By Abigail Field
The Lying Bankers Scandal should be called the Bailout Theater scandal. I don’t mean the perhaps decades-long part where traders manipulated LIBOR by 0.01% or so, up and down, for personal profit. I mean the part that started in 2007 when the bankers lied by much more so they’d look healthier than they in fact were. That part is bailout theater because Friday’s data dump by the New York Fed proves the Fed and other “regulators” knew what was happening and effectively approved.
Why? Apparently the Fed decided that allowing criminal fraud was necessary to calm markets, even though the fraud did nothing to actually make the banks safer or sounder: Bailout Theater. And for that, the top guy at the NY Fed at the time, our current Treasury Secretary Timothy Geithner, needs to be fired by President Obama and indicted if possible by Eric Holder. Not that I’m holding my breath on either point.
The documents also show that the focus on the LIBOR 1 and 3 month is misplaced. The lying happened at those maturities, sure. But the lying was much worse at 1 year, for example. Why? Well think about it–banks were worried that the entity they were loaning to wouldn’t be around much longer. To take the risk of loaning money a long time in the future, the bankers wanted huge premiums. The victim class of arbitrary winners and losers can be much larger than people have been focused on.
The Federal Reserve Knew LIBOR Was A Lie And Didn’t See Fraud
The document dump’s accompanying press release, er, “explanatory note,” shows the Fed didn’t see criminal fraud when it learned about willful lying about the banks’ borrowing costs for the express purpose of deceiving markets about banks’ health. Barclays, at least, started telling the Fed about the fraud in August 2007, and eventually become most detailed in April, 2008. Here’s how the Fed press release describes learning about what was happening, bold mine:
Among the information gathered through markets monitoring in the fall of 2007 and early 2008, were indications of problems with the accuracy of LIBOR reporting. …Suggestions that some banks could be underreporting their LIBOR in order to avoid appearing weak were present in anecdotal reports and mass-distribution emails, including from Barclays, as well as in a December 2007 phone call with Barclays noting that reported “Libors” appeared unrealistically low.
Let’s look at the indications, courtesy of Barclays
On August 28, 2007 a Barclays reply all email, which includes “Fabiola Ravazzolo” of the NY Fed and Pat Leising of the World Bank, notes:
“Today’s USD libors have come out and they look too low to me. Lloyds for instance has printed 5.48% for 3 months. Probably the lowest rate you coud attract liquidity in threes would be 5.55% and I am not too sure how much you would get at that level. [...]
Draw your own conclusions about why people are going for unrealistically low libors
9/26/07 (“There is liquidity in one to six months but our feeling is that libors are again becoming rather unrealistic and do not reflect the true cost of borrowing.”)
10/3/07 (“USD: 3 month libor rose 1 bp yesterday. It should have risen more. One libor contributor set it 2 bps lower than where they were paying at 11 am!?”) Note, Jason Miu of the NYFed is added to the distribution list
(“…demand for funding and a hoarding of liquidity is still combining to drive Libors higher, another factor we are seeing recently is a more realistic approach in setting Libors by contributing banks, that has been particularly noticeable in USD & EUR this week where the little business that does occur has usually been above where official Libors have set.
With year end coming into today’s 1 month USD & EUR fixings we are looking for EUR to fix @ 4.79 (although the real cash offer is 4.81) and USD @ 5.25 although there is no real offer in the market, one large London broker suggests 5.60 and it would be bid 5.70 through the FX arbitrage out of EUR.”
See that? Even though LIBOR is getting ‘more realistic’, Barclays was still expecting it to settle 0.35-0.45% lower than the real cost of money. I wonder what ‘less realistic’ looked like.
And that December 11 call? Well, Barclays released an ’unofficial transcript’. The key exchange:
“Barclays: You know, LIBORs being set too low anyway, but uh, yeah, that-that is correct.
Fed person: “Yeah.”
(see page 3; the Fed person is a “Peggy” whose last name is not identified.) In context, it’s clear Peggy is acknowledging the NY Fed knew the LIBOR rate is based on lies. And she’s at least the third person to have been directly told.
Barclays also released a March 27, 2008 email, which includes the comment:
“Liquidity conditions in term maturities remains very poor, there is very little cash to support where Libors are being set and the few lenders in the market are increasingly more name sensitive.”
So after eight months and all of the above “indications” that criminal fraud is being committed–again, banks deliberately lying about borrowing costs to deceive the markets and manipulate market perception of the banks’ strength–what does the Fed do? The press release explains:
As market strains intensified in early 2008, to better understand the nature and extent of the potential problems with LIBOR, analysts in the Markets Group gathered additional and more in-depth information. As part of this broad effort, on April 11, an analyst from the Markets Group queried a Barclays employee in detail as to the extent of problems with LIBOR reporting.
Holy Cow! The Fed called Barclays on April 11 and asked a bunch of questions! Now that’s an aggressive response. Which analyst was it? Fabiola Ravazzolo, the very person that was first tipped off about LIBOR manipulation eight months earlier. Here’s how the press release describes the call:
The Barclays employee explained that Barclays was underreporting its rate to avoid the stigma associated with being an outlier with respect to its LIBOR submissions, relative to other participating banks. The Barclays employee also stated that in his opinion other participating banks were also under-reporting their LIBOR submissions.
And then comes what is probably the key sentence:
The Barclays employee did not state that his bank had been involved in manipulating the rate for its own trading advantage.
See, the Fed didn’t see didn’t see the market rigging as wrong, if it was to hide banks’ weakness. But market rigging for trading advantage? Now THAT would’ve been a problem! Since when did motive play a role in criminal fraud, beyond helping prove intent? Given that tiny distortions of LIBOR by traders caused lots of stolen profits, these large distortions of LIBOR gave people much bigger wins and losses that weren’t deserved. Who cares why the bankers lied?
The Fed Knew of Widespread Criminal Fraud on April 11, 2008
Barclays’s unofficial transcript of the April 11 reveals Barclays’s awkward, painstaking efforts to make the NY Fed understand the fraud. Pathetically, the transcript also shows that at least one of the at least three people at the NY Fed that’s been informed of Dollar LIBOR lying by Barclays doesn’t have a clue about Dollar LIBOR, and hasn’t really internalized those earlier notifications.
Note, most of the elipses are to get rid of things like “mm hmm”; none of the omissions are substantive. Starting at page 3, after 2 pages of chit-chat:
FR: But, how reliable is the BBA for instance because you have only sixteen banks? Is it the same framework that the EURIBOR so banks they, they just report the the average rate for what they were lending or is it different?
[Barclays]: You’re supposed to publish, um, the rate at which you could borrow money.
FR: Ah, you borrow, not lending?
[Barclays]: No. So you’re supposed to, and that’s the definition of LIBOR is actually…
FR: You could… Borrow, so not necessary where you are borrowing?
[Barclays]: Yeah, because the-the panel is supposed to be, a, um, a panel of prime banks…And so it’s where those banks, um, decide they, they could actually borrow cash in the interbank market…. Now, um, you know, obviously there has been a lot of speculation about LIBORs and, you know… I’ve read some really interesting articles about them….Um, and uh, w-, you know we, w-we, we strongly feel it’s true to say that…Dollar, Dollar LIBORs do not reflect where the market is trading which is you know the same as a lot of other people have said….Um, wha-, it depends on which part of the curve you’re looking at. … Um, currently, we would say that in the three months, um, if we as a prime bank had to go in the interbank market and borrow cash, it’s probably eight to ten basis points above where LIBOR is fixing….If, if, if we had to go in the market and …Properly borrow money, it would be …About eight to ten above and in the one year…It would probably be about twenty basis points in the market.
Now the analyst asks a good question, albeit one that shows she never paid attention to the earlier “indications”:
FR: And, and why do you think that there is this, this discrepancy? Is it because banks maybe they are not reporting what they should or is it um…
[Barclays]: Well, let’s, let’s put it like this and I’m gonna be really frank and honest with you.
FR: No that’s why I am asking you [laugher] you know, yeah [inaudible] [laughter]
Barclays then tells the analyst as plainly as possible that banks are lying about LIBOR because telling the truth impacts their share price in an untenable way. At this point–at this months late, belated point, the NY Fed cannot claim ignorance of criminal fraud. Sure, normally proving intent is a barrier to criminal prosecution, but in this situation, it’s a gimme. Really.
[Barclays]: You know, you know we, we went through a period where…We were putting in where we really thought we would be able to borrow cash in the interbank market and it was…Above where everyone else was publishing rates….And the next thing we knew, there was um, an article in the Financial Times, charting our LIBOR contributions and comparing it with other banks and inferring that this meant that we had a problem raising cash in the interbank market.
[Barclays]: And um, our share price went down….So it’s never supposed to be the prerogative of a, a money market dealer to affect their company share value….And so we just fit in with the rest of the crowd, if you like….So, we know that we’re not posting um, an honest LIBOR….And yet and yet we are doing it, because, um, if we didn’t do it…It draws, um, unwanted attention on ourselves.
FR: Okay, I got you then.
Barclays tries to alert the Fed that even worse criminal securities fraud than Barclays’s manipulations are occurring:
[Barclays]: And in fact, wha-what we’ve noticed is almost like um, a um, um perverse thing where people that we know that are paying for money actually put in the lowest LIBOR rates.
[Barclays]: So it, it’s almost to um, you know the ones that need cash the most put in the lowest, lowest rates.
I wonder how the (former) shareholders of all those banks feel right now? How about a former Royal Bank of Scotland shareholder? RBS was on the LIBOR US Dollar panel in 2007 and in 2008. RBS failed in October 2008. Want to bet RBS was one of the big liars Barclays is referring to?
All of the above is from the transcript pages 3 to 7. On page 10, Barclays continues telling the Fed like it is:
[Barclays] ...in the Dollar market, people are putting it down below…Where they could actually borrow. Now, you know, it’s the same uh thing, some, uh, people might say, well, you know, sss-, this-this bank and this bank called me or this central bank gave me or things like that, but it’s not interbank…You know? And-and it if-if we kept it to a spirit of interbank…Dealers, cut out money market funds, cut out central banks, cut out cor-corporates…And purely based it on the spirit of it, um, interbank dealers, where the money is available, where I would be able to borrow in the interbank market…Without, w-without question it-it would be higher than the rate that I’m actually putting in
[Barclays]: For, for Dollars.
And again, on page 11, Barclays again explains that what a bank says its LIBOR is is material information:
[Barclays]: Um, it’s like, if I start to say that the LIBOR’s a lot higher and then people…Start to say, well why is he fixing a lot higher than everyone else? Do-do you know, it’s actually going to make it harder for me to borrow that cash?
And then finally the analyst not only demonstrates that she gets it, but that she knows it’s wrong:
FR: Yeah. No, no, it’s clear, it’s clear…you know, I mean, you remember I was in behind [an overnight Euro rate] so I remember when we were looking at rate you always question is correct so you just check, uh, so I’m-I’m c-, I’m very suspicious or I’m very curious or, let’s say, I find bizarre that who is responsible to com-, to collect this, er, you know, data, they’re not questioning banks just to see you know, that the, the level of the rate during the day is very different from…What i-is fixed.
[Barclays]: I mean, we-we-we’ve we’ve all received letters…From the…British Banking Association…To remind people of their…Obligation
FR: Yeah, but this is, mm hmm…
And then you can just see her shaking her head, feeling sympathetic to Barclays:
FR: You have a business and I completely understand the story, ah, but you know uh, if everybody has got a similar approach so one can also overcome this article on the FT or whatsoever…It’s that you are penalized just because you are honest the way somebody else that is dishonest, eh, you know that’s an advantage so that’s why I was thinking in that direction but… I understand. No, no and I completely understand the, the point is that ah you know, you, you, you always try to, to try and help for everybody you know, and this is so bizarre what is going on in the market
[Barclays]: It is bizarre. Yeah…I mean we, it- it’s true words to…Say we feel very…Very uncomfortable with it.
FR: I understand now.
[Barclays]: But, the-the position we find ourselves in, is one where we can’t really fight it.
FR: I know, I know
The call goes on for another dozen plus pages that I won’t excerpt here.
The Fed’s Damage Control Effort
The press release wants us to feel good; once the NY Fed had that April call, the Fed sprang into action! First, it spread the word:
That same day – April 11, 2008 – analysts in the Markets Group reported on the questions surrounding the accuracy of the BBA’s LIBOR fixing rate in their regular weekly briefing note. …this report was circulated to senior officials at the New York Fed, the Federal Reserve Board of Governors, other Federal Reserve Banks, and U.S. Department of Treasury. …
Here’s the key language from the April 11, 2008 memo:
Further, the fact that the TAF stopped out above LIBOR has also triggered a significant amount of questions over the accuracy of the BBA’s LIBOR fixing rate. Over the past few weeks, the 1-month term dollar deposit rate and the 1 -month LIBOR fixing have diverged by as much as 30 basis points. The divergence between the two rates is similar to that observed during prior periods of heightened market stress, most notably in August and early December 2007. Our contacts at LIBOR contributing banks have indicated a tendency to under-report actual borrowing costs when reporting to the BBA in order to limit the potential for speculation about the institutions’ liquidity problems.
Note: the Fed was spotting the problem on its own, using data, without needing to be told by Barclays. The press release continues:
Five days later, the first media report on problems with LIBOR emerged. From this point onwards the notion that banks were underreporting LIBOR in order to avoid signaling weakness was widely discussed in the press and in market commentary.
At this point, why didn’t the SEC leap into action? I realize RBS is listed on the London Stock Exchange, but surely the dollar LIBOR banks that are listed here deserved investigating, right? Citigroup, perhaps? Back to what the press release says the fearless Fed did upon the news of criminal fraud becoming widely known. Basically, they made sure everyone in charge knew:
In late April and into May 2008, New York Fed officials met to determine what steps might be taken to address the problems with LIBOR. The New York Fed also acted to brief other US agencies. On May 1 Tim Geithner, then President of the New York Fed, raised the subject at a meeting of …the heads of the principal regulatory agencies in the US, chaired by Treasury. On May 6 New York Fed staff briefed senior officials from the U.S Treasury in detail.
Which makes me wonder: why don’t all those people see criminal fraud on the facts as they knew them? Securities fraud, wire and mail fraud, bank fraud, fraud fraud fraud: lying for money. And yes, it’s lying for money when you’re propping up your share price by lying. Don’t our top regulators know the way to stop fraud is to prosecute it? Why does it take so many meetings to decide what to do?
The press release:
On May 20 the Markets Group sent a further report on problems with LIBOR to the broad set of senior officials who receive its regular analysis.
Here’s the crucial part of that report:
What evidence exists that banks were misquoting to the LIBOR panel?
Around the time the WSJ article first reported on this matter in mid-April, we heard from several Eurodollars brokers and bank funding desks that many LIBOR banks were bidding for funds up to 25 basis points above their LIBOR quotes in the same maturity on the same day. The BBA also received a number of formal complaints along these lines. Several of these market participants suggested that discrepancies between funding rates and LIBOR quotes had existed since at least last August, but had gotten marginally worse since mid-March.
Additionally, around days on which the BBA’s efforts to address LIBOR have received media attention, there have been fairly dramatic increases in the LIBOR fixings. For example, in the two days surrounding the WSJ’s April 16 article, 3-month LIBOR increased 17 bps, which was the largest two-day increase in the rate since August
9. Earlier this week, as the integrity of LIBOR again received attention, 1-year LIBOR increased 21 bps, and OIS and fed funds-LIBOR basis swaps suggest that a large portion of this rise was not due to a re-pricing of policy expectations.
Amazingly, the Fed still seems to be in well, we don’t really know anything mode: “Beyond the anecdotal evidence and LIBOR re-sets, it is difficult to find convincing evidence of actual misreporting.”
Well, where did you look for such evidence? Given Barclays’ statements, it’s only difficult to find convincing evidence if you ignore what you’ve been told and don’t follow up on it. Subpoenas anyone?
Back to the press release:
On June 1, 2008, Mr. Geithner emailed Mervyn King, the Governor of the Bank of England, a report, entitled “Recommendations for Enhancing the Credibility of LIBOR. Among the recommendations were specific proposals to improve the integrity and transparency of the rate-setting process…As is clear from the work culminating in the report to Mr. King of the Bank of England, the New York Fed helped to identify problems related to LIBOR and press the relevant authorities in the UK to reform this London-based rate.”
That’s how top regulators deal with evidence of criminal fraud quite likely being committed by American banks and which harms American investors? No investigation, no prosecutions, just a set of industry created suggestions for another country to deal with? Who is Tim Geithner getting his cues from anyway? Could it be JPM Chase’s Jamie Dimon, who started serving at the NY Fed in January, 2007 and whose bank was a dollar LIBOR contributor? Did Dimon frame the issues for Geithner, shape the way he understood them?
Meanwhile, Barclays keeps telling the NYFed what’s happening. Check out this excerpt from an October 24, 2008 call:
So, people like Rabo and Chase will be able to get money cheaper than say Barclays, RBS. I mean, West, Deutsche, Landesbank I don’t know where he gets his libor indications from. I can’t imagine anyone would want to lend him any money. There have been, recently you’ve had certain banks who I know have been paying 25 basis points over where they’ve set their libors …
And now, four years later, there’s outrage? Heads had better roll off to jail, not just at the top of a lot of banks, but also from within our government.
We need to restore the rule of law.