Institute for Financial Transparency

Shining a light on the opaque corners of finance


Nobody ever went to jail for saving the Too Big to Fail banks

Typically, where there is smoke, there is fire.  The BBC reported the Bank of England pressured the Too Big to Fail UK banks in 2008 to say they could borrow money in the interbank lending market for less than they actually could.

The banks did this by knowingly submitting artificially low rates to the British Bankers Association for it to use in calculating the Libor interest rates.

Libor isn’t some backwater interest rate.  It is so ubiquitous (over $300 trillion in securities reference it) it is frequently referred to as the “price for money”.  Libor is also considered a barometer of the health of the banks.

According to the BBC,

In the recording, a senior Barclays manager, Mark Dearlove, instructs Libor submitter Peter Johnson, to lower his Libor rates.

He tells him: “The bottom line is you’re going to absolutely hate this… but we’ve had some very serious pressure from the UK government and the Bank of England about pushing our Libors lower.”

Mr Johnson objects, saying that this would mean breaking the rules for setting Libor, which required him to put in rates based only on the cost of borrowing cash.

Mr Johnson says: “So I’ll push them below a realistic level of where I think I can get money?”

His boss Mr Dearlove replies: “The fact of the matter is we’ve got the Bank of England, all sorts of people involved in the whole thing… I am as reluctant as you are… these guys have just turned around and said just do it.”

Did the BoE really try to save the UK’s too big to fail banks by having them manipulate the barometer of their health to show they were healthier than lending banks and other market participants thought?

Mr. Dearlove’s comments sure make it sound like that was what the BoE was up to.

If true, we know manipulating Libor is punishable.

Banks have been fined more than £6bn for allowing submitters to be influenced by requests from traders or bosses to take into account the bank’s commercial interests, such as trading positions.

During the financial crisis, banks had a commercial interest in suggesting through their Libor submissions they were in better shape than the market thought.  So if the Bank of England encouraged false submissions, it would seem like someone should be punished.

Adding to the smoke which suggests there is a fire,

The phone call between Mr Dear love and Mr Johnson took place on 29 October 2008, the same day that Mr Tucker, who was at that time an executive director of the Bank of England, phoned Barclays boss Mr Diamond. Barclays’ Libor rate was discussed.

While all of this is highly suggestive there is a major bon-fire.  None of this is definitive proof of a fire (where definitive proof is a specific official at the Bank of England telling the bankers to lie).

Ultimately, we have to recognize that nobody will ever go to jail for having saved the too big to fail banks.

The bigger lesson here is why do we continue to allow ourselves to have a financial system where this kind of conduct could potentially occur.

If banks provided the exposure level transparency necessary to earn a label from the Transparency Label Initiative, every market participant could see if they lied by understating their cost to borrow in the interbank market.  This would end any perceived benefit from lying.

Since the public found out how easily bankers were manipulating Libor for their personal gain, there has been some reform to make it harder, but not impossible, for bankers to manipulate Libor.  Libor is now calculated using a cascading series of inputs: bank selected real time transactions, historical data and, if these are insufficient, expert judgement by the submitting bank.