Bank of England chief says NY Fed cited no evidence of LIBOR fraud in 2008

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Governor of the Bank of England Mervyn King, in London June 14, 2012. THE CANADIAN PRESS/AP, Rebecca Naden/PA

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LONDON - The governor of the Bank of England said Tuesday that U.S. authorities did not show him any evidence of manipulation of a key market rate when they raised concerns in 2008.

Mervyn King told a House of Commons committee that during the 2008 financial crisis, there was widespread concern about what the London interbank offered rate, or LIBOR, was indicating about the state of banks. However, there were no fears being voiced about misreporting.

UK lender Barclays has since been fined US$453 million by U.S. and U.K. financial authorities for manipulating LIBOR between 2005 and 2009. Barclays' chief executive Bob Diamond resigned as a result of the scandal and chairman Marcus Agius says he will go once his successor is chosen.

Treasury Select Committee member Michael Fallon pressed King on why Timothy Geithner — now U.S. Treasury secretary but then president of the New York Federal Reserve — in 2008 proposed "procedures designed to prevent accidental or deliberate misreporting" and "eliminate incentive to misreport,"

"When you design any self-reporting scheme you have rules to prevent misreporting," King said.

"That isn't the same as saying you've got evidence that there is misreporting, nor did the Fed or anyone else send us any evidence of misreporting."

LIBOR is an average rate set by banks each morning that measures how much they expect to pay each other for loans. The rate is also used in calculating borrowing costs of hundreds of trillions of dollars in loans and investments such as bonds, auto loans and derivatives. The process is supervised by the British Bankers Association.

At the height of the 2008 credit crisis, following the collapse of Lehman Brothers, interbank borrowing dried up as fear and speculation over which lender would be the next to fail gripped the markets lenders.

In sometimes testy exchanges with the committee, King said the first he knew of any alleged wrongdoing during 2008 "was when the reports came out two weeks ago."

Those reports by the U.S. Department of Justice, the Commodity Futures Trading Commission and Britain's Financial Services Authority detailed rate manipulation by Barclays between 2005 and 2009.

"We have been through all our records. There is no evidence of wrongdoing or reporting of wrongdoing to the Bank (of England)," King said.

An analysis published by the NY Fed in May 2008 noted that although banks "may have incentives to misreport in order to manipulate the level of the LIBOR fixing, and thereby influence their funding or derivative positions, this is not the primary driver of recent alleged misquotes."

In his testimony to the U.S. Senate Banking Committee Tuesday, U.S. Federal Reserve Chairman Ben Bernanke said that LIBOR was a "critical benchmark for many financial contracts, so the actions of traders and banks that have been disclosed are not only very troubling in themselves, but they have the effect of undermining public confidence in financial markets."

Members of the panel also asked Bernanke about what the Fed knew about problems with Libor and what they have done to correct the problems. Bernanke defended the response taken at the time by the New York Federal Reserve.

"There was a substantial response by the Federal Reserve Bank of New York, both in terms of informing all the appropriate authorities. That information led to investigations. The Federal Reserve Bank of New York also contributed substantially to thinking about how to better structure the LIBOR panel and the LIBOR information collection to avoid some of the weaknesses in the system that became evident during the crisis," Bernanke told the committee.

King also defended his intervention which led to Diamond's resignation on July 3, denying suggestions by committee chairman Andrew Tyrie that the governor exceeded his authority and hadn't consulted properly.

King said he was prompted to act after Agius announced his resignation on July 2.

In a meeting that night with Agius and Michael Rake, the senior independent director, King concluded that "they hadn't really taken on board the loss of confidence of the regulators in the executive management."

"It was an honourable decision of Mr. Agius to resign, (but) he had inadvertently put any prospective new chairman in an impossible position," King said, either of having to fire Diamond immediately or work with Diamond, not knowing what further problems might emerge.

In his testimony to the committee last week, Agius said: "We were told in no uncertain terms that he (Diamond) did not have support of the regulators."

Senior officials at U.K. markets regulator the Financial Services Authority had already voiced their concerns about Barclays board — including their belief that the management was repeatedly pushing at the boundaries of regulation. This led to a meeting with the bank's executives in February 2012 and an unprecedented letter to the chairman to underline those concerns. Adair Turner, the head of the Financial Services Authority, reiterated those concerns to Agius after Barclays was fined.

"It is possible to sail close to the wind once, you can sail close to the wind twice, maybe even three times, but when it gets to four or five times — it becomes a regular pattern of behaviour — you do have to ask questions about the navigational skills of the captain on the bridge," King said.

"I think what had happened over many months was that the board of Barclays had been in something of a state of denial about the concerns of regulators," he added.

King said he wasn't acting as a regulator and wasn't urging Barclays to remove Diamond.

However, Tyrie questioned King's role, saying: "This is a conversation about handing someone a revolver and telling him to go off and shoot his chief executive."

"I don't like these firearms analogies, and they are false," King said. "The question was left absolutely with them. ... I did not know what the outcome of that meeting would be."

Diamond resigned as chief executive the next day.