Counterparties: What the Fed knew
We now know what the New York Fed knew about Barclays fudging its Libor submissions. Included in the NY Fed’s vast document dump in response to a congressional request is this confidence-deflating exchange from Apr. 11, 2008:
Barclays: So, we know that we’re not posting um, an honest Libor.
B: And yet and yet we are doing it, because, um, if we didn’t do it
FR: Mm hmm.
B: It draws, um, unwanted attention on ourselves.
The NYT reports that after that and other exchanges between members of the NY Fed and Barclays, Tim Geithner, then head of the NY Fed, called and emailed the head of the Bank of England with his concerns and suggestions for how to improve oversight of Libor. The governor of the BoE, Mervyn King, called those suggestions “sensible”, but as the NYT’s Marc Scott writes, none of them were actually implemented.
And that leads back to the post-scandal explanation offered by Barclays: that England’s central bank tacitly encouraged Barclays to continue its improper Libor submissions. Deputy BoE governor Tucker forcefully argued before members of Parliament on Monday that he was acting precisely as he should have, questioning what Barclays was doing to lower its borrowing rates in the aftermath of its rejection of government capital.
To Matt Levine, the real question for regulators in Barclays’ Libor fixing is intent. The latest emails, he writes, actually make Barclays seem more diligent:
The earlier Barclays emails, in which derivatives traders asked Libor submitters to change their rates to help the swap book, sound terrible: market manipulation for high-fives and profit. Mis-marking within a reasonable range is not necessarily a scandal; in some sense it’s most of what most traders do most of the time. It only becomes a scandal when you do your mis-marking for nefarious purposes, with “hiding trading losses” and “screwing derivatives counterparties” being reasonably obvious nefarious purposes. “Keeping our name out of the FT and our stock price out of the crapper” is a gray area…
During the financial crisis interbank lending all but dried up and, Levine writes, Libor was widely known to be a fiction: “I think these Fed documents make it hard to share the collective amnesia of thinking that Libor was the most important and trusted thing in the world until it was broken by a secretive coterie of bankers and nobody knew about it. Everybody knew about it”. – Ben Walsh
On to today’s links:
JPMorgan reports $5.8 billion loss on failed CIO trades, quarterly profit drops 9% – DealBook
The complete JPMorgan earnings release – JPMorgan
JPMorgan’s 8K: CIO traders mis-marked securities – JPMorgan
Former-CIO head Ina Drew cedes two years’ pay over trading losses – Bloomberg
China’s economic growth is slowing – and likely at a faster rate than official GDP data suggests – Also Sprach Analyst
China’s “M&A is driven more by politics than the domestic economy” – Bloomberg