SNP welcomes banking inquiry as records show LIBOR warnings ignored in 2007

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By Martin Kelly

The SNP has offered a cautious welcome to the announcement of a joint parliamentary inquiry into standards in banking by Chancellor George Osborne today.

However the nationalists have said a full and open public inquiry would guarantee the accountability of Labour Ministers in office at the time of the LIBOR fixing scandal.

The SNP last week called for the Treasury Select Committee to be allowed to conduct an immediate investigation without ruling out the benefits of a broader public inquiry.

The party also published yesterday a list of ten questions relating to Labour’s period in office which they say should be answered in the interests of a transparent and open investigation into the banking industry.

The renewed calls for answers from Labour follows documents that show officials from the Bank of England and the FSA ignored several warnings that rigging was taking place.  According to UK and US government records, the UK authorities were told at least five times that there were problems in the way the LIBOR rate was being set.

The earliest of these warnings was in Autumn 2007 at a meeting attended by eight Bank of England officials including Paul Tucker, and a representative from the FSA as well as executives from the world’s biggest banks.  Also present was an official from the British Bankers’ Association – the body charged with overseeing LIBOR.

According to the Chicago Tribune, minutes of the meeting show that LIBOR rates were discussed and it was noted that the rates were lower than actual bank borrowing rates.  According to the paper, the minutes noted, “Libor indices needed to be of the highest quality given their important role as a benchmark.”

The paper says:

A review of meetings held by a UK financial industry group, along with regulatory documents filed last week in the U.S. and UK, show how questions about Libor were debated quietly, out of public view, for years even as banks allegedly manipulated the rate for profits or to mask ailing financial health.

According to the FSA, “individuals at Barclays raised concerns with the FSA, the Bank of England, the Federal Reserve Bank of New York and the BBA about the accuracy of Libor submissions.”

A spokesman for the New York Fed declined comment.

According to people familiar with the matter, one chat was between Barclays Chief Executive Bob Diamond and Tucker, who is seen as a candidate to become BoE governor next year, and who was executive director for markets from 2002 to 2009.

In October 29 2008 at the height of the financial crisis, Mr Tucker had a telephone conversation with Mr Diamond regarding the high level of Barclays’ Libor submissions.  The FSA report judged that “no instruction for Barclays to lower its LIBOR submissions was given during this telephone conversation”.

In an added twist, it has emerged that current bank of England Chief Sir Mervyn King admitted that the LIBOR rate was not a true reflection of the rate at which banks lent to one another.

Speaking in front of a House of Commons Treasury Committee in November 2008, Mr King said: “[LIBOR] is in many ways the rate at which banks do not lend to each other, and it is not clear that it either should or does have significant operational content.  I think it is convenient, very often, for people to justify what they do for other reasons, in terms of Libor, but it is not a rate at which anyone is actually borrowing.  It is hard to see how it can actually have much of an impact.”

Meanwhile, an opinion poll released yesterday by the Sunday Times/You Gov demonstrated the confidence of the Scottish people in Alistair Darling’s tenure as Chancellor, which was during the period the rate rigging scandal took place.

It found that Scots consider Darling’s competence in office, leading up to and during the financial crisis, to be as bad as or worse than Tory ministers who were in charge around the dark period of British economic history known as “Black Wednesday” in 1992.

The SNP Treasury Spokesperson Stewart Hosie MP, a member of the Treasury Select Committee, said:

“The FSA report into Barclays highlights a staggering litany of prolonged manipulation of the LIBOR.  A parliamentary inquiry is a welcome step, but a full, open independent inquiry will help all of us understand how banks, regulators and politicians failed to notice and act at the time this was going on.

“We must have full transparency from not only the banks but also the Labour members who were Ministers at the time, and the financial regulators that reported to them. 

“Alistair Darling was Chancellor, Gordon Brown was Chancellor and Prime Minister and Ed Balls was Economic Secretary to the Treasury when LIBOR fixing was going on.  Were Darling and his colleagues asleep at the wheel or did they know what was going on yet fail to take any action?

“Americans and British regulators received complaints about LIBOR manipulation as early as 2007. Why was Parliament, the markets and the public not informed of the allegations by Alistair Darling?

“Given the importance of transparency and openness around liquidity for UK banks particularly during the credit crisis, it is unforgivable that these allegations were not reported to Parliament nearer the time.

“The consequences of LIBOR fixing at any point are almost endless but of particular significance during a financial crisis. Confidence in the banking system is based on trust.

“For too long Labour has been trying to pretend that the economic crisis had nothing to do with them – but now we know that Mr Darling, Mr Brown, Mr Balls were in charge during the worst period of regulation in the history of the UK financial system. The buck stops with Ministers and they must account for their actions in public.”