King Defends BOE Libor Role After Scrutiny on Geithner Memo
King told Parliament’s Treasury Committee today in London that the e-mail sent by the then president of the Federal Reserve Bank of New York included recommendations rather than allegations at a time when global regulators were expressing concern on the quality of the borrowing benchmark.
“Mr. Geithner was sending that to us as a suggestion for how these rules should be constructed and we agreed with him, but neither of us had evidence of wrongdoing,” King said. “The first I knew of any alleged wrongdoing was when the reports came out two weeks ago.”
King and Financial Services Authority Chairman Adair Turner faced repeated questioning today on Libor and their roles in the resignation of former Barclays Plc (BARC) Chief Executive Officer Robert Diamond. At risk is the Bank of England’s reputation as the guardian of London’s financial district at time when the government is preparing to put it in charge of regulation.
The Bank of England initially became embroiled in the scandal over an October 2008 phone call between Diamond and Paul Tucker, at the time markets director at the central bank. A memo by Diamond of the call suggested Tucker might have hinted that Barclays could lowball its Libor submissions.
Correspondence released today included a congratulatory e- mail from Diamond in December 2008, when Tucker was promoted to Bank of England deputy governor.
“Congratulations Well done, man. I am really, really proud of you. Talk soon. Bob.” Tucker’s response is: “Thanks so much Bob. You’ve been an absolute brick through this. Paul.”
“Have spoken to HSBC and RBS,” Tucker wrote to Diamond in an e-mail sent on May 28, 2008. “Sense similar across all three of you. I encouraged contact among Mark Dearlove peer group.”
Dearlove was head of Barclays’s money market desk at the time and responsible for the bank’s Libor submissions. Tucker said today the correspondence related to his desire for banks to participate in a comprehensive review of Libor by the British Bankers Association “at a more senior level.”
Barclays was fined 290 million pounds ($453 million) last month for its involvement in manipulation of Libor, a benchmark for $500 trillion of financial products. In addition to Diamond, Chairman Marcus Agius and Chief Operating Officer Jerry del Missier also resigned after the fine.
Lawmakers quizzed King and Turner on how explicit they were in demanding Diamond’s resignation.
Turner said he didn’t give an “instruction or direction” to Agius about Diamond, but told the chairman he would have to think about the CEO’s “brand” and “whether he was the right person” to lead necessary change at the bank. King said he wanted Agius to tell the bank’s board about “the depths of concerns that the regulators had about the executive management of the bank.”
“What had happened over many months was that the board of Barclays had been in something of a state of denial,” King said. He said he encouraged Agius and the board to “go away and reflect” on the concerns of regulators.
“I did not know what the outcome of that meeting would be,” King said. Diamond resigned afterwards as CEO.
Treasury Committee Chairman Andrew Tyrie said in a statement after the hearing that regulators “should not be able to bring arbitrary pressure to bear on the boards of private companies.”
“It appears that governance checks need bolstering,” he said, adding that the Financial Services Bill that will give the Bank of England new powers “must rectify this deficiency.”
Questioned on Geithner’s e-mail, King said he received it one evening while on a visit to Frankfurt, and he forwarded it to Tucker. Geithner, who is now the U.S. Treasury secretary, sent the memo to King on June 1, 2008, after the two discussed Libor at a meeting of central bankers in Basel, Switzerland, the previous month.
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.”
Tucker passed the comments to Angela Knight, then the CEO of the BBA, according to correspondence released by the Bank of England last week. The BBA, which is responsible for Libor and was reviewing the benchmark at the time, said it would take the recommendations on board. King said the association needed encouragement to address Libor concerns.
“They did have to be nudged to get into the right direction, but once they had been nudged they worked very hard,” he said. “I don’t believe the BBA could possibly be held responsible for monitoring whether the rate was 1 basis point too high or too low.”
All of Geithner’s recommendations were in the BBA’s consultation document on Libor, though some were eliminated because “the players in the market felt they were not practicable,” King said. Some of the proposals were in the reforms that followed the consultation, and “at no stage after that did the New York Fed or any other central bank or player express any concern about the final outcome.”
King told lawmakers that it was quite understandable for Geithner to show concern on the quality of Libor as a global borrowing benchmark because of the New York Fed’s role as a regulator. The Bank of England didn’t have such responsibilities at the time, he said.
Parliament is currently considering a bill that would expand the Bank of England’s powers beyond monetary policy, including giving it authority over macro prudential tools and banking supervision to help prevent another financial crisis.
To contact the editor responsible for this story: Craig Stirling at email@example.com