While the Lieborgate scandal gathers steam not so much because of people's comprehension of just what is at stake here (nothing less than the fair value of $350 trillion in interest-rate sensitive products as explained in February), but simply courtesy of several very vivid emails which mention expensive bottles of champagne, once again proving that when it comes to interacting with the outside world, banks see nothing but rows of clueless muppets until caught red-handed (at which point they use big words, and speak confidently), the BBC's Robert Peston brings an unexpected actor into the fray: the English Central Bank and specifically Paul Tucker, the man who, unless Goldman's-cum-Canada's Mark Carney or Goldman's Jim O'Neill step up, will replace Mervyn King as head of the BOE.
In making false submissions about their borrowing costs, managers at Barclays believed they were operating under an instruction from Paul Tucker, deputy governor of the Bank of England, I have learned.
This belief was fostered after a telephone conversation in the autumn of 2008 between Mr Tucker and Bob Diamond, who at the time ran Barclays' investment bank, Barclays Capital, and is today chief executive of Barclays.
The heart of the matter is that in 2008, at the height of the credit crunch, the perception of banks' financial strength was linked to how much they had to pay to borrow. Barclays managers were very worried that the appearance of the bank paying more to borrow than other banks was damaging confidence in its health.
So Barclays so-called "submitters", the managers who gave borrowing data to the British Bankers Association's Libor-setting committees, consistently told these committees that Barclays was paying a lower interest rate to borrow than was actually the case.
And what is striking is that after their conversation took place, senior Barclays' management on October 29 2008 gave an explicit instruction to reduce Libor submissions.
We hope it comes as no surprise to anyone that central banks, already known to sell Treasury puts in order to game interest rates on global benchmark securities, would go so far as to advise BBA member (which as noted last week was shocked to find that epic manipulation was going on here) banks to do all in their power to lie and cheat to the market in order to avoid the perception of reality.
Yet here is the punchline in Peston's piece:
What is striking is that even the artificially suppressed quotes for Barclays' borrowing costs provided to the BBA committee were higher than other banks' quotes.
Which conveniently brings us once again to our piece from January 22, 2009 when the market was crashing every single day, when the world's central banks would do anything to halt the collapse in risk and asset prices, up to an including telling their host banks to lie about funding conditions, before the real QE1 was announced back in the middle of March, in which we made just this speculation.
Everyone knows there is something very screwy about LIBOR, with opinion ranging from it's way too high to the opposite. We also have been quite vocal in our opinion of the TED Spread but that's irrelevant for the time being. Lately we have been looking at the most recent BBA data for the 3 month LIBOR submission by bank and while the average is 1.122%, the range is quite wide: 1.04% at the tight end to 1.204% at the wide. What confuses us is that the banks that submitted the lowest rates are the ones that have the most governmental independence, notably BofA and JPM, while the other end of the range is represented by pseudo nationalized banks such as RBS, in which the UK government recently acquired a 70% stake, and UBS, which had all of its bad assets swept by the Swiss National Bank in exchange for a loan (read more about the Swiss model here).
The implication is that with more governmental involvement or even virtual nationalization, the cost to lend to another bank creeps higher, when compared to entities such as BofA and JPM which still, at least theoretically, carry all their bad assets on their books. This intuitively is very confusing as the cheapest LIBOR should come from the nationalized entities, that have a full governmental backstop.
So while LIBOR's moves in itself have been very puzzling lately, the components of LIBOR and their relative values provide an additional layer to the puzzle.
Three and a half years later the puzzle is no more: it was all one big epic fraud, pardon, no fraud, as the CFTC and SEC settlements never admitted or denied fraud. Let's just call it benign market manipulation of a $350 trillion market.
But what the table above brings up are some curious observations: note the banks that in the middle of January were telegraphing to the world they were the healthiest via the one metric that was actually still relevant: 3 Month USD funding costs.
We already know that Barclays has been exposed to be manipulating Libor on an epic scale. And even with all this, it still could manage to only be in the third best quartile? If they were manipulating their Libor submissions they sure sucked at it. Which of course is why even the BOE got involved.
However, it begs the question: what about the Libor submissions of the three then "healthiest" banks: Bank of America, JP Morgan and Deutsche Bank. If Barclays was manipulating and gaming Lie-bor, only to fall even below the median submission, does this mean that these three banks were all furiously coming up with totally meaningless numbers? And how long until the SEC comes up with a US scapegoat bank to mimic the FSA's bold action on Barclays?
If, and this is a big if, the SEC does for once do something proactive in its illustrious career of corrupt, incompetent complacency and co-option, not to mention pornoholic hypnosis, the next and final question becomes: will it be Bank of America, or JP Morgan... and just how will the market react to the knowledge that two of the world's biggest non-nationalized banks participated in what as many have been warning for years, the biggest market manipulation fraud in history.
Finally, if the BOE ends up getting crucified for Barclays' stunning email disclosure, will the Fed, which certainly had a role to play in all of this, be once again left untouched?