Tuesday, July 3, 2012

Bank of England and FSA soon to discover cover-up worse than crime

According to a BBC report (h/t ZeroHedge), the Bank of England and the FSA eased Barclays' Bob Diamond out of his job.

What persuaded Mr Diamond and his board colleagues that he should resign was an unambiguous message to the bank from Sir Mervyn and Lord Turner that they would be happy if he resigned. 
They were unable to force him out, because the recent FSA investigation into how Barclays attempted to rig the important Libor interest rates did not find him personally culpable. 
However, as a regulated institution, it was impossible for Barclays' board to ignore the revealed wishes of the two most powerful regulators in the City. 
"This is a case of the governor getting his way by the inflexion of his eyebrows," said a source.
Please re-read the highlighted text again with particular emphasis on how it was impossible to ignore the revealed wishes of the regulators and how the regulator could get his way by the 'inflexion of his eyebrows'.

The reason this is important is what it says about the conversation between the Bank of England's Paul Tucker and Bob Diamond.

Simply by questioning why Barclay's Libor submissions were out of line, the BoE was communicating by inflexion of its eyebrows.

Support for this can be found in a Financial Times article.
Bob Diamond is threatening to reveal potentially embarrassing details about Barclays’ dealings with regulators if he comes under fire at a parliamentary hearing on Wednesday over the Libor rate-setting scandal, according to people close to the bank’s chief executive. 
“If he is attacked, he will fight back,” said one person familiar with preparations for the Treasury select committee hearing. 
Such a confrontational tactic could aggravate the fraught relations between the bank and the authorities after Barclays paid £290m to settle an investigation by UK and US regulators over the bank’s involvement in manipulating key interbank lending rates....
Since Mr. Diamond has been forced to resign, we can expect that he will not reveal any potentially embarrassing details.  After all, the government could still pursue him for fraud.
Barclays is facing a fierce backlash from politicians and some shareholders following its record fine. But the bank believes it has been unfairly singled out for criticism for reaching a settlement while 20 other banks are still embroiled in the probe. 
According to two people close to Mr Diamond, the Barclays chief executive is furious that he and the bank have been blamed for “lowballing” the rates at which Barclays said it could borrow from rivals at the height of the financial crisis in 2007 and 2008. 
Bankers insist the authorities knew these rates were inaccurate but did not object at the time because of fears it could further destabilise already panicked markets. 
“[Regulators] knew perfectly well those rates were not the ones where banks were prepared to lend to each other,” said one senior banker at another institution. “They had all the evidence.” 
Regulators and only regulators had all the evidence.  This was a function of the regulators' information monopoly.  Only regulators have access on an on-going basis to each bank's current asset, liability and off-balance sheet exposure details.

As a result of this information monopoly, the regulators knew who was understating their Libor submissions, who was not understating their submissions and the amount of the understatement.
The settlement documents themselves allude to prior dealings with regulators over the issue. 
These include a conversation with the Financial Services Authority about “the extent that the Libors have been understated”
How long did the FSA know that Libor submissions were understated? Did the Bank of England know it was common practice to understate Libor?  Did the Bank of England know 'perfectly well those rates were not the ones where banks were prepared to lend to each other'?
and an October 2008 exchange, since revealed to have been between Mr Diamond and Paul Tucker, deputy governor of the Bank of England, in which Mr Tucker asked Mr Diamond why Barclays’ Libor submissions were higher than those of other banks. 
After that conversation, the settlement documents say, mid-level Barclays managers “mistakenly believed” that Barclays had been told by the BoE to reduce its Libor submissions. US settlement documents say that Mr Tucker did not give such an instruction and that Mr Diamond did not think he had done so..... 
Simply by questioning Barclay's Libor submissions as being too high, the BoE communicated its wishes by a metaphorical inflexion of its eyebrow.

My question is:  is it a crime if a bank regulator permits a bank to disclose information that the regulator knows to be false and misleading?

I can easily imagine that the Bank of England would have wanted banks to report as low a Libor as possible.  It appears that the BoE was aware that banks manipulated Libor.  Is it a crime if the BoE sought to take advantage of the banks manipulating Libor to try to reduce the severity of the financial crisis?

Regular readers know that adoption of the Japanese model for handling a bank solvency led financial crisis and with it preservation of the myth that the banks have positive book capital levels necessitated deception.

A prime example of deception is regulatory forbearance that blesses the banks keeping zombie borrowers alive using 'extend and pretend' techniques.

The simple truth is that banks wiped out their book capital.  BoE Governor Mervyn King was fully aware of this as confirmed by a WikiLeaks of an e-mail where he talks about the issue of bank solvency.

This returns me to the question:  is it a crime for the financial regulators to permit a bank to disclose information that the regulator knows to be false and misleading?

What is clear to your humble blogger is that by forcing Mr. Diamond out (I assume the top three officials at every bank involved in the Libor scandal will be fired), the BoE and FSA have turned the spotlight onto themselves and what they knew and when they knew it and what actions they took.

I have a couple of additional questions that would be interesting to know the answer to.  Did Mr. Tucker call any other UK based banks around that time to inquire about their Libor submissions?  Did these banks subsequently lower their submissions?

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