Libor scandal highlights the question: who will guard the guards

As the various regulators make the rounds explaining why their agency was not responsible for the failure to put a stop to the manipulation of the Libor interest rate, a bright light is now being shown on the question of who will oversee the regulators to ensure they perform their function?

Regular readers know that under the FDR Framework, the role of overseeing the regulators falls to the market.

The reason the market can oversee the regulators is because of transparency.  With transparency, market participants have access to all the useful, relevant information in an appropriate, timely manner. This includes,

• For banks, this means the banks are required to disclose on an ongoing basis all of their current global asset, liability and off-balance sheet exposure details.

• For structured finance securities, this means that these deals report on an observable event basis all activity, like a payment or default, that occurs involving the underlying collateral before the beginning of the next business day.

By eliminating opacity from all of the currently opaque corners of the financial system, market participants are in a position to monitor what is happening and see if the regulators are doing what they are suppose to do.

As reported by the Telegraph,

The latest instalment of the Libor fiasco aired today .... it also raised key questions about how the Bank will operate and whether it’s fit for the job. 

Sir Mervyn King and Paul Tucker – the Bank’s Governor and his deputy – and Financial Services Authority chief Lord Turner were the latest heavyweights called before MPs. 

Between them, they contrived to paint a damning picture of financial regulation and oversight. 

The FSA’s inadequacies were laid horribly bare – it failed to spot attempts to rig Libor and has subsequently mishandled the fallout. 

As Lord Turner admitted on Monday evening, the regulator was warned 13 times by Barclays that banks were “low-balling” Libor. Clearly an unlucky number, because the warnings never reached the top of the FSA..... 

Compare that with events in the US when a Barclays employee told a regulator that the bank had been under-reporting Libor. The message was passed to senior managers at the New York Federal Reserve and subsequently found its way on to the desk of Tim Geithner, then heading the organisation.....

Where it effectively died as he wrote a cover his backside email to the Bank of England without informing it what the Barclays employee had said.

The conclusion to all of this must be clear – even to the FSA. The Libor story has laid bare the need for better supervision of the Bank when it takes on the regulator’s remit next year.  

The same holds true of the Fed.