Bank of England Governor Mervyn King testified before the House of Commons today about the growing LIBOR scandal, in which bankers are accused of having purposely distorted one of the world’s most important benchmark rates.
Some $500 trillion in assets worldwide are linked directly to the London Interbank Offered Rate (LIBOR), which dictates how much interest you pay on your credit card or home loan to how much money bankers make on complicated derivatives contracts.
The BoE has been accused of knowing about and even condoning banks’ attempts to manipulate that rate—in particular, to drive the costs of interbank lending lower during the financial crisis.
But King’s comments this morning make him appear plain delusional.
Not only did he deny that the Federal Reserve had ever warned him about the possibility that banks could manipulate their submissions and thus the overall rate, he argued that he didn’t even know about any misconduct until two weeks ago.
King is quoted in the Telegraph’s liveblog of his appearance:
“The first I knew of Libor wrongdoing was when the FSA reports came out two weeks ago. The NY Fed did not raise any evidence of wrongdoing with regards to Libor. None of us had any evidence of wrongdoing. Any self-reporting scheme had to have structures to report misreporting, but that doesn’t mean misreporting was going on.”
That’s just ridiculous for two reasons:
Emails exchanged between the NY Fed and the BoE—not to mention documents released by the Fed in the last week—pretty clearly demonstrate concern that LIBOR was being manipulated, whether to signal that a bank was more creditworthy than it actually was or for the financial gain of traders.
Even if the BoE did not have access to some of the Fed’s more detailed documents about LIBOR manipulation, an email exchanged between King and then-NY Fed Governor Timothy Geithner definitely brought up concerns about banks deliberately misreporting the rate:
Eliminate incentive to misreport
If the combination of best practices and audit recommendations above in (1) above seems unlikely to be sufficiently effective in ensuring accurate reporting, a complimentary approach might be to adopt the following process for collecting, calculating, and publishing LIBOR rates. The BBA [British Banking Authority] could collect quotes from all members of the expanded panel, and then randomly select a subset of 16 banks from which the trimmed mean would be calculated. The names and quotes for the 8 banks whose rates are averaged to calculate the LIBOR fixing would be published. The banks’ whose reports fall above or below the midrange would not be publicly identified, nor would the level of their outlying rates. This random sampling from an expanded panel would lessen the likelihood that the market would draw a negative inference regarding a particular bank’s continued absence from the list of published quotes.
There are good reasons that the BoE could have played down deliberate manipulations—we explained last week that the banks’ reasons for pushing down LIBOR submissions at that time were probably the least of central bankers’ concerns. But the idea that King did not interpret Geithner’s emails as showing that banks were making deliberate attempts to adjust LIBOR (for whatever reason) is ludicrous.
King also alleged that the first time he knew that traders had been rigging LIBOR was two weeks ago, when the U.K.’s Financial Services Authority came out with a series of allegations against Barclays. Either this is misleading/false or King has had his head under a rock for the last few years.
Whether or not King actually thought banks were misbehaving, allegations about LIBOR rigging have been coming out for years. Sure, King could have had less proof that it was happening in rates denominated in sterling than it was in, say, rates denominated in yen—true, these are calculated by using the submissions of different banks.
But King should have at least paid enough attention to hear about U.S. and U.K. regulators opening investigations into the subject in 2010 (or at least read articles on the subject in 2011), and kept on top of the pace of allegations when it magnified earlier this year. Was he absolutely certain about it? Maybe not. But the scale of allegations made against banks should have, at the very least, indicated that something shady was most likely taking place.
Did King actually lie in his testimony? That’s unclear. But what he did say suggests that he’s either unable to face the facts or that he has been remiss at doing his job.
NOW READ: How Barclays Made Money On LIBOR Manipulation >