Libor: a scandal back in the spotlight

Tom Hayes © Rex Features
Libor trader Tom Hayes: jailed for 11 years

Several junior bankers have been convicted of tampering with a key interest rate. Now there are allegations that the Bank of England was doing the same. Simon Wilson reports.

What’s happened?

The acquittal last week of two former Barclays bankers accused of Libor-rigging, plus a taped conversation between two Barclays staff broadcast on the BBC’s Panorama this week – in which they appear to discuss concerted pressure from the Bank of England and civil servants to lower the lender’s Libor submission at the height of the financial crisis in 2008 – have put the Libor scandal back in the spotlight.

Libor is the “London interbank offered rate”, a benchmark interest rate used to set the price of trillions of dollars worth of loans globally. Until the system was changed after the scandal, the rate was calculated each night by averaging out rates submitted by a pool of trusted banks, each of whom stated what rate they would expect to pay to borrow money short-term. Famously, that proved an easy system to rig.

How, exactly?

If you could influence (or bribe) bank or brokerage staff to make particular Libor submissions, you could place massive bets – tens of millions of dollars – on the direction of Libor-based short-term rates, and reap the rewards. Two well-reviewed books published in recent months (The Fix, by two Bloomberg reporters, and The Spider Network, by David Enrich who covered the scandal for The Wall Street Journal) describe how a network of bank traders and brokers did just that for years before being exposed in 2012.

The latter book draws on extensive interviews with Tom Hayes, the British star Libor trader who made $280m of profits for UBS and ended up with 11 years in jail. He is appealing against his conviction, seeing himself as a scapegoat who took the fall for a practice that was widely known and tolerated by bosses.

What does the tape contain?

It’s a recording of a senior Barclays manager, Mark Dearlove, instructing the bank’s Libor submitter, Peter Johnson (who pleaded guilty last summer to manipulating Libor and went to prison) to lower his Libor submissions. “The bottom line is you’re going to absolutely hate this… but we’ve had some very serious pressure from the UK government and the Bank of England about pushing our Libors lower.” Johnson objects that this would be breaking the rules. “So I’ll push them below a realistic level of where I think I can get money?”, he asks. His boss Dearlove replies: “The fact of the matter is we’ve got the Bank of England, all sorts of people involved in the whole thing… I am as reluctant as you are… these guys have just turned around and said just do it”.

Why’s that significant?

The tape is so significant because it implicates the Bank of England in the Libor-rigging scandal – not just because of its content but because the taped conversation took place on the same day that Bob Diamond, who was then the boss of Barclays, discussed Libor with the Bank of England’s Paul Tucker. As such, it calls into question the evidence given in 2012 to a Treasury select committee by Diamond and Tucker (later the deputy governor) that they hadn’t known anything about banks “lowballing” Libor submissions until the scandal broke in 2012.

It’s important here, though, not to conflate two separate sets of allegations. The Libor rigging for which Hayes and others were convicted was straightforward fraud. Traders and Libor submitters were guilty of colluding to shift the benchmark up or down to boost their gains and bonus prospects – something they knew was dishonest. The Bank – if indeed it did pressure lenders into lowering the rate – had very different motivations.

Which were?

It is suspected of pressuring lenders to lower the rate to make it look as though the financial crisis wasn’t as bad as it actually was. “Give the impression the banks are still lending to each other and you might prevent them collapsing like a pack of dominoes,” as Jim Armitage says in the Evening Standard. “A confidence trick, sure, but with the noble aim of saving the world.”

In the event, the alleged plan didn’t work. But for all the questions over who knew what when, no one is disputing that Tucker and senior civil servants were acting with the interests of the UK and the global financial system at heart – “not trying to bag themselves a Porsche”. Even so, if the allegations concerning the Bank are true, they do add weight to one aspect of the convicted bankers’ appeals.

In what way?

If the Bank did pressure lenders to manipulate Libor to save the financial sky from falling in, it suggests it was widely known that the benchmark was easy to tamper with. That makes it more likely that relatively junior bankers prosecuted for fraud are telling the truth when they say they acted with the knowledge of senior management.

The Fix has an instructive interview with Minos Zombanakis, the Greek banker who devised the Libor system in 1969. “Back then the market was small and run by a few gentlemen… We took it for granted gentlemen wouldn’t try to manipulate things like that. But banking now is like a prostitution racket run by pimps.”

Will there be an inquiry?

Conservative MP Chris Philp, who sits on the Treasury committee, has gone on record as saying the Barclays tape makes him suspect that “those people giving evidence, particularly Bob Diamond and Paul Tucker, were misleading parliament [and] that is a contempt of parliament”.

He wants them recalled urgently to explain. Diamond this week said he stood by his previous statements; Tucker hasn’t as yet commented. Some have called for a new investigation. Granted, Libor was only one small part of dishonesty in the global banking system, argues Jim Armitage. But while fairly junior bankers are languishing in jail, “it seems only just that we have a proper investigation, led by a QC with proper investigatory powers, into who knew what about this shabby affair”.