LIBOR Update: Rigged Revelations

We have written extensively on LIBOR-related issues over the years, and we were interested to see the two recent publications by Andy Verity, the BBC’s economics correspondent, in The Times (see here and here). The linked articles are extracts from Verity’s upcoming book, Rigged, which investigates the LIBOR-rigging scandal—and presents claims that “investigating agencies, including the FBI in the United States and Britain’s financial regulator, were told in November 2010 of an international drive to get Libor and Euribor rates down, regardless of the real cost of borrowing cash.”   

This claim has already sparked comment in the British parliament, with David Davis, MP, calling for an inquiry into claims that state involvement in Libor-rigging were “covered up,” with low and middle-ranking bankers subject to “scapegoating.”  Davis also expressed concern that the Treasury select committee “may have been misled by the state agencies about the knowledge and involvement of the state in setting false rates.”  The chair of the Treasury committee, Andrew Tyrie, similarly expressed concern at the suggestion that the “committee’s inquiry into the Libor scandal was not told the whole truth.”

The UK’s Financial Conduct Authority, the Bank of England, and the European Central Bank have all made statements disclaiming the allegations.  According to the Times, other implicated entities, including the FBI and Federal Reserve, have thus far declined to comment.

The two primary reasons for the Libor-rigging scandal are well known: the self-reporting nature of the metric meant, first, that traders could, and did, nudge the Libor in a direction that would benefit a derivative swap—a money-making measure—or, second, that traders would, and did, lowball their borrowing rate, and thus depressing the Libor metric as a whole—a protective measure meant to instill the market with a (false?) confidence in one’s bank’s health and well-being.  Verity’s allegations raise a third option: the impetus to deflate Libor was coming not from the individual employees in the derivatives group, from the employees responsible for setting Libor, or even from an individual bank’s senior management: it was coming from the outside, and it was coming from the top. 

The two extracts that have been published to date provide for dramatic reading.  The first focuses on Barclays, which was coming under pressure for “spoiling it for everyone” by continuing to report more accurate interest rates, thus keeping Libor high.  The excerpt includes the following conversation extract, obtained from a confidential recording:

“Mate, I’ve been on fire tonight,” [Mark] Dearlove said, sounding stressed and dreading what he was about to order Johnson to do. “The bottom line is you’re going to absolutely hate this, and I’ve spoken to Spence about it as well, but we’ve had some very serious pressure from the UK government and the Bank of England about pushing our Libors lower.”

[Peter] Johnson — who later would be jailed for Libor-rigging — replied: “So I’ll push them below a realistic level of where I think I can get money?”

“PJ, I’m on your side, 100 per cent. These guys don’t see it. They’re bent out of shape. They’re calling everybody from Diamond to Varley to Jerry [del Missier].”

The discussion continues with references to pressure from the European Central Bank, and the contrast in consequences is already stark.

In the second extract, the FBI enters the chat, interviewing the above-referenced Johnson about the same call.  In that interview, Johnson explains that Barclays was not the only bank facing pressure, stating that “we understood that the French banks had been told to get their rates down.”  When asked if he knew who the source of that pressure was, Johnson replied, “We believe it was the Banque du France.”  “So the national bank of the respective country?” the interviewer clarified; “Yes,” responded Johnson.  He also explained, in response to a question about Chase Bank, that there had been rumors surrounding its recent offer to lend into the market—namely, that “the Fed [Federal Reserve] had asked it to” do so.

Neither the recording of the Johnson/Dearlove call, nor Johnson’s interview transcript, were produced by the FBI or other regulators.  This includes—a point Verity closes on—a failure to disclose to the juries in the rate-rigging trials that resulted in several traders being sent to prison.  While Johnson himself pled guilty in 2014, and thus did not stand trial, it would appear that scope of the revelations goes far beyond the individual actions of any one trader.

Rigged builds on Verity’s previous work on the same subject, including The Lowball Tapes, a 2022 podcast which included interviews with the traders as well as audio recordings obtained exclusively by the BBC.

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