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NY Fed knew of Libor issues in ’08

By Sheyna Steiner ·
Monday, July 16, 2012
Posted: 4 pm ET

Barclays' strained relationship with honesty in regard to Libor didn't begin recently.

On Friday, the Federal Reserve Bank of New York released documents in response to a Congressional request for information on the Libor scandal. Barclays also provided documents, including emails and a phone transcript from April 2008 involving an unidentified Barclays employee and Fabiola Favazzolo at the New York Federal Reserve Bank. She is FR in the following excerpt from the transcript.

FR: And, and why do you think that there is this, this discrepancy? Is it because banks maybe they are not reporting what they should or is it um …

(Unidentified employee): Well, let’s, let’s put it like this and I’m gonna be really frank and honest with you.

FR: No that’s why I am asking you (laugher) you know, yeah (inaudible) (laughter)

(Unidentified employee): You know, you know we, we went through a period where

FR: Hmm.

(Unidentified employee): We were putting in where we really thought we would be able to borrow cash in the interbank market and it was

FR: Mm hmm.

(Unidentified employee): Above where everyone else was publishing rates.

FR: Mm hmm.

(Unidentified employee): And the next thing we knew, there was um, an article in the Financial Times, charting our LIBOR contributions and comparing it with other banks and inferring that this meant that we had a problem raising cash in the interbank market.

In order to not appear as though they had a problem raising cash, Barclays submitted lower bids in order to fit in with all the other banks.

In 2008,  Treasury Secretary Timothy Geithner was head of the New York Fed. In June 2008, Geithner emailed the Governor of the Bank of England a report titled "Recommendations for enhancing the credibility of LIBOR" which included suggestions such as adding auditing procedures and eliminating incentives to misreport.

The good news is that this probably won't happen again, at least not at Barclays. As part of the settlement with the Commodity Futures Trading Commission, Libor submissions must now be based on reality rather than estimates, the Wall Street Journal reported last Monday in the story "What's next to watch in Libor drama."

From the story:

The U.K. bank now must base its submissions on market prices rather than some hazy estimate of borrowing costs. It also will beef up monitoring and compliance structures to prevent traders from influencing its rate setters. Most important, an independent auditor will scrutinize Barclays's Libor submissions for the next five years and report back to the CFTC.

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1 Comment
Richard P. Bachman
July 18, 2012 at 10:53 am

I was surprised at your reccomendation of possibly purchasing cd's as opposed to buying equities. I have been buying fixed income for the past 31 years. In fact I started with $240,000,
and have been living off of this portfolio for 31 years. My current value is now $1,600,000.00, and my current income is approximately $100,000 per year. I did this by not listening to the so called experts, who at one time were stating that historically equities always beating fixed income.