That really was the week that was in the City of London, during which Barclays and the Bank of England became embroiled in the issue of the London interbank offered rate (LIBOR) being manipulated amid the crisis of 2008.
The Barclays crisis is only the start of the LIBOR issue. Photo: Getty Images
Recall that, as the crisis hit and the LIBOR rate rose through the roof, Willem Buiter, my ex-colleague on the Bank of England’s Monetary Policy Committee and now the chief economist at Citigroup, called it “the rate at which banks don’t lend to each other”. The concern at the Bank, especially in October 2008, was that the whole financial system was going to come crashing down.
Recall that on 7 October 2008, the then chancellor, Alistair Darling, received a call in Luxembourg to tell him that RBS was about to fail without a huge injection of cash from the government, which in the end it received, in secret. The next day, seven central banks – those of Canada, Switzerland, the US, the UK, Sweden and Japan, plus the ECB – acted in concert to cut interest rates by 50 basis points. I was one of the people who voted for that rate cut and I recall thinking we were sitting on a cliff edge. Our situation was precarious indeed.
The LIBOR issue here is that traders who worked for Barclays were systematically claiming that they were borrowing money at lower rates than they actually were. This put Barclays in a better financial position than it probably should have been at a time when the talk in the markets was that the bank was in trouble and would potentially run out of credit. It remains unclear why the traders would have done this without approval from senior management, as it is unclear what they had to gain personally.
On 27 June, Barclays was ordered to pay £290m to settle claims arising from the manipulating of the markets. On the announcement, the share price fell by 15 per cent, more in expectation of vast numbers of civil suits that would be filed for losses made. This is just the beginning: other banks are also being investigated, so there is every expectation that there are further twists and turns of this matter to come. More heads will roll before it is all over.
The big questions are: how widespread were the actions of those involved, who knew what and when, and what did regulators at the Bank of England or the Financial Services Authority (FSA) know? It is clearly not time for bankers to stop apologising.
In recent days, Barclays has been caught in the eye of the storm. Politicians went after the leadership and initially its chairman, Marcus Agius, who resigned on 2 July only to return the following day, not to run the bank but to find a new CEO after the resignation of its highly paid chief executive, Bob Diamond, and Jerry del Missier, his chief operating officer. Apparently Mervyn King, governor of the Bank, and Adair Turner, chairman of the FSA, made it clear that they wanted him to go. There is also talk of an internal, bloodless coup by Barclays staff keen to see changes at the top.
Diamond turned out not to be for ever. It is unclear how large a severance package he will receive – but the bigger it is, the more embarrassing it will be for the government. The question is whether this was all done by a few rogue traders or if it was more widely known within Barclays; and if the bosses didn’t know, why didn’t they?
We need to find out whether what happened was because of incompetence, outright illegality or both. The government has announced a limited inquiry to be run by the Treasury select committee rather than the arm’s-length judicial public inquiry called for by Ed Miliband, which seems the minimum necessary. Presumably David Cameron is reticent to expose himself to another uncontainable Leveson-style fishing expedition. George Osborne has tried to turn the blame on the previous Labour government (and on Ed Balls in particular), because of its light-touch approach to financial regulation but that seems like a dead end, given that the Tories continually argued for an even lighter touch.
The Bank of England is involved because apparently there was a phone conversation in October 2008 between Diamond and Paul Tucker, then the Bank’s executive director of markets. The notes on the conversation submitted by Diamond do suggest that Tucker was interested in the LIBOR rate being lower, but they do not seem to suggest that he was implying that it should be fiddled. This sounds plausible to me; Bank of England insiders were in the grip of panic and appeared not to have the faintest clue what was going on until very late in the game.
Diamond has reportedly claimed that Tucker told him that “a number of senior officials in Whitehall” had expressed concern over the Barclays LIBOR numbers. Darling immediately made it clear that he was not one of them. So, who are these officials? The plot thickens.
Tucker is now the Bank’s deputy governor for financial stability and the front-runner to replace King as the next governor. On 12 September 2008, he made a speech in which he discussed the upside risks to inflation and made no mention of the gathering financial crisis. Indeed, he argued: “One can safely conclude that it is not all straightforward at present to calibrate monetary conditions.” Tucker’s failure to spot what was coming is a major issue. Lehman Brothers failed on 15 September 2008.
In addition, throughout 2008, Tucker continued to vote against rate cuts, even though the UK economy had entered recession in the April-to-June quarter of that year. One big question was why he didn’t appear to have a clue that the system was in meltdown in the middle of September. At the very least, this should kill any chance he has of being the next governor and likely does the same for John Varley, a previous boss of Barclays.
Another question that Tucker has to answer is: did he know that the LIBOR was being manipulated? If he answers “yes”, he should resign because of his culpability. If the answer is “no”, he should resign because he should have known. Off with his head.
David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire