Financial regulators knew about Libor manipulation, but no one acted

With the release of the Libor-related documents by the NY Fed and the Bank of England, it is clear that the financial regulators knew that Libor was being manipulated in 2008.  It is also clear that no financial regulator took the necessary steps to stop the manipulation at that time.

THE lesson to be drawn from those facts is the need to restore transparency in all the opaque corners of the financial system.

• For banks, this requires that they disclose on an ongoing basis their current asset, liability and off-balance sheet exposure data.
• For structured finance securities, this requires that each security disclose before the next beginning of the next business day all the activities, like payments and delinquencies, that occurred with the underlying collateral.

Sunshine is the best disinfectant.  Had there been transparency, Libor could have been based off of actual trades.  The result being that it would not have been easy to manipulate.

As reported in the Independent,

Regulators on both sides of the Atlantic failed to act on clear warnings that the Libor interest rate was being falsely reported by banks during the financial crisis, it emerged last night....
An unnamed Barclays employee told a New York Fed analyst, Fabiola Ravazzolo, on 11 April 2008: "So we know that we're not posting, um, an honest Libor." 

He said Barclays started under-reporting Libor because graphs showing the relatively high rates at which the bank had to borrow attracted "unwanted attention" and the "share price went down". 

The verbatim note of the call released by the Fed represents the starkest evidence yet that Libor-fiddling was discussed in high regulatory circles years before Barclays' recent £290m fine. 

The New York Fed said that, immediately after the call, Ms Ravazzolo informed her superiors of the information, who then passed on her concerns to Tim Geithner, who was head of the New York Fed at the time. 

Mr Geithner investigated and drew up a six-point proposal for ensuring the integrity of Libor which he presented to the British Bankers Association, which is responsible for producing the Libor rate daily. 

Mr Geithner, who is now US Treasury Secretary, also forwarded the six-point plan to the Governor of the Bank of England, Sir Mervyn King. 

The Bank pointed out last night that there was no evidence in the Geithner letter of banks actually making false submissions – although then note did allude to "incentives to misreport".....

Which suggests that the Geithner letter was written solely to try to cover Mr. Geithner's backside as oppose to spurring the Bank of England to take some action.

What is clear is during the debate about the Dodd-Frank Act, Mr. Geithner did not share the simple fact that banks had been manipulating Libor with the US public.

As a result of this failure to disclose this information, the debate did not focus on how to bring transparency to all the opaque corners of the financial system.

This is reflected in the Dodd-Frank Act which does nothing to bring transparency to all the opaque corners of the financial system and ensure that market participants have access to all the useful, relevant information in an appropriate, timely manner.