A sensible thing to do perhaps

TSC sources on Sunday said Mr Tucker must have known that Royal Bank of Scotland and Lloyds Banking Group were posting false rates because their Libor submissions were lower than Barclays even after they had been locked out of markets and forced to take £60bn in secret loans from the Bank.

For we wouldn\’t have wanted the true Libor rates (infinity % for at least some of the reporting banks) to have been reported.

But it is a bit difficult to call for scalps at one bank over actions one was ignoring, if not encouraging, at others at the same time.

Note, for those who have not been keeping up, that this applies only to the deliberate attempts to talk Libor down during the crisis. This has no effect on the earlier attempted manipulations to favour trading positions.

14 thoughts on “A sensible thing to do perhaps”

  1. For we wouldn’t have wanted the true Libor rates (infinity % for at least some of the reporting banks) to have been reported.

    Would we not? Having government officials hand out secret loans from the taxpayer and collude in rigging markets is a good idea (especially when it is done without any punishment for the the bank bosses who have failed so spectacularly or any consideration of the moral hazard created)? How do we guarantee that the people responsible will have perfect knowledge and wisdom, and won’t be corrupt? If you support this, why not get them to centrally plan all industries?

    Now the government, in part to address the consequences of its meddling, wants to guarantee stock market returns:

    http://www.telegraph.co.uk/finance/personalfinance/pensions/9385161/Pensioners-to-be-insured-against-stock-market-falls.html

    Madness.

  2. I think it would be hard for Tucker to explain why Barclays should be fined for behaviour that he was evidently condoning in the banks that had been nationalised. I do hope someone on the TSC is on the ball on this one. Either the regulators must be censured for accepting submissions that were clearly unrealistic, or the FSA will have to recant on that part of its findings – and the world will have to accept that LIBOR is subject to political manipulation when it suits.

  3. “the world will have to accept that LIBOR is subject to political manipulation when it suits”

    I wouldn’t call it “political” manipulation if it were part of a BoE support scheme, which it now appears it might well have been. I’m curious what happened during previous crises. It’s one of those practical details that’s glossed over in economic courses (suppressing external indicators when central banks step in).

  4. I have a modicum of sympathy for Mr Tucker in this situation.

    For the system of lender of last resort to work and give time for the affected bank to resolve the problem needs confidentiality, otherwise panic could follow and there is no opportunity to sort out the problem. The fact that he knows a bank is in effect lying puts him in an awkward situation and I reckon he has to act as if he doesn’t know that any bank is seeking help from the BoE.

    Once the situation has been resolved full disclosure is then required so that the market can express its own opinion of the affected bank.

  5. “For we wouldn’t have wanted the true Libor rates (infinity % for at least some of the reporting banks) to have been reported. ”

    But they wouldnt have been reported (or, at least, not publically, unless the BBA leaked).

    Provided no more than 4 banks were under BoE support at once, the “infinity” (actually just stupidly high – people are still buying even Greek bonds) returns would have been excluded from the LIBOR calculation as the top 25% outliers.

  6. Political manipulation of LIBOR to maintain it at a sensible rate while markets were in turmoil was reasonable. What is not reasonable is then to censure and fine one bank for playing along with the manipulation.

  7. Richard,

    Not just UK banks. I think that’s the problem, really. The panel banks included several foreign banks that were in at least as much trouble as RBS and HBOS. How many outliers do you want?

  8. I don’t see that it would have made much difference if genuine numbers had been published. Because the truth was a very open secret. The CDS market, for example, was not fooled.

    Guaranteeing equity investments used to be a profitable business for equity structured products desks – typically the guarantee was paid for by a cap on the upside. It’s much less attractive when interest rates are very low, because the present value of the guarantee is much higher.

    Richard: the BBA panel submissions are published, by Reuters.

  9. For the system of lender of last resort to work and give time for the affected bank to resolve the problem needs confidentiality, otherwise panic could follow

    People withdrawing their money from a badly run bank is not panic – it is a rational and desirable outcome.

    and there is no opportunity to sort out the problem.

    The badly run bank failing is the solution to the problem.

    Political manipulation of LIBOR to maintain it at a sensible rate while markets were in turmoil was reasonable.

    Who gets to define sensible and turmoil here? What punishment will be enacted on the officials if they get it wrong? Who compensates those who would have benefited from having a higher LIBOR rate? Why bother having markets at all if we[1] get the government to meddle whenever the market doesn’t produce the answer we[1] want?

    [1] For a suitably narrow, politically connected insiders definition of “we”.

  10. People withdrawing their money from a badly run bank is not panic – it is a rational and desirable outcome.

    Rational for each individual: yes. Desirable: not so much, because the bank goes bust if everyone tries to withdraw everything at once. That’s, like, the whole effing point.

  11. Tim said: “For we wouldn’t have wanted the true Libor rates (infinity % for at least some of the reporting banks) to have been reported.”

    A bank with central bank support doesn’t need interbank lending. Should it’s estimate of interbank borrowing costs be then high or low? Should it even be on the panel of submitters?

    There is another option: For banks in receipt of central bank support to not submit figures. BBA Libor can be calculated with a mere 7 submissions according to their present guidelines.

  12. Rational for each individual: yes. Desirable: not so much, because the bank goes bust if everyone tries to withdraw everything at once. That’s, like, the whole effing point.

    If a bank has lost the confidence of its depositors/creditors, then it deserves to go bust in my opinion. Via deposit insurance, lender of last resort, secret bailouts, interest rate meddling, QE, etc we keep trying to make individual institutions safer, yet the result seems to be to make the system as a whole more unstable due to the moral hazard created by the interventions. We need a completely different approach.

  13. @ Ed
    Confidence can be destroyed by lies just as much as by truth.
    We are not talking so much about depositors withdrawing money from a badly-run bank, which usually did not happen, but a run on a relatively well-run bank. I was in print pointing out that Applegarth’s Northern Rock was wrong about losses on its unsecured lending long before Roberrt Peston triggered a run on the bank (which was not insolvent, even according to darling’s hand-picked accountant) but *I* didn’t precipitate a run on the bank.

  14. @john77
    Yes, lies and rumors about a bank could be a problem. The best solution I can think of is for the bank to maintain full reserves for all instant access deposits and only lend out money that has been lent to the bank via fixed term bonds.

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