Skip to main content

Timothy Geithner, at the time president of the New York Fed, raised the Libor issue with Bank of England Governor Mervyn King in 2008.John Gress

U.S. authorities became aware in the spring of 2008 that Barclays PLC was attempting to manipulate a widely used benchmark interest rate, and yet the abuse persisted, a revelation that could further erode confidence in the financial system.

The Federal Reserve Bank of New York on Friday released internal reports, slide presentations, e-mails and transcripts related to the British bank's admission that it sought to skew the London interbank offered rate, or Libor, during the financial crisis.

A congressional committee demanded the disclosure as part of its investigation of Libor tampering, an issue that was first raised in media reports in April, 2008, but only now is getting serious attention because the $451-million (U.S.) settlement between Barclays and U.S. and British regulators has brought new details to light.

The New York Fed insisted that its disclosure shows it pushed its British counterparts to correct problems with Libor, an interpretation backed by an e-mail that Timothy Geithner, the former New York Fed president who is now U.S. Treasury Secretary, sent to Bank of England Governor Mervyn King June 1, 2008.

That's unlikely to quiet lawmakers, who are bound to ask why the rate-fixing apparently continued even after Mr. Geithner's intervention.

"Any manipulation of this rate is a serious concern," Representative Randy Neugebauer, the Texas Republican who asked the New York Fed to release records of its communication with Barclays over Libor, told Bloomberg News in an e-mail statement. "We'll continue looking into this matter to determine who was involved in this practice and whether it could have been prevented by regulators."

Libor is a measure of what it costs more than a dozen major banks to borrow from other banks for periods ranging from overnight to a year in the London market.

As such, it serves as the starting point for setting prices on securities around the globe worth some $360-trillion, according to Bloomberg. In all, Libor is measured in 10 currencies over 15 different lending periods. The most common rate – and the one at the heart of the current scandal – is the cost of borrowing U.S. dollars for three months.

Libor also helps gauge the health of the financial system. During the financial crisis, Libor spiked as nervous banks balked at lending money to institutions they feared could fail at any moment.

In its settlement last month with the U.S. Securities and Exchange Commission and the Financial Services Authority in Britain, Barclays admitted it submitted rates that were below its actual cost of borrowing to deflect speculation that it was struggling.

"We know that we're not posting, um, an honest Libor," a Barclays employee told a New York Fed official during a phone call on April 11, 2008, according to one of the transcripts released Friday. "We are doing it, because, um, if we didn't do it, it draws, um, unwanted attention to ourselves."

The controversy is growing rapidly. Already, Barclays chief executive officer Robert Diamond and a senior deputy have resigned, and British parliamentarians have held heated committee hearings on the matter.

In the United States, Mr. Neugebauer's House financial services committee plans to shine a spotlight on the issue, and Fed chairman Ben Bernanke has been told to be prepared to answer questions on Libor when he testifies at the Senate banking committee on Tuesday. In Canada, the Investment Industry Regulatory Organization of Canada said Friday it would review the way it measures CDOR, the Canadian Dealer Offered Rate, which is similar to Libor.

Through a spokesman, Canada's Finance Minister Jim Flaherty declined to comment on the Libor scandal, citing continuing investigations of more than a dozen other banks involved in setting the rate.

Several banks involved in the Libor process have been asked to provide information, including Royal Bank of Canada, which has said it is co-operating with regulators and has done nothing wrong.

A spokesman for the Bank of Canada declined to comment because the central bank is in its customary blackout period ahead of next week's policy announcement.

Some think the extent of the foul play that went on with Libor is being exaggerated. Alan White, a professor of investment strategy at the University of Toronto's Rotman School of Business, said there are no obvious signs of systematic abuse in the Libor data. Still, Barclays' admission that it tried, and the investigations, will cause investors to lose faith in the financial system, he said.

"It affects the market's confidence if they think the rate is being fiddled with," Prof. White said. "Clearly, the banks have an interest in fiddling with it, but it's not that easy to fiddle."

Report an error

Editorial code of conduct

Tickers mentioned in this story