In case you had a few more questions about how the system still works today, and why those so deep into the mire seem to come out unscathed.



If Libor-fixing is such a great scandal,

why did Geithner and other regulators do so little?

Wall Street Journal Review and Outlook, 16 July 2012.

The Federal Reserve Bank of New York released a trove of documents on the Libor scandal Friday, and the official Fed spin is that they show that regulators were "highlight[ing] problems" with Libor in 2007-2008, and "press[ing] for reform."

Well, let's see. In June 2008, Timothy Geithner, then head of the New York Fed, sent Bank of England Governor Mervyn King two pages of recommendations for "Enhancing the Credibility of LIBOR" and wrote that he would be "grateful if you would give us some sense of what changes are possible."

This is not exactly the language of a regulator who has just uncovered what we're now told is the financial crime of the century.


In the wake of Barclays's $450 million settlement with U.S. and U.K. regulators over attempted Libor-fixing, the political and media worlds are aflame with indignation that some banks misreported their borrowing costs during the financial panic of 2008. The U.S. Department of Justice let it out over the weekend that it is preparing criminal cases against individuals and banks in connection with the scandal. However, the evidence and testimony coming from regulators show they were well aware of price-fixing behavior at the time, but were not all that alarmed by it.

That's especially clear from the New York Fed's document dump, if not from its spin. In August 2007, for example, one unidentified Barclays employee wrote to a Fed official, Fabiola Ravazzolo, to say, "Today's USD libors have come out and they look too low to me. Lloyds for instance has printed 5.48% for 3 months. Probably the lowest rate you coud [sic] attract liquidity in threes would be 5.55% and I am not too sure how much you would get at that level." It doesn't appear that anyone called the cops.


Nine months later, Ms. Ravazzolo discussed Libor bidding on the phone with someone on Barclays's money-market desk. The transcript compiled by Barclays and released by the New York Fed reads like a David Mamet play without the obscenities—or any air of criminality.

At one point, the unnamed Barclays trader tells Ms. Ravazzolo:


"We strongly feel it's true to say that . . . dollar LIBORs do not reflect where the market is trading which is you know the same as a lot of other people have said." Ms. Ravazzolo's shocked response, as recorded in the transcript? "Mm hmm."

When the Fed official asks her interlocutor why Libor is lower than the banks' actual borrowing costs, he says he's "gonna be really frank and honest." For the sake of clarity, we'll omit most of the "Mm hmms" interjected by Ms. Ravazzolo as she's informed of Barclays's heinous crime:

Barclays executive: "[Y]ou know we, we went through a period where we were putting in where we really thought we would be able to borrow cash in the interbank market and it was above where everyone else was publishing rates. 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."

Ms. Ravazzolo: "Yeah."

"And, um, our share price went down."


"So it's never supposed to be the prerogative of a money market dealer to affect their company share value."


"And so we just fit in with the rest of the crowd, if you like."


"So, we know that we're not posting, um, an honest Libor."


"And yet—and yet—we are doing it, because, um, if we didn't do it . . . it draws, um, unwanted attention on ourselves."

"Okay, I got you then."

The conversation proceeds for perhaps another 10 minutes before Ms. Ravazzolo signs off with "Have a great weekend. Bye."


The New York Fed says that Ms. Ravazzolo was merely gathering market intelligence as part of the Fed's crisis response and not engaging in a criminal investigation. Which is precisely the point. It would be a strange, not to say incompetent, criminal conspiracy if traders were openly discussing it with government officials.

Another phone-call snippet, from October 2008, at the peak of the panic, with another Fed official went similarly:


Barclays trader: "[T]hree month Libor is going to come in at 3.53 . . . . It's a touch lower than yesterday's but please don't believe it. It's absolute rubbish. . . . [R]ecently you've had certain banks who I know have been paying 25 basis points over where they've set their Libors . . . "

[Unscandalized Fed official] Tania: "All right, well thank you very much for your time. I appreciate it." Which is exactly how you'd expect a federal official to respond upon being informed of the existence of a multibillion-dollar bank heist.

And lest there be any doubt, the New York Fed's own "explanatory note" makes clear that in the spring of 2008 briefing notes covering the underreporting of Libor were

"circulated to senior officials at the New York Fed, the Federal Reserve Board of Governors, other Federal Reserve Banks, and the U.S. Department of Treasury."

The Fed also briefed the President's Working Group on Financial Markets, the so-called committee to save the world, that June.


Fed officials might argue that the middle of a financial crisis was no time to shout from the rooftops about bank borrowing costs. But the documents released Friday suggest that even in private, in his emails with fellow central bankers in the U.K., Mr. Geithner was not exactly calling in the shock troops over Libor. Instead, he was suggesting ways to "eliminate [the] incentive to misreport" Libor rates.

In other words, the question is not what did regulators know, and when did they know it. They knew it all along. The real question is when did a Libor rate that the New York Fed itself calls "increasingly hypothetical" during the panic switch from being a sign of distress to a criminal conspiracy?

After he decamped to Treasury from the Fed, did Mr. Geithner merely drop the subject? And what was Bill Dudley, his successor atop the New York Fed, doing about it for the last three and a half years? The Commodity Futures Trading Commission says it started investigating in 2008. But somehow it took until 2012 for Libor misreporting to become a great financial scandal.



The regulators and their media cheerleaders can't have it both ways. If the problem with Libor bidding was merely an "incentive to misreport" and thus nothing for regulators to get too worked up about, then let's fix the way banks report the rates, or find some other way to determine such a rate, and move on.

But if this is really the epic deceit and crime we are now reading about, then either new evidence needs to come to light, or the regulators who smiled and nodded and "Okayed" and "Mm hmmed" through the panic years are complicit with the banks now in the dock. They had ample opportunity to shut down this behavior, but nothing released by the New York Fed or the Bank of England suggests much more than a raised eyebrow at the time.

If heads are going to continue to roll over Libor, they should also include those of Mr. Geithner and the rest of the regulators who let this slide.

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