The Libor smoking gun

The 2011 report by the Financial Services Authority into the collapse of Royal Bank of Scotland in early October 2008, three weeks before Tucker’s call with Diamond, makes clear the lender had lost its access to the money markets, noting that the “liquidity run reached extreme proportions”.

“On 7 October, 2008, RBS’s wholesale counterparties, as well as, to a lesser extent, retail depositors, were simply not prepared to meet its funding needs and RBS was left reliant on ELA from the Bank of England,” wrote the FSA.

The reference to ELA, or Emergency Liquidity Assistance, is important as Tucker, unlike the rest of the market at that stage, would have known that the Bank of England had begun providing secret loans, first to crisis-ridden HBOS and then to RBS, that totalled nearly £62bn.

Speaking to the Treasury Select Committee in November 2009, Tucker told the MPs that without the emergency loans it “would have been a lot worse than it would have been” otherwise. “This was a classic lender of last resort operation,” he said.

Records of historic Libor submissions available on Bloomberg show that despite HBOS and RBS being on emergency life support they were both submitting Libor figures that appeared to show they could borrow at cheaper rates in dollars and sterling than Barclays throughout the months leading up to the collapse of Lehman Brothers in September 2008, and in the period afterwards.

To any expert looking at the figures this would have appeared ridiculous, as it suggested banks that were on the brink of bankruptcy were in better shape than banks such as Barclays that insisted they did not have a liquidity problem and were about to raise billions of pounds of funding from Qatari investors.

Tucker would have been well aware that neither HBOS nor RBS had any access to funding and therefore the numbers they submitted did not reflect what they could actually borrow at in the market.

The authorities knew very well that Libor was being manipulated.

14 comments on “The Libor smoking gun

  1. Of course they knew. That’s been obvious all along. I’d guess this is why the Treasury absolutely doesn’t want a judicial inquiry. They can silence politicians, but a judge is a bit more difficult.

    The “bash the banks” meme is in many ways a smokescreen to deflect attention from the behaviour of the Bank of England and the Treasury during the financial crisis. What puzzles me is that the FSA doesn’t seem to have been in the loop. If they had limited themselves to investigating the 2005-2008 LIBOR manipulation by traders none of this would have come out. By investigating all of the LIBOR irregularities they’ve done a thorough and comprehensive job which has dropped not only Barclays but the Bank of England and the Treasury right in it. There are serious questions to be answered, but I don’t think they will be.

  2. It’s a further effect of Brown’s disastrous “tri-partite” bank regulation. Since part of the point of last-resort lending is to restore confidence in a bank or the banking system, it’s unlikely to work well if the supported banks continue to look distressed (eg, high Libor rates). With a single organisation responsible for the banking system, that’s easy to fix. Interesting.

  3. The article says: “Tucker would have been well aware that neither HBOS nor RBS had any access to funding and therefore the numbers they submitted did not reflect what they could actually borrow at in the market.”

    LIBOR is not a measure of the cost of interbank borrowing but an average of a number of estimates.

    Barclays appear to me to have been more realistic with their estimates and this resulted in higher submissions while they were trying to find private investment money which dropped when they obtained it.

    HBOS and RBS seem to have taken the view that emergency lending from the BoE reduced their risk profile and that it should be reflected in their LIBOR submissions. But if the emergency lending was confidential it shouldn’t have been reflected in their LIBOR submissions as the interbank market wouldn’t have known about it.

  4. is it a smoking gun, or is it regulators etc. acting sensibly during a crisis?

    if the BoE is providing secret loans to try to keep banks alive without causing a panic, do we also expect them to be jumping up and down pointing to Libor rates and saying “these are clearly fictional we know nobody is prepared to lend to you” – that wouldn’t exactly be joined-up thinking would it.

  5. I think this whole lender of last resort is silly. If other banks find you not worthy of liquidity, you should be put into receivership. Now they just seem to be playing games: get a cheap loan from BOE, while savers still get a lousy interest rate on deposits.

  6. Both HBOS and RBS were subsequently taken over. The last resort lending precedes that to allow an orderly transition and to keep credit flowing. (Depositors will get even worse rates if the bank collapses taking their deposits with it.) In exceptional cases, the whole system can freeze, with a huge crisis of confidence or even from panic, not necessarily because of faults at any given bank, and last resort lending then does whatever it takes to get money flowing again. It’ is more analogous to control system engineering than finance in that case.

  7. I hear a whisper of top level resignations from the FSA. Not for this debacle though…

  8. Luis,

    You can’t be serious. The FSA’s finding, for which they have fined Barclays, is that Barclays submitted lower rates to make their financial position look stronger. If during this period the Bank of England was turning a blind eye to exactly the same behaviour (only more so, because the rates were lower) from nationalised banks, that is the most appalling example of double standards.

  9. Frances: you’re completely misreading the situation.

    Traders at Barclays rigged LIBOR well before the crash. The bank made a concerted effort to submit lowballed LIBOR numbers after the crash. Possibly with the tacit support of the BoE, which may also have tacitly supported other banks’ LIBOR lowballing.

    As a result, the Yanks and the FSA have fined Barclays for rigging LIBOR. It’s not clear what part of the fine relates to which activity (although it is very clear that Barclays’ spin is trying to position it as related to the second, in order to hide its unequivocal wrongdoing in the first).

    Nobody else has been fined yet. They are currently being investigated, and some/most/all of them will be fined. They will pay fines on the same basis as Barclays, minus the discount for singing like a canary. That includes the nationalised banks, if they’re found to have engaged in the same activities as Barclays.

    Where the blazes are the double standards there…?

  10. “in order to hide its [Barclays] unequivocal wrongdoing”

    In the first case, however, the bank itself (as an institution) wasn’t rigging Libor: that was traders attempting to make themselves better deals notionally on the bank’s behalf, but actually to enrich themselves. The banks involved seemed to have stopped that activity quite rapidly once they discovered it, sacked the traders, and provided evidence to the authorities.

  11. Frances,

    not joking, making a different point.

    yes if the FSA is going to fine one, it should fine all.

  12. It would be interesting to work out when messing with LIBOR became common. For those who study financial crises will remember the Japan premium on LIBOR that did for many Japanese banks international operations and also helped to push authorities into injecting new capital.

    http://www.nber.org/papers/w7251

    What did for the Japanese banks did not occur for RBS.

  13. john b

    I’m not misreading the situation at all. I’ve read the FSA report and I’m well aware that Barclays were also fined for trader manipulation of LIBOR during the period 2005-2010. That is a completely different issue from the lowballing of LIBOR during the financial crisis and in particular in the summer and autumn of 2008.

    The double standard is that if the Bank of England tacitly encouraged lowballing of LIBOR submissions by HBOS and RBS – which it looks very much as if it did – the FSA really can’t censure Barclays for doing exactly the same. Nor can it censure HBOS and RBS. If the Bank of England is complicit then it must be called to account. Either that, or the FSA must accept that political manipulation of LIBOR in extreme circumstances is a reasonable thing to do – which was Luis’s point. The present situation, which is that banks can be fined by the FSA several years after doing things that the Bank of England knew they were doing and took no action to prevent, is really not acceptable.

    This looks like quite a bad split between the FSA and Bank of England, actually.

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