Too big to blame: the great Libor cover-up

[ad_1]

Photo by Matt Cardy/Getty Images

In February 2007, a British hedge fund called The Childrens Investment Fund Management (TCI) wrote to the board of Dutch bank ABN Amro, in which he was an investor. TCI was known as an activist shareholder, unafraid to use its power to influence the companies in which it took a stake. TCI demanded that the board of ABN Amros actively pursue the potential spin-off, demerger, sale or merger of its company in order to realize the true value of its shares. The bank became the center of a bidding war that was ultimately won with a $93.8 billion bid by a consortium led by the Royal Bank of Scotland (RBS). It was the last great craze of the pre-crash era, the deal that ushered in the crisis: the following year, as the financial sectors’ exuberance died down, the now dangerously overburdened RBS canceled 5.9 billion bad investments. A few months later, it had to be saved by the government at a cost of 27 billion for the taxpayer.

Still, it wasn’t a bad deal for everyone. TCI made more than half a billion pounds in profit in the 2007-08 financial year, and during its ABN Amro campaign, hedge fund 19 partners shared more than $90 million in compensation. One of them, a promising young financier named Rishi Sunak, left for California the following year.

The crash of 2008 took some time to seep into the UK economy: first felt as a wave of unemployment and rising debt, then the longer and more vicious structural decline of austerity. An increasingly angry and cash-strapped public wanted to know who was to blame. Fred Goodwin and James Crosby, CEOs of RBS and HBOS respectively, lost their knighthoods in a process known as downgrading, but no banker has been jailed in the UK for causing the crisis . Then-Bank of England Governor Mervyn King, who failed to meet the bank’s financial stability obligations in the years before the crash or did nothing about the asset price bubble that made her so damaging, was rewarded with a seat in the Lords. .

In 2022 Gordon Brown regretted that he had not imprisoned any banker at the time, but in the years that followed some went to prison not for causing the crash, but for interfering with power most jealously kept from the bank: the power to decide the price of money.

Every morning for four decades, someone working at the till of each of London’s largest investment banks sent a message to a central authority, the British Bankers Association (BBA), at the time of the 2008 crisis, detailing what not she expected it. would cost them to borrow money that day. From these 16 estimates, the BBA would then take the average of the middle eight, and this would be the day-to-day market rate for borrowing money, the London Interbank Offered Rate (Libor).

Select and enter your email address The Saturday Read Your new guide to the best writing on ideas, politics, books and culture every weekend – from the New Statesman. Morning Call A quick and essential guide to the home politics of the New Statesman’s Westminster team. The Crash A weekly newsletter to help you understand the global economic downturn. Green Times The weekly environmental email from the New Statesmans. Events and Offers Stay up to date with NS events, subscription offers and updates.

Your email address

Job Title Job Title Administration/Office Arts and Culture Board Member Business/Business Services Client/Client Services Communications Construction, Works, Engineering Education, Curriculum and Teaching Environment, Conservation and NRM Facilities Management and Maintenance / land Financial management Health – Medical and nursing management HR, training and organizational development Information and communication technologies Information services, statistics, records, archives Infrastructure management – transport, public services Lawyers and practitioners Librarians and Library Management Marketing OHS, Risk Management Operations Management Planning, Policy, Strategy Printing, Design, Publishing, Web Projects, Programs and Advisors Property, Asset and Fleet Management Public Relations and Media Purchasing and Procurement Quality Management Scientific and Technical Research and Development Provision of Security and Law Enforcement Services Sports and Recreation Travel, Accommodation, Tourism Wellness, Community/Social Services Job Title Administration/Office Arts and Culture Board Member AdministrationBusiness/Business ServicesClient/Customer ServicesCommunicationsConstruction, Works, EngineeringEducation, Curriculum, and TeachingEnvironment, Conservation, and GRNFacility/Grounds Management and MaintenanceFinancial ManagementHealth—Medical and Nursing ManagementHR, Training, and Organizational DevelopmentInformation and Communications TechnologyInformation Services, Statistics, Records, ArchivesInfrastructure Management – Transportation, UtilitiesLegal Officers and PractitionersLibrarians and Library ManagementManagementMarketingOHS, Risk ManagementOperations ManagementPlanning, Policy, StrategyPrinting, Design, Publishing, WebProjects, Programs and AdvisorsProperty, Assets and Fleet ManagementPublic Relations and MediaPurchasing and ProcurementQuality ManagementScience and Technical Research and DevelopmentSecurity and Law EnforcementService DeliverySports and RecreationTravel, Lodging, TourismWellness, Community/Social Services

Libor has been used to value hundreds of trillions of pounds of financial instruments, including mortgages and business loans; for this reason, it was considered the most important number in the world. Variations of one-hundredth of 1% could cost a bank tens of millions. The system had been designed to prevent market manipulation, a very high or low quote would be dropped from the figure, but it didn’t work.

For many years, it was common for traders to ask if the rate could be pushed one way or another. In 1991, former Morgan Stanley trader Douglas Keenan reported that banks were increasing their profits by misstating how much it would cost them to borrow. During the 2015 trial of a trader convicted of interest rate rigging, the court received internal messages in which he told a colleague that if they wanted to adjust the key borrowing rate, they could simply give the cashier a Mars bar and they’ll sit you where you want.

Content from our partners

[See also: Our new financial masters]

Yet, as BBC economics correspondent Andy Verity writes in Rigged, a forensic account of the Libor scandal based on new records, data never shared with juries and years of his own diligent reporting on the matter that changed during the financial crisis. The rate-rigging that had gone unrecognized (or at least unpunished) for many years became a desperate measure of survival, as banks falsified figures to make it look like they could still finance themselves cheaply. on the market. Verity claims that when the Treasury and the Bank of England discovered this was happening, they didn’t try to stop the fraud, they made it mandatory.

This had become necessary because the Bank of England, along with the US Federal Reserve and the European Central Bank, were themselves manipulating the numbers in the grandest way possible. Interest rates were cut to near zero, and when that didn’t have the desired effect, banks manipulated the national debt market, buying up hundreds of billions of dollars of bonds issued by their own governments. This huge artificial demand has driven up the prices of these bonds, reducing the yield (called yield) on all this debt and making money even cheaper to borrow (a process known as quantitative easing).

The whole point was to end the credit crunch that had jeopardized the global financial system, but the financial sector remained too scared to lend. In the United States, Bear Stearns and Lehman Brothers had gone bankrupt; in the UK, Northern Rock and RBS had to be rescued by the state. Banks continued to worry, reasonably enough, that if they loaned hundreds of millions to another institution, that institution might not survive to repay the debt. So even as the government strove to make money cheaper than ever, it continued to charge much higher rates for all the money it actually lent.

Peter Johnson PJ, to his colleagues the Libor bidder at Barclays, could see from his Bloomberg terminal that the actual prices banks were charging each other to borrow in the market were much higher than the Libor rates Barclays posted every morning. By lowering the rate, the bank gave the impression that its financial situation was much stronger than it really was.

When PJ posted more realistic rates, however, it appeared that Barclays was in trouble, so his bosses, apparently under pressure from the Treasury and the Bank of England, insisted he publish figures that were in the pack. He repeatedly told his managers that he wasn’t going to lie if asked about the unrealistic Libor rates he had to post; they sympathized but insisted that he continue. From their offices on the 29th floor above PJ’s office in Canary Wharf, the executives assured the Bank and Treasury that they would go lowball with the rest of the industry.

As Verity reports in detail, PJ became one of many people in the UK and US, mostly lower-level employees, the people who submitted the fake rates, but never the managers who told them to do so who were used as scapegoats for the Libor scandal and the crash itself. In 2016, along with three Barclays traders, PJ was found guilty and sentenced to four years in prison.

Well, you might say, if my boss asked me to manipulate an international financial benchmark, I would refuse. But the lesson of Rigged is that it’s not that easy. Work confines us morally as well as physically, we seek compromises and try to change things from within, not realizing that those above us have not made such compromises and when illusions are exposed , we end up with the bill.

RiggedAndy VerityThe History Press, 348pp, 25

Buying a book can earn NS a commission from Bookshop.org, which supports independent bookstores

[See also: How the super-rich live]

[ad_2]