Taken from the real-world economics review, issues no.47
What is in the number? The importance of LIBOR
The first paragraph (see above), on page 242 caught my attention: LIFFE (London International Financial Futures Exchange), whose contracts are historically linked to LIBOR, experienced volatile moves in the Sterling overnight market. This was primarily in two things called EONIA and SONIA (we are likely to hear more of this during the inquiry).
I’m currently looking for news sources, to see if this was public knowledge, but the Bank of England put ‘pressure’ to bring some normality in the market. The volatile and ‘unruly’ moves were influenced by the positions of big banks. Please not, this occurred before the reputed direct manipulation of the LIBOR rate itself.
It begs the question: why did the BoE reforms fail and big banks were able to influence the overall LIBOR rate a year later?
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Two questions need to be asked: who knew what and when? During the credit crunch of 2008, there was a concentrated effort to get interest rates down – which was the right thing to do. If banks are not lending to each other then money dries up in the wider economy; Baroness Vadera prepared a paper with former colleagues at the bank UBS headed ‘Reducing Libor’, which was shared with senior figures within the last Labour government. The previous administration was concerned about the eye-watering interest rates of Barclays, RBS and HBOS.
As Alistair Darling noted in his post-crash analysis, the Bank of England and Treasury thought RBS was a matter of hours away from collapsing. Fear was running high through the Treasury and the Bank of England with senior figures honestly believing the economy was on the verge of collapse.
We need to know one fundamental fact: who, and how, authorised the plan to bring down the Libor rate? of course, I’m not suggesting the previous government openly told the City to manipulate the rate, but the wider plan to stabilise the financial sector has been exploited by some. Labour refusing to participate in Parliamentary inquiry is politically foolish – it stupidly portrays guilt and secrecy. No one is claiming the Treasury helped manipulate rates or Ed Balls attitude to little regulation, as City Minister, helped create the air of corruption. Failing to cooperate, however, creates the environment for conspiracy theories.
And that’s why I am more concerned about the other clandestine institution, the Bank of England. In the eye of the storm, in 2008, the BoE had a very close relationship with the financial sector and secured emergency loans to several institutions. I can slightly understand the naivety of politicians, but not central bankers. If Mervyn King was genuinely blind to the activities of the City then we need a new Governor of the Bank of England; it would be dangerous to have such an incompetent figure overseeing one of the most influential central banks in the world.
There is a reason why conspiracy theories are very fertile around the Bank of England.….
I’m not going to speculate on who knew what and when, it would be incredibly facetious and the political equivalent of Cluedo. The inquiry should not be about saving face, but an exercise in finding the truth.
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An anonymous insider has written for the Telegraph, explaining how they altered the LIBOR rate. This is Earth shattering and should be read by everyone:
What the trader told us was that the bank could not be seen to be borrowing at high rates, so we were putting in low Libor submissions, the same as everyone. How could we do that? Easy. The British Bankers’ Association, which compiled Libor, asked for a rate submission but there were no checks. The trader said there was a general acceptance that you lowered the price a few basis points each day.
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.
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