Friday, July 13, 2012

Barclay's told Fed it was manipulating Libor submissions 'to fit in with crowd'

As reported by the Telegraph, a Barclay's trader explicitly told the Fed that it was not being honest in its Libor submissions because it did not want to stand out from other banks that it felt weren't being honest either.

The simple fact that this information was kept from market participants is simply unacceptable.

The New York Federal Reserve warned top US officials in 2008 that lenders may be under-reporting their borrowing costs after a Barclays trader admitted attempts were made to manipulate Libor submissions to "fit in with the rest of the crowd". 
The bank has released a transcript of a conversation between Fabiola Ravazzolo of the New York Fed and an unamed Barclays trader from April 2008 where the employee claims attempts to manipulate Libor were made after unfavourable media reports suggested it was struggling to borrow affordably. 
"We were putting in where we really thought we would be able to borrow cash in the interbank market... 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," said the trader. 
"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. 
"It's true words to say we feel very uncomfortable with it. But, the - the position we find ourselves in, is one where we can't really fight it."
Please re-read the highlighted text.  And how did the Fed react to this stunning confession?
The Federal Reserve's Markets Group, which acts as a Wall Street watchdog, reported its concerns to officials at the New York Fed, the Federal Reserve Board of Governors, other Federal Reserve Banks, and the US Department of Treasury. 
The central bank claims that it became concerned about Libor after the 2007 financial crisis and passed on what it found to the Bank of England Governor Sir Mervyn King.
Apparently the Fed was concerned, but couldn't bring itself to do more than state is concern that banks manipulating the second most important rates in the financial markets might be a really bad thing.

Even more interesting to me is the simple fact that when Dodd-Frank was being debated, the Fed didn't see fit to inform the market of this manipulation.  It is probably just me, but I think it would have had some impact on Dodd-Frank.

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