As a bank doing business in the United States, Barclays U.S. operations would have come under the Fed’s purview. This would have been even more the case after it acquired the investment banking and trading operations of the bankrupt Lehman Brothers in September, 2008.
Officials with the New York Fed talked to authorities in Britain about problems with the calculation of Libor and also heard from market participants about whether an alternative could be found for Libor, people familiar with the situation said.
In early 2008, questions about whether Libor reflected banks’ true borrowing costs became more public. The Bank for International Settlements published a paper raising the issue in March of that year, and an April 16 story in the Wall Street Journal cast doubts on whether banks were reporting accurate rates. Barclays said it met with Fed officials twice in March-April 2008 to discuss Libor.
According to the calendar of then New York Fed President, Timothy Geithner, who is now U.S. Treasury Secretary, it even held a “Fixing LIBOR” meeting between 2:30-3:00 pm on April 28, 2008. At least eight senior Fed staffers were invited.
It is unclear precisely what was discussed at this meeting or who attended. Among those invited, along with Geithner, was William Dudley, who was then head of the Markets Group at the New York Fed and who succeeded Geithner as its president in January 2009. Also invited was James McAndrews, a Fed economist who published a report three months later that questioned whether Libor was manipulated.
“A problem of focusing on the Libor is that the banks in the Libor panel are suspected to under-report the borrowing costs during the period of recent credit crunch,” said that report in July, 2008, that examined whether a government liquidity facility was helping ease pressure in the interbank lending market.
When asked for comment, Mr. McAndrews directed questions to a New York Fed spokeswoman. Dudley could not be immediately reached for comment.
To be sure, the Fed’s reports have sometimes been inconclusive. One from last month – only shortly before the Barclays settlement was announced – found that “while misreporting by Libor-panel banks would cause Libor to deviate from other funding measures, our results do not indicate whether or not such misreporting may have occurred.”
However, a 2010 draft of a related paper had said that banks appeared to be paying higher rates to borrow from other banks during the financial crisis compared with the levels they reported.
One step the New York Fed could have taken in 2008 when questions initially were raised was to find a way to get its staff embedded in the Libor calculation process, Yale’s Verstein said.
There, they could use the Fedwire Funds Service – an electronic system through which banks settle interbank loans between one another – as a backstop to measure whether banks were accurately reporting borrowing costs. Then after the financial crisis had passed, regulators could have helped “urge on a newer and better system,” he said.
The New York Fed was not part of the Barclays settlement, which was the first major resolution in the Libor probe.
The U.S. Commodity Futures Trading Commission, the U.S. Department of Justice, and the Financial Services Authority in Britain, settled with Barclays.
The scandal has thrown into sharp relief a potential regulatory gap: No single regulator appears to have had ultimate responsibility for making sure rates banks submitted were honest.
On Monday, the Bank of England’s Tucker called the issue of banks improperly submitting rates a “cesspit.”
In documents released with the Barclays settlement, the CFTC said Barclays traders on a New York derivatives desk asked another Barclays desk in London to manipulate Libor to benefit trading positions.
“For Monday we are very long 3m (three-month) cash here in NY and would like the setting to be set as low as possible,” a New York trader e-mailed in 2006 to a person responsible for setting Barclays rates.
Darrell Duffie, a Stanford University finance professor who has followed the Libor issue for several years, said that he believed regulators were “on the case reasonably quickly” after questions were raised in 2008.
“It appears that some regulators, at least at the New York Fed, indeed knew there was a problem at that time. New York Fed staff have subsequently presented some very good research on the likely level of distortions in Libor reporting,” Duffie said. “I am surprised, however, that the various regulators in the U.S. and UK took this long to identify and act on the misbehaviour.”