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Barclays, Libor and the still missing killer email

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The political row about Libor and UK Chancellor of the Exchequer George Osborne’s attempt to suggest the previous Government tried to manipulate it  becomes more bizarre in the light of emails we now have on the issue. Coupled with the testimony of the Bank of England’s Paul Tucker, they raise the question: “Has Osborne libelled Labour politicians about their involvement in Libor fixing?”

Osborne has tried to conflate two things: the perfectly reasonable concern that the Bank of England and Labour Government had that interest rates in 2008 were too high; and the practice of trying to manipulate Libor by Barclays “submitters” from 2005 to 2008 in favour of Barclays traders who had taken risky positions on interest rates via derivatives or swaps or other arcane financial instruments.

On the latter: there are supposed to be Chinese walls between the submitters and the traders. Each morning the submitters for the banks on the Libor panel are supposed to produce their honest assessment of the short term rate at which other banks will lend to their bank. They are answering the question: “At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?” The submission is put in independently without seeing the other banks’ rates.

The answers are received by Thompson Reuters who aggregate them and put them through a formula (including ditching the outliers – the top and bottom quartile figures), and the resulting Libor (London interbank offered rate) is then published.

The submitters’ rates are based on their perceptions of what the right answer will be, not on actual transactions; they do not know whether, at the end of the day, they will have surplus funds to lend to other banks or be in deficit and so have to borrow. It reflects how secure the banking system is seen to be. The higher the rate, the more risky a bank’s creditworthiness, the lower the rate, the less risky.

The rate has knock-on effects on all sorts of other interest rates – which is why the traders in another part of Barclays are interested in it. If, for example, they are (in effect) betting on interest rates falling and they can get their chaps, for the odd bottle of Bolly, to massage down the figure submitted from Barclays, that will have a small but significant effect on the aggregated Libor rate. As a result, the interest rates our trader is interested in will go down (only slightly – we are talking big profits out of tiny movements in rates). The trader cashes in, Barclays raises its profit and the trader preserves his bonus for the year – and possibly his job.

That’s why some of the emails from the traders to the submitters were pretty desperate. If the interest rate market went against them, they could be in deep trouble. And it is this for which Barclays was hit by a £290m fine.

All this is quite a separate issue from the 2008 correspondence between Barclays and the Bank of England apparently prompted by the Cabinet secretary, Sir Jeremy Heywood.

The email we now have that sets out the position most clearly, indicating the issues at stake, is that between Heywood and Bank of England Deputy Governor Paul Tucker of 26 October 2008.

“There is no incentive for lenders to offer funds after 10.30 at or below Libor when they know two banks continue to pay above Libor throughout the remainder of the day.” Email from Jeremy Heywood

There had been turmoil in the financial markets, Britain and the world was staring into the abyss – depression and potential financial collapse. The Government, unsurprisingly, was interested in interest rates and would want Libor to be falling – that would indicate confidence in the banking system and also lead to lower interest rates generally for businesses and those with mortgages, all of which would help get us out of the crisis all the quicker.

The email notes that rates in America were falling, but Libor was not – or at least it was falling too slowly. Two banks, Barclays and RBS, were apparently bidding it up. “For example, on 23 October 3-month Libor fixed at 6.005%,” says the email. “RBS continued to bid 6.050% through the remainder of the day.” In other words RBS was defying the Libor Panel with a higher rate after Libor was set at 10.30 that day. “There is no incentive for lenders to offer funds after 10.30 at or below Libor when they know two banks continue to pay above Libor throughout the remainder of the day.”

For whatever reason, Barclays and RBS were willing to go out on a limb and borrow at above Libor.

At this time too the 2008 Credit Guarantee Scheme (CGS) was in play. This was, in effect, a guarantee of government money available for banks to borrow if their liquidity looked like drying up in the crisis – so they could keep on lending.

But it came at a price. The Heywood email notes that the CGS rate of interest, including fees, would be higher than Libor and speculates that Barclays was willing to borrow on the money markets at above Libor because “avoiding the CGS signals that banks using the Interbank market need no government assistance in borrowing”.

It then speculatively proposes a scheme to set CGS at slightly below Libor at a price based on a Dutch scheme where fees are set at what might have been reasonable for 2007-08 but excluding the September turmoil (which had pushed the price up).

This is very far from asking Barclays to manipulate Libor down.  Quite the opposite. It actually acknowledges that Barclays might have had good market reasons, from its point of view, for bidding Libor up. Quite naively perhaps, in the light of what we know now, it does not suggest Barclays might have had an interest in gaming the system.

What we don’t have here is the killer email from Ed Balls, Children’s Secretary, (for that is what he was at this time) pleading with Barclays: “My people are hurting; for God’s sake bring that Libor rate down so that I can put food into their little mouths.”

Paul Tucker has now “absolutely” denied  seeking to manipulate Libor and denied any ministers suggested it.

Osborne is at least naïve but more likely deviously trying to rewrite history and misinterpreting the meaning of words to construct a stick to beat the Labour Government with. He is the arch-manipulator here.

It beggars belief that the Government in the fraught times of 2008 would close its eyes, sit on its hands and not ask questions about why Barclays was bidding up Libor. If it knew why, it might be able to help out. That is what the emails actually show.

So has George Osborne libelled Balls and Baroness (Shriti) Vadera, former financial adviser to the Labour government? This issue is considered in a supplementary posting: Libor libel: Has George Osborne defamed Ed Balls

About alrich

Journalist and blogger on legal and financial/economics issues

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