By Martin Kelly
A second British bank has been implicated in the Libor rate rigging scandal after explosive documents were released by US authorities late Friday evening.
Official records released by the Federal Reserve of New York suggest that Lloyds group may have been involved in rigging the Libor rate as early as August 2007.
The records show a Federal Reserve official was warned on August 2007 that Libor rates, including a submission from Lloyds, look “too low”.
“Today’s USD libors have come out and they look too low to me. Lloyds for instance has printed 5.48% for 3 months. Probably the lowest rate you could attract liquidity in threes would be 5.55%,” the Barclays trader says.
The warning, from a Barclays’ whistleblower, contains an explanation as to why the rates are suspiciously low and instructs the official to “draw your own conclusions” as to the reasons, he concludes.
The release of the files, gathered as a result of US investigations into Libor rate rigging, comes less than a day after it emerged Bank of England Head, Sir Mervyn King, was warned about rate rigging in 2008.
Emails released in New York showed that former Fed Chief Tim Geithner wrote to the Governor of the Bank of England in 2008, warning him about the risk of “deliberate misreporting” of Libor.
In the correspondence, Mr Geithner called for an overhaul of the British Bankers’ Association saying: “To improve the integrity and transparency of the rate-setting process, we recommend the BBA work with Libor panel banks to establish and publish best practices for calculating and reporting rates, including procedures designed to prevent accidental or deliberate misreporting,”
Sir Mervyn responded, saying that the recommendations “seem sensible to us”. The BoE chief said he had passed the note to his deputy Paul Tucker, and asked him to talk to Bill Dudley, a senior executive at the US Federal Reserve, and the BBA.
Mr Tucker, giving evidence to the Commons Treasury Select Committee last week denied knowing about the extent of Libor rate rigging, saying only that he believed there was a general problem.
Mr Tucker told the committee that he was “not aware of allegations of low-balling until the last few weeks”.
Failing to mention the memo from Sir Mervyn King, Mr Tucker told MPs: “People became concerned in the United States in the spring of 2008 about where dollar Libor was relative to where dollars could be borrowed in New York, and this did concern people and we heard about it. There was chatter about it.”
However, the evidence shows that the New York Fed gathered a mass of information about Libor rigging from sources inside Barclays in 2007 and 2008. On April 11, 2008, one Barclays trader told Fabiola Ravazzola, a New York Fed official: “So, we know that we’re not posting, um, an honest Libor… And yet and yet we are doing it, because, um, if we didn’t do it, it draws, um, unwanted attention on ourselves.”
Commenting on the latest twist in the scandal, the SNP’s Treasury spokesperson Stewart Hosie MP questioned why UK authorities did not launch their own investigations earlier.
Mr Hosie said:
“Reports that Timothy Geithner pressed the Bank of England to make changes in the way Libor was set in 2008 escalate the questions over who knew what and why action was not taken earlier on the rate-rigging scandal.
“It is clear that problems with Libor – reported in the FT in September 2007 – were no secret in City circles yet we are supposed to believe that nobody in Downing Street at the time or the FSA knew what was going on.
“We need to know how detailed the discussions were between Central Banks, between the regulators at the FSA and their US counterparts, as well as between Ministers and Officials at the Treasury. These are exactly the questions that we need to get to the bottom of.
“This is exactly why the SNP wanted an independent judge led and wide-reaching inquiry to root out the issues and bring all parties involved to account.”
Libor is short for the London Interbank Offered Rate, a measure of the cost of borrowing between banks and a crucial benchmark for interest rates worldwide. Libor is the world’s most important benchmark for interest rates. Roughly £6.4 trillion in loans – including credit card rates, car loans, student loans and adjustable-rate mortgages – as well as some £220 trillion in derivatives are tied to Libor.