When Barclays was found guilty of rigging LIBOR, regulators threw the book at it. But is it possible that the bank was acting under instruction from the Bank of England?
The BBC reckons it has found a rather large hole in the mask of innocence worn by the Bank of England during the LIBOR scandal.
To remind you, LIBOR stands for London Interbank Offered Rate. It is the rate at which banks are willing to lend to each other, and used to be set using a system that relied on an awful lot of trust in the banks themselves. Each day, banks were supposed to submit the three-month borrowing rate, measured in dollars, that they had to pay to borrow from other banks. This information, from all the banks was put together and formed the LIBOR rate.
These days, the system is different and is based on hard data rather than what banks say they are doing.
A few years ago, evidence emerged that a number of banks, but with Barclays very much in the vanguard, had been manipulating LIBOR. Evidence of wrong doing went back as far as 2005.
The FSA released a report saying derivatives traders at Barclays had made 257 requests to fix the LIBOR rate. It turned out that one trader sent a message saying: "duuuude... what's up with ur guys 34.5 3m fix... tell him to get it up!".
Back in 2005 no one cared, but by 2007 the words ‘credit crunch’ had penetrated public consciousness. The rate at which banks lent to each really did matter. Indeed, the run-on Norther Rock occurred because the bank was struggling to borrow from other banks.
It got messy, because there were signs that that Bank of England was not dealing with the problem, or at the very minimum was sending mixed signals.
Timothy Geithner, US treasury secretary during Obama’s first term, sent Bank of England governor, Mervyn King, a list of proposals to tackle the LIBOR problem.
But the UK LIBOR rate was much higher than the US equivalent – this vexed the Bank of England.
And there were suggestions of somewhat confusing conversations between the Bank of England's deputy governor Paul Tucker, and Bob Diamond, boss at Barclays. According to Barclays, Mr Tucker said that LIBOR "did not always need to be the case that we appeared as high as we have recently". Was that the Bank of England giving permission to manipulate LIBOR downwards? Paul Tucker said later that his words were taken out of context, and that the wrong impression was given.
Then in 2012, the chickens came home to roost. The Barclays chair, Marcus Agius resigned, followed by the resignation of the CEO Bob Diamond. Mervyn King called for a cultural change within the bank.
Barclays was fined $2.3 billion by US and UK regulators, at that time there was even a question over whether Barclays would be allowed to continue to do business in the US.
Arrests were made concerning LIBOR irregularities, one trader Tom Hayes, who had worked for UBS was sentenced to 11 years in jail – some felt he made been made into a scapegoat.
But now the BBC has obtained access to recordings of two Barclays employees, suggesting that they had been instructed by the Bank of England to manipulate LIBOR. According to the BBC, Barclays executive Mark Dearlove was recorded saying: “ We've had some very serious pressure from the UK government and the Bank of England about pushing our Libors lower.”
Barclays trader Peter Johnson is recorded responding, or so says the BBC: “I'll push them below a realistic level of where I think I can get money?"
To which, the BBC alleges, Dearlove responded: “The fact of the matter is we've got the Bank of England, all sorts of people involved in the whole thing ... I am as reluctant as you are ... these guys have just turned around and said just do it."
This is a tricky one, though.
It looks as if Barclays and other banks were manipulating LIBOR for their own reasons for years.
The fact that the Bank of England appeared to want LIBOR to fall to support the economy is a different issue.
But then, the top needs to set an example. When even the Bank of England, however justified, appears to give the green light to certain conduct, it does rather lose its moral authority, especially when you consider that these days, the FSA is no more, and the financial regulator, the FCA, is part of the Bank of England, itself.