Officials from the Bank of England and Britain's financial watchdog missed several opportunities to investigate how banks set the London interbank offered rate, now the subject of a scandal that has forced the resignation of the chairman of Barclays, according to U.S. and UK government records.
British regulators or the association charged with overseeing Libor were told at least five times since 2007 that fault lines existed in the way the rate was set.
Critical questions were raised in 2007 when in the autumn eight Bank of England officials, including Paul Tucker, now deputy governor, held a regular money market committee meeting with an official from the Financial Services Authority (FSA) as well as executives from the world's biggest banks.
As usual, an official from the British Bankers' Association (BBA), charged with the oversight of Libor, was also present.
Minutes of the meeting reveal attendees discussed the fact that Libor rates were lower than actual bank-borrowing rates. The minutes noted that, "Libor indices needed to be of the highest quality given their important role as a benchmark."
Now, nearly five years later, the same problem raised in that meeting -- and other meetings or phone conversations involving UK and U.S. financial regulators -- are at the heart of investigations that led last week to a $453 million fine against Barclays for playing a role in rigging the global rate that underpins trillions of dollars of derivatives and loans.
More than a dozen other banks are being investigated in the long-running global probe by authorities in North America, Europe and Japan, including Citigroup, HSBC, UBS and Royal Bank of Scotland.
Analysts and bankers expect more big fines.
A review of meetings held by a UK financial industry group, along with regulatory documents filed last week in the U.S. and UK, show how questions about Libor were debated quietly, out of public view, for years even as banks allegedly manipulated the rate for profits or to mask ailing financial health.
The regulatory documents detailing how Barclays attempted to
manipulate the rate were filed last week by the Commodity Futures Trading Commission and the Justice Department in the U.S. and the FSA in the UK.
According to the FSA, "individuals at Barclays raised concerns with the FSA, the Bank of England, the Federal Reserve Bank of New York and the BBA about the accuracy of Libor submissions."
A spokesman for the New York Fed declined comment.
According to people familiar with the matter, one chat was between Barclays Chief Executive Bob Diamond and Tucker, who is seen as a candidate to become BoE governor next year, and who was executive director for markets from 2002 to 2009.
Diamond has so far survived the scandal but on Monday, Barclays Chairman Marcus Agius quit, citing "the devastating blow" to Barclays reputation. Diamond and Agius, are expected to appear before UK lawmakers on Wednesday and Thursday and are likely to face stiff questioning about what regulators knew.
An FSA spokesperson declined comment. The BBA said it is cooperating with regulators. A review of how Libor is set began in March.
More details about the conversation between Tucker and Diamond could shed light on how the bank set its borrowing costs. Some at Barclays, according to the CFTC, mistakenly believed the bank had been granted permission to submit low borrowing costs after that conversation.
A spokesman for the Bank of England said on Monday it had not been aware of improper setting of Libor or manipulation.
"It is nonsense to suggest that the Bank of England was aware of any impropriety in the setting of Libor," the spokesman said. "If we had been aware of attempts to manipulate Libor, we would have treated them very seriously."
The BBA has coordinated Libor since the 1980s in a process which is not officially regulated. The rates are compiled and distributed for the trade body each day by news and information provider Thomson Reuters, parent company of Reuters.
The figures are designed to reflect rates at which top banks believe they could borrow money from each other in 10 major currencies and for 15 borrowing periods, from overnight loans to 12 months. By submitting false borrowing costs, banks could profit on derivative trades or avoid signaling to the market they were riskier than competitors.
In late 2007 and in 2008, when financial markets were in turmoil following the collapse of Lehman Brothers, Barclays artificially lowered its Libor submissions to avoid creating the perception that it was in trouble, but said other banks were also guilty of similar actions.
The FSA and CFTC documents detail multiple times when Barclays traders sought to manipulate Libor between 2005 and 2009. In September 2007, a Barclays manager asked the bank's compliance office what the bank's legal obligations were in contributing to the Libor calculation "when there are no trades in the market."
A big problem in calculating Libor has been that banks submit borrowing costs for maturities such as six or 12 months when they aren't actually borrowing money for those time periods.
Two months later, on November 15, a financial industry meeting was held. The meeting was for the Sterling Money Markets Liaison Group.
Formed in 1999, the group includes bankers and trade associations and meets quarterly with regulators to discuss a critical part of the UK financial plumbing system - how banks borrow money for short periods of time in the interbank market.
The meeting was held during the advent of the financial crisis as problems with subprime mortgages in the U.S. began to cause problems globally. In recent months, a top U.S. subprime mortgage lender called New Century Financial Corp. had imploded.
Elsewhere, investment bank Bear Stearns was in trouble, in France, a bank had suspended withdrawals from three investment funds and the European Central Bank (ECB) had injected billions of short-term funds into the financial system to lower spiking money-market interest rates.
Some three dozen people participated, including bankers from Barclays, Citigroup, JP Morgan Chase, Royal Bank of Scotland, Deutsche, Goldman Sachs, HSBC Holdings and Lloyds. Eight attended from the Bank of England, including Tucker.
According to the minutes, "Several group members thought that Libor fixings had been lower than actual traded interbank rates throughout the period of stress. Libor indices needed to be of the highest quality given their important role as a benchmark for corporate lending and hedging, and as a reference rate for derivatives contracts."
A BBA official told the group how it handled "quality control and safeguard measures used by the BBA to ensure the quality of Libor." The official said "dispersion" between what banks submitted had increased but had since lessened, partially "reflecting clarification from the BBA on Libor definitions."
Yet some two weeks later, in late November, 2007, a Barclays employee responsible for submitting Libor borrowing costs said in an email that Libor was "not reflecting the true cost of money ... Not really sure why contributors are keeping them so low but it is not a good idea at the moment to be seen to be too far away from the pack," according to the FSA regulatory filing.
The next day, a Barclays employee charged with submitting borrowing costs was "overruled" in submitting too high a cost during a phone conversation. During that discussion, the group "discussed their belief that other banks were submitting unrealistically low rates and speculated that other banks were basing submissions on derivatives' positions," according to the CFTC and FSA regulatory filings.
According to the CFTC filing, a Barclays treasury manager then phoned the BBA "and stated that he believed that Libor panel banks, including Barclays, were submitting rates that were too low because they were afraid to 'stick their heads above the parapet.'"
But the warning signal apparently did not go far. The Barclays official even "encouraged the BBA to react and be heavy-handed, suggesting the sanction that banks involved in such conduct be removed" from the Libor panel.
According to the CFTC, the BBA then emailed a steering committee - made up of the very banks submitting borrowing costs for Libor - to request "views on whether rates were artificially low and how to address this."
A few days later, problems increased inside Barclays and this time led to a conversation with the FSA, according to the FSA filing.
On December 4, according to the FSA filing, a Barclays employee who submitted the bank's Libor costs emailed a manager: "Feeling increasingly uncomfortable about the way in which (US dollar) libors are being set by the contributor banks, Barclays included. My worry is that we (both Barclays and the contributor bank panel) are being seen to be contributing patently false rates. We are therefore being dishonest by definition and are at risk of damaging our reputation in the market and with the regulators."
The internal whistleblower's concerns were "escalated" to bank compliance which two days later contacted the FSA. According to the FSA filing, "Compliance relayed an unspecific concern about the levels at which other banks were setting U.S. dollar Libor."
The FSA regulatory filing noted that the Barclays compliance office didn't confess that the bank's own submissions were improper. The FSA filing also said that Barclays' compliance office told the FSA that bank's submissions "could be justified although there may be a difference of opinion as to where Libor should be set given the liquidity conditions at the time."
According to the filing, the compliance official internally said that the FSA had "agreed that the approach we've been adopting seems sensible in the circumstances, so I suggest we maintain status quo."
By the spring of 2008, more questions surfaced in a conversation between Barclays and the BBA. At one point, a Barclays treasury official told the BBA in a phone call that the bank "had not been reporting accurately."
"We're clean, but we're dirty clean, rather than clean-clean," the Barclays official said. The BBA official, according to the CFTC filing, responded, "No one's clean-clean."
In August 2008, a month before the financial crisis spiraled with the implosion of Lehman Brothers, the BBA said it had reviewed how Libor was set and "concluded from the contributing panel bank's comments, including Barclays, that the contributing banks were confident that their submissions reflected the costs of borrowing" in the market and that "the existing process for Libor submissions was appropriate," according to the CFTC filing.
Months later, on September 16, 2009, the Bank of England's Money Markets Liaison Group held a meeting. Nine representatives from the Bank of England attended, as did bankers from Barclays, Deutsche, Goldman Sachs, JP Morgan, Lloyds and RBS.
During the meeting, a BBA official said the association was finishing a new governance structure for Libor. The official also said "there had been some isolated errors in the inputting of Libor submissions by banks recently. The fixings would not be recomputed unless the process as a whole had been compromised, which had not been the case recently."
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