"I wish I could say that this was an isolated case... You will hear more on this in due course" is how the UK FSE's Director of enforcement described Lie-borgate to Reuters this weekend [8]. It seems incredibly that the US regulators and investing public alike are shunning this interest rate rigging scandal as the UK goes to DEFCON 1 with more than a dozen other banks being investigated in the long-running global probe. The Barclays Chairman quit over the weekend (and we assume will not be the last casualty) as The Telegraph [9] notes the 'dislocation of libor from itself' - since banks could not be seen borrowing at higher rates for fear of liquidity repercussions, as widespread. According to the trader the BBA asked for a rate submission but there were no checks and "everyone knew" and "everyone was doing it". What is incredible is the level of nonchalance that this illegal act had taken on with entire teams of people well aware as open discussion occurred (not clandestine blue-horseshoe-likes-low-libor-style). Indeed this widespread and well-known action of dislocating libor from itself (since in a trader's words "everyone knew we couldn't borrow at Libor, you only needed to look at CDS to see that... with real Libor rates 3 to 4 per cent higher than the BBA's submitted Lie-bor") has now led George Osbourne, as per the FT [10], to launch a 'Leveson-style' probe into standards in the banking industry - a full, public independent inquiry into the $504 Trillion market's underlying integrity [11]. Libor had dislocated with itself for a very good reason – to hide the true issues within the bank.
The Telegraph: Libor scandal: How I manipulated the bank borrowing rate [9]
According to the trader, "everyone knew" and "everyone was doing it". There was no implication of illegality. After all, there were 20 to 30 people in the room – from management to economists, structuring teams to salespeople – and more on the teleconference dial-in from across the country.
The discussion was so open the behaviour seemed above board. In no sense was this a clandestine gathering.
The main business of the day was to deal with the deepening crisis. And questions were raised about what we, in one of the bank's sales teams, could be doing to earn our wages.
The answer was fire-fighting. Helping the corporate bank with clients – predominantly explaining why the customer's loan was being moved from base rate to Libor and why their interest margin was increasing sharply. It wasn't easy for the corporate bankers. They were under orders from the credit committee, and powers at the top, to change a client's borrowing rate to Libor and increase the margin if any covenant was breached, no matter how small.
We accompanied the relationship managers to meetings to explain what was happening in the economy – why base rate lending could not be sustained, why margins had to increase, and of course to explain the general economic backdrop.
As part of that, we had to explain the "dislocation of Libor from itself". As the trader put it, everyone knew that we couldn't borrow at Libor, you only needed to look at the price of our credit default swaps – effectively survival insurance for the bank – to see that.
What that meant was that even though Libor may have been, for example 2pc, the real Libor rate the bank was paying was more like 5pc or 6pc. So in fact, we needed to be lending money at Libor plus 3pc or 4pc just to break even. That is what we were telling clients.
Looking back, I now feel ashamed by my naivety. Had I realised what was going on, I would have blown the whistle. But the openness alone suggested no collusion or secrecy. Management had been in the meeting, and so many areas of the Treasury division of the bank represented, that this was clearly no surprise or secret.
Libor had dislocated with itself for a very good reason – to hide the true issues within the bank.