dozen banks are being investigated for manipulating Libor, the global benchmark for $360 trillion of securities.
Treasury Secretary Timothy F. Geithner, who headed the New York Fed at the time, and Fed Chairman Ben S. Bernanke will be questioned about Libor at regularly scheduled Congressional hearings this month. Senate Banking Committee Chairman Tim Johnson, a South Dakota Democrat, said July 10 he is “concerned by the growing allegations of potential widespread manipulation of Libor and similar interbank rates.”
“They are going to have a very difficult audience” on Capitol Hill, said Karen Shaw Petrou, a managing partner at Federal Financial Analytics, a Washington research firm. “It’s going to be ‘What did you know, when did you know it, and why didn’t you do anything about it?’”
Petrou said lawmakers are unlikely to be satisfied by a memo showing that Geithner recommended changes to the way Libor rates are calculated to Bank of England Governor Mervyn King in June 2008.
The U.S. Office of the Comptroller of the Currency said today it became aware of potential problems with the Libor rate-setting process in 2007 and “reached out to British authorities at the time,” according to an agency spokesman.
“We met with the British Bankers Association and the FSA, which already had work underway on the integrity of the Libor rate-setting process,” Bob Garsson, a spokesman for the OCC, said in a telephone interview today, referring to the U.K. Financial Services Authority.
The New York Fed released the documents in response to a request from Representative Randy Neugebauer, a Texas Republican who serves on the House Financial Services Committee, for transcripts of communications with Barclays relating to setting Libor from August 2007 to November 2009.
“Any manipulation of this rate is of serious concern,” Neugebauer said in an e-mailed statement today. “We’ll continue looking into this matter to determine who was involved in this practice and whether it could have been prevented by regulators.”
Twelve Democratic senators, including Jack Reed of Rhode Island and Carl Levin of Michigan, yesterday sent a letter to Geithner and Attorney General Eric Holder asking for an examination of “allegations that U.S. and foreign bank regulators may have been aware of this wrongdoing for years.”
Geithner’s recommendations on Libor were passed along to the British Bankers’ Association by King and Paul Tucker, at the time markets director of the U.K. central bank, according to correspondence released by the Bank of England today.
Memo to King
Geithner wanted procedures to prevent “misreporting,” and the BBA, which was reviewing Libor, said it would take the recommendations on board. He sent the memo to King after the two discussed Libor at a meeting of central bankers in Basel, Switzerland, the previous month. Geithner was succeeded by William C. Dudley at the New York Fed in January 2009.
“Today’s revelation is stunning,” Representative Dennis Kucinich, a Democrat of Ohio, said in a statement. “Not only did banks knowingly and intentionally manipulate a bedrock of financial markets, but government regulators in both the United States and the United Kingdom knew about the manipulation and only offered a couple of suggestions to improve the system.”
Geithner’s recommendations included one to “establish and publish best practices for calculating and reporting rates, including procedures designed to prevent accidental or deliberate misreporting.” King forwarded Geithner’s message to Tucker, who shared them with Angela Knight. She was then the chief executive officer of the BBA, the lobby group which coordinates Libor.
“As is clear from the work culminating in the report to Mr. King of the Bank of England, the New York Fed helped to identify problems related to Libor and press the relevant authorities in the UK to reform this London-based rate,” the New York Fed said in the statement today.
Libor is calculated from a daily survey carried out for the British Bankers’ Association, in which the world’s biggest lenders are asked the rate they’re charged to borrow over a variety of short-term maturities in currencies including dollars, euros and yen. Banks are accused of low-balling submissions for the benchmark during the financial crisis.
“It is fair to believe that, if one bank did this to allay market concerns of their risk, that other firms coming under market pressure may have also done the same,” said Joshua Rosner, managing director at research firm Graham Fisher & Co. in New York.