Seven Banks Under U.K. Libor Investigation as FSA Criticized

Seven Banks Under U.K. Libor Investigation as FSA Criticized
The Financial Services Authority headquarters in the Canary Wharf business district of London. Photographer: Simon Dawson/Bloomberg

The U.K. financial regulator said it’s investigating seven lenders over attempts to manipulate interbank offered rates as lawmakers criticized it for not opening the probe earlier.

The regulator didn’t pay attention to warning signs or react fast enough to reports of problems with Libor rates, lawmaker George Mudie told Financial Services Authority Chairman Adair Turner.

The FSA investigation, which led to a record $453 million fine last month against Barclays Plc by U.K. and U.S. authorities, wasn’t opened until 2010, despite press reports and submissions from bank employees that the London interbank offered rate was being manipulated as early as 2007.

“This was under-regulated,” Mudie, a member of the opposition Labour party, said at a hearing of Parliament’s Treasury Select Committee yesterday in London. “You were warned about it and warned about it.”

The FSA is now investigating seven banks on suspicion of submitting false interest rates, and regulators in other countries are looking into additional lenders, Tracey McDermott, the regulator’s acting head of enforcement, told the panel, without identifying any of the firms. The FSA is seeking to levy more civil fines, she said.

Royal Bank of Scotland Group Plc, UBS AG, Lloyds Banking Group Plc and Deutsche Bank AG are among the lenders regulators in Europe, Asia and the U.S. are investigating.

False Rates

Turner said Barclays employees who contacted them “weren’t being entirely honest” when discussing problems with setting Libor. Barclays employees talked about “dislocations” in the benchmark and didn’t say that anyone was submitting false rates, Turner told the Treasury Select Committee.

The reports only reached the junior level and weren’t escalated to senior management, he said. He has asked the regulator’s internal audit department to review any contact with Barclays to determine whether the agency missed red flags on Libor.

“I think we should have spotted it earlier,” Turner said. “There was a failure in general to see this whole financial crisis coming.”

The first time Turner was notified was in November 2009, when the FSA’s then-Chief Executive Officer Hector Sants told him about the case they were working on with the U.S. Commodity Futures Trading Commission.

Geithner Warning

Timothy F. Geithner, then the head of the New York Federal Reserve bank, in June 2008 warned the Bank of England that the method used to set the London interbank offered rate was open to abuse.

U.K. fraud prosecutors didn’t begin a criminal investigation until last week, though they were kept informed of the regulator’s probe, McDermott said.

Barclays traders involved in allegedly manipulating Libor rates between 2005 and 2007 may be charged by U.S. prosecutors before the Labor Day holiday on Sept. 3, said a person familiar with the Justice Department investigation in Washington.

Turner and Andrew Bailey, the regulator’s head of banking supervision, said the cultural issues at London-based Barclays came from the “tone at the top,” including former CEO Robert Diamond.

Officials at the Bank of England’s Financial Policy Committee, which includes Governor Mervyn King, put pressure on the FSA to crack down on “aggressive” behavior at Barclays, according to a board meeting summary dated Feb. 9 published by lawmakers yesterday.

Barclays Letter

Members of the committee, including Turner and Paul Tucker, deputy governor of the central bank, are testifying to the same panel of lawmakers today on a report into U.K. financial stability.

Barclays was warned by Turner in an April letter to Chairman Marcus Agius that it aggressively interpreted rules, took advantage of complex structures and submitted misleading estimates of capital levels.

Turner said the letter was the only one of its kind he has written to a bank chairman and was meant to drive home the message that the bank was “gaming the system.”

Jerry del Missier, Barclays’s former chief operating officer, told the same group of lawmakers yesterday that Diamond instructed him to submit artificially low Libor rates, and blamed compliance managers for failing to act. Del Missier, 50, said Diamond told him those instructions came from the Bank of England, which he then passed along to Mark Dearlove, the head of the bank’s money-markets desk.

Derivative Benefits

The FSA also found in its investigation of Barclays that its derivatives traders were colluding with other banks to submit false rates in order to benefit their own positions.

“It’s worthwhile saying that what was going on in ’05, ’07 was not something that anyone, including the CFTC, expected” when they began their investigation, Turner said. “The derivatives trader is not asking the submitter to change his submission on a note that he believes is hidden but by shouting it across the floor, and that indicates that there is something deeply wrong with the culture.”

Turner said it hadn’t occurred to him before 2009 that the rate was something that could be manipulated.

Confidence in Libor, a benchmark for financial products valued at $500 trillion worldwide, has been dented by Barclays’s admission that it submitted false rates. Diamond, who resigned as Barclays’ CEO after the bank was fined, told the committee this month that other banks low-balled submissions.

“Members are increasingly wondering how such a large industry has been allowed to grow up on such a finger-in-the-wind number,” Steve Baker, a U.K. Conservative lawmaker who isn’t a member of the Treasury Select Committee, said in a telephone interview after yesterday’s hearing.

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