Strategy

Bank of England Snatches Defeat from the Jaws of Victory

The deputy governor can’t explain why officials appeared to know rate-rigging was going on but did nothing.
Andrew SawersJuly 9, 2012

Last week the LIBOR scandal threatened to engulf the Bank of England as allegations surfaced that it had urged Barclays to “lowball” its rate submissions. On Monday, however, testimony given by the bank’s deputy governor, Paul Tucker, to a U.K. parliamentary committee probably was enough to sweep away claims that the Bank of England — and even top-level government officials — had been complicit in the rate-rigging scandal that recently saw Barclays landed with a £290 million fine.

While attention has focused on the rates Barclays was reporting, the Bank of England was, it was claimed, concerned about the rates Barclays was paying: two quite different things, as it turned out.

However, evidence emerged toward the end of Tucker’s hearing that suggested he knew, or at least ought to have realized, that banks were manipulating the data they put forward to the body that calculates the London interbank offered rates (LIBOR) for various currencies and a number of short-term maturities. So while the U.K. central bank probably didn’t tell Barclays to manipulate its rates, it had in its possession some evidence that rate-rigging was taking place in the market — but did nothing about it.

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Claims that the Bank of England had in fact told Barclays to do so first surfaced just before Bob Diamond, who resigned as Barclays’s chief executive a week ago, gave evidence to the same parliamentary committee. A Barclays file note of a telephone call between Diamond and Tucker on October 29, 2008, suggested Tucker said, “It did not always need to be the case that [Barclays] appeared as high [in its LIBOR submissions] as we have recently.”

Unnamed “senior” Whitehall government officials were referred to in this note, which therefore hinted at government involvement. While Diamond says he did not read this phone conversation as an instruction from the bank to keep its LIBOR bids low, one of his senior staff, chief operating officer Jerry del Missier, apparently did. He also resigned last week for his part in the scandal.

Tucker told the committee that the Bank of England’s and the government’s concern in October 2008 was, in fact, that Barclays’s money-market activity risked inadvertently giving “distress signals” or “looking desperate” by always paying top LIBOR rates. Barclays, he said, had refused to take a capital injection from the U.K. government, unlike two other banks, RBS and Lloyds. Tucker said there was concern whether Barclays had made the right decision in declining such support.

There was also concern that, by paying higher rates, Barclays might have attracted funds from the rest of the banking system to the extent that it reduced the benefit of the package of measures that had been introduced to provide liquidity to the interbank market.

But Tucker’s good work before the committee was largely undone when it emerged that minutes of a meeting he attended as far back as 2007 read: “Several group members thought that Libor fixings had been lower than actual traded interbank rates through the period of stress.” Tucker tried to explain, “We thought it was a malfunctioning market, not a dishonest one,” a reply that did not go down well with the parliamentary committee, whose chairman, Andrew Tyrie MP, said, “This doesn’t look good, Mr. Tucker.”

“Shambolic”
PIRC, a leading independent consultancy providing research and advisory services to institutional investors on corporate governance and corporate social responsibility, has branded the boardroom shuffle at Barclays “shambolic.” Last week’s news that chief executive Diamond was resigning came just a day after the announcement of the resignation of the chairman, Marcus Agius, who has now been recalled to lead the search for Diamond’s replacement. But the investment consultancy said the bank “shouldn’t have got themselves into a situation where they were losing both the chair and the chief executive, only to have to reverse one of those decisions.”

The resignation of the chairman last week was widely regarded as a move — ultimately futile — to take some of the pressure off Diamond so that he wouldn’t have to resign. Barclays, says a PIRC spokesperson, had been trying to “buy a bit of time by throwing the chairman under the bus.”

The PIRC spokesperson told CFO European Briefing, “We felt last week that it was fairly obvious that Bob Diamond would have to resign. Now they’ve had to U-turn and say Agius will go back and be a full-time chair.” PIRC’s representative added, “The process was handled poorly.”

PIRC said Agius had been under pressure from investors, anyway: “Some shareholders feel he hasn’t done a particularly good job of acting as a restraint on Bob Diamond.” Agius’s position was untenable, moreover, because he was also honorary chairman of the British Bankers’ Assn., the body responsible for collecting data from the banks and then calculating and publishing LIBOR rates. (Agius has resigned from that role, too.)

But while the decision to have an outgoing chairman involved in the search for a new chief executive might be deemed a highly questionable corporate-governance practice, the PIRC spokesperson admitted that, under the circumstances, this was the “least-worst” solution.

Diamond, who has been the focus of shareholder rebellion over boardroom pay, is believed to be still negotiating his severance package amidst considerable public and political pressure for him to be stripped of almost any payout.

Andrew Sawers is editor of CFO European Briefing, a CFO online publication.