Call by Bank of England to Barclays about Libor makes case for requiring banks to provide ultra transparency

According to a Bloomberg report, during the height of the financial crisis the Bank of England made a call to Barclays that may have triggered the submission of false data for setting Libor.

Regular readers know that the only way investors will ever trust the financial markets is if there is the disinfectant of sunlight being shone on all the opaque corners of the financial system.  This includes bringing ultra transparency to banks by requiring them to provide on an ongoing basis disclosure of their current asset, liability and off-balance sheet exposure details.

With this information, Libor could be based on actual trades as opposed to make believe.

With this information, inquiries by regulators don't trigger interest rate manipulation.

With this information, the question of did the regulator request Barclays lie to lower Libor does not get raised (remember, unless the call was recorded (was it and if not why not?), there is plausible deniability about what was said and the action taken).

Without this information, there is the perception that the Bank of England might have had a very good reason for wanting Barclays to lie about Libor as it would make the banks appear to be stronger than they were.

As a practical matter, the interbank lending market had frozen as no one could tell who was solvent and who was not and as a result who was likely to repay any funds and who was not.  As a result, Libor was complete make believe.

Barclays Plc (BARC) deliberately reported artificially low borrowing costs at the height of the 2008 financial market turmoil after a senior manager discussed external perceptions about the bank’s strength with regulators at the Bank of England. 

Barclays, which was fined $453.2 million by U.S. and U.K. regulators for submitting false London and euro interbank offered rates, “believed mistakenly that they were operating under an instruction from the Bank of England” to lower its Libor submissions, Britain’s Financial Services Authority said today. 

The case is the first in an international investigation into whether banks tried to manipulate Libor, the benchmark rate for $360 trillion of securities, to hide their true cost of borrowing as financial markets were roiled by the September 2008 collapse of Lehman Brothers Holdings Inc.

At that time, Barclays was concerned about how it was being perceived due to its higher Libor submissions relative to other banks whose reported borrowing costs helped establish the benchmark rate, the U.S. Commodity Futures Trading Commission said in its order today. 

“Even though it maintained that its liquidity position was in fact strong, Barclays was increasingly worried about these market and media perceptions,” the CFTC order said. 

In October 2008, the Bank of England had a telephone conversation with a senior individual at Barclays in which it raised questions about the bank’s liquidity position and relatively high Libor submissions, the CFTC said. 

In reaction to the external pressure and the discussion with the Bank of England, Barclays believed it needed to lower its Libor submissions, the CFTC said.

According to the U.K.’s FSA, the Bank of England did not instruct Barclays to lower its Libor submissions during the phone call. 

Instead, a “misunderstanding or miscommunication” occurred within Barclays as the substance of the conversation was relayed down the chain of command, the FSA said. 

A Bank of England spokesman said the call was one of many regular market calls made by the bank and was conducted by Paul Tucker, who was markets director at the time and is now the central bank’s deputy governor for financial stability. 

A member of Barclays’ senior management later instructed the employees to lower the Libor submissions for dollars and sterling so Barclays would be “within the pack,” or in line with rates reported by the other banks, according to the order. The employees, whose identities were withheld by investigators, reluctantly complied with the request, the CFTC said.

“I will reluctantly, gradually and artificially get my libors in line with the rest of the contributors as requested,” the Barclays employee responsible for submitting dollar borrowing costs said in an e-mail cited in the CFTC order. “I will be contributing rates which are nowhere near the clearing rates for unsecured cash and therefore will not be posting honest prices.”