By Pam Martens: July 25, 2012
Federal Reserve Chairman Ben Bernanke’s statement to Congress last week that the process for setting Libor is “structurally flawed” may live in infamy as the understatement of this financial era.
According to documents available on the British Bankers Association’s web site, just 90 days before Barclays was charged with rigging Libor and fined $453 million by U.S. and U.K. regulators, it had been appointed to a steering committee to oversee the integrity of Libor.
LIBOR, the London Interbank Offered Rate, is the benchmark interest rate set each business day, in 10 currencies and 15 maturities. It is supposed to represent the actual rate at which banks are borrowing from each other. The rate is used as an index to set approximately $10 trillion in consumer loans, including adjustable rate mortgages, credit card debt and student loans in the U.S. It also impacts the rate of interest received by municipalities, pensions, and corporations around the world on hundreds of trillions of dollars in interest rate swaps. Financial institutions peg their interest rates on notes they issue to Libor as well and it impacts trillions in exchange traded derivatives.
On March 28 of this year, the BBA announced that a Libor review was being conducted to consider three areas: “The financial instruments included for the purposes of defining the rate; a rigorous code of requirements for all contributors; and strengthening the statistical underpinning of the contributions.”
Conducting the review would be a steering group to “include Barclays, Credit Suisse, HSBC, Lloyds, RBS, CME,” (the U.S. based Chicago Mercantile Exchange). Other “users and contributors of the rate” were also to be asked to participate in some way. And, the U.K. Treasury, Bank of England, and the Financial Services Authority were to be “engaged” and kept informed.
Barclays sat on all 10 panels of Libor. It is the only bank thus far to be charged and fined in the Libor matter by U.S. and U.K. authorities. One of those authorities was the Financial Services Authority (FSA) of the U.K. This review was announced on March 28, 2012; the charges and fines against Barclays were announced on June 27, 2012. Why did the FSA allow Barclays to be involved in an ethics review when it should have known at that time that it would be releasing devastating emails showing how Barclays’ personnel had rigged Libor.
Up to now, the public had been led to believe that the British Bankers Association (BBA), a trade association of international banks, was overseeing the setting of Libor. As bad as that sounds, the reality is even worse. According to a BBA governance document dated November 17, 2008, the document that grew out of secret behind the scenes emails flying back and forth between the Federal Reserve Bank of New York, the Bank of England and the BBA, Libor is overseen by an “independent” body made up of ten international banks who are on at least one of the ten Libor currency panels and three other persons from non-bank financial institutions. Clearly, the British have a far different interpretation of the word “independent” than on this side of the pond.
Below are excerpts from the governance document dated November 17, 2008:
“Foreign Exchange and Money Markets Committee (“FX & MM Committee”) This independent body has the overarching responsibility for the operation and development of BBA LIBOR.
“The Foreign Exchange and Money Market Committee (‘the Committee’) is the entity responsible for the governance of LIBOR.
1. The Committee is independent of the BBA and any other organisation.
2. The composition of the Committee is: a. At least one member from a panel bank for each of the 10 LIBOR rates; b. At least three members from financial entities other than banks that use LIBOR. Typically one from the fund management industry, one from corporate treasurers and one from major exchanges trading LIBOR products…”
It also does not appear that up to this point the Libor process was being audited. The governance document states: “The BBA is subject to a regular independent audit of practices and processes and in future the FX & MM Committee and LIBOR processes will be included in this audit.” (Italics emphasis added.)
One of the emails released by the Bank of England, dated June 5, 2008, indicates that the BBA viewed the banks as the “victims” of the Libor scrutiny – not the consumers and municipalities being fleeced by the Libor rigging. The email reads in part: “We need to demonstrate that we are doing something ‘strong’ on governance. Our FXMM Committee are in agreement with this, and it is them, as the affected institutions, that are the potential victims in all this.”