Monday, July 9, 2012

BoE's Paul Tucker: Libor a 'cesspit' and banks's dishonesty suggests other major debt markets rigged too

In his testimony before the Treasury Select Committee, the Bank of England's Paul Tucker made the definitive case for requiring transparency in all the opaque corners of the financial system including requiring banks to provide ultra transparency and disclose on an ongoing basis their current asset, liability and off balance sheet exposure details.

From a Telegraph article,

The market for determining one of the world’s key interest rates was a “cesspit” and banks cannot be trusted to be honest in several other major markets, the deputy governor of the Bank of England has warned. 
Paul Tucker told MPs that Barclays’ abuse of the Libor system may be only one part of the banks’ dishonesty over crucial financial information, suggesting that other markets should now be investigated.

An official inquiry into Libor – which helps determine interest rates for householders and businesses – should be broadened to include several over markets where banks are trusted to report their own data, he said.

Please re-read the highlighted text as the only way to restore trust in a financial system is by providing transparency.

We can have investigations for years, but all the investigations will show is that every place in the financial system where the regulators failed to ensure there was transparency is a problem.

Regular readers know that in our modern financial system based on the FDR Framework the primary task of the regulators is to ensure that market participants have access to all the useful, relevant information in an appropriate, timely manner.

Clearly, that was not the case with Libor.  At the outset, the regulators should have required that it be based on actual trades.  Trades that were reported as part of each bank's disclosure under ultra transparency.
Barclays has been fined almost £300 million for deliberately lying about the rates it was paying during the financial crisis, in order to downplay the financial pressure it was under. 
Other banks are also being investigated for distorting Libor, which is calculated on major banks’ own reports of their borrowing costs. 
Mr Tucker said he could not be sure that abuse of the Libor system is not continuing to this day, telling the committee: “I can't be confident of anything after learning of this cesspit.”
The Libor scandal could be repeated in a number of other “self-certifying” markets where prices are determined, he said. 
“Self-certification is clearly open to abuse, so this could occur elsewhere,” he said.
The Deputy Governor of the Bank of England has now made the definitive case for requiring transparency.

His message is simple, if the banks would screw their customers using Libor, they will screw their customers any way they can.

The only way to stop this is by requiring transparency.
A Financial Services Authority inquiry into Libor should be extended to other self-certifying markets, he said. The Treasury said last night that the review, led by Martin Wheatley, was free to examine markets other than Libor. 
An expansion of the FSA review could take in a number of other interest-rate-related data as well as some complex financial instruments measuring the difference between banks’ borrowing costs and that of the US government. Some markets in gold and oil are also based on self-certification. 
Mr Tucker faced intense questions from the MPs about why the Bank had not acted on abuse of Libor earlier and had not apparently been aware of abuses until a few weeks ago. 
He admitted that the Bank had been concerned about the integrity of the Libor process during the financial crisis, but did not suspect deliberate wrongdoing. “We thought it was a malfunctioning market, not a dishonest market,” he said.
The lesson from the 1930s is that where there is opacity there is dishonesty and the only way to end this dishonesty is with transparency as sunshine is the best disinfectant!

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