Unlikely as it seems, LIBOR has been making headlines – again. Endless stories about banks facing heavy fines and their traders facing criminal trials have made this acronym for an interbank rate synonymous with fixing, rigging and manipulation. The latest story relates to a court hearing last week and what the Bank of England (BoE) knew about LIBOR rigging by the commercial banks and when.
Ever since it first received widespread media attention in 2012, the BoE has strenuously denied any prior knowledge of LIBOR malpractice: either traders fixing the rates or the banks lowballing, which involved submitting inaccurate rates not drawn from within that day’s market trading range. The court hearing revealed a high level email which showed that the BoE’s protestations were unambiguously false – their senior officials knew as long ago as 2007.
Back then, very few people outside the City could tell you that LIBOR stands for the London Interbank Offered Rate: a benchmark rate which is set between commercial banks and the British Bankers’ Association as the daily measure at which those banks lend to each other and tied to a host of other financial products.
Until recently, the daily process of determining LIBOR involved 16 banks stating what interest rate they thought they could borrow at, from which an average was then taken. But the financial crisis of 2008-9 and the ensuing scandal, which affected a cluster of international banks, mean that the term LIBOR now has toxic connotations – part of an everyday lexicon commonly used to stigmatise the banks.
Primarily, LIBOR has continued to make headlines because of Britain’s Serious Fraud Office (SFO). For nearly five years, the SFO has been investigating and prosecuting LIBOR related crime, resulting in a series of high profile trials and the conviction of several individuals: former UBS and Citigroup derivatives trader Tom Hayes, who is serving 11 years, while four former Barclays traders received prison sentences of between 33 months and 6 1/2 years. Two further defendants are to be retried next year after their jury failed to reach a verdict with other traders also awaiting trial.
Since he was convicted in August 2015, Hayes has vigorously protested his innocence, arguing that his behaviour was consistent with established market practice, which was condoned and encouraged by his superiors – far removed from the “LIBOR ringmaster” of manipulation as the SFO painted him. At trial, his defence lawyers argued that traders like Hayes were requesting that LIBOR submitters make a commercially advantageous, but factually accurate submission, drawn from within that morning’s cash trading range.
Simultaneously, his lawyers suggested, lowballing was also being undertaken on the instruction of senior management at several banks. This resulted in false rates that were not reflective of true market conditions, but which helped to make those banks appear to be more solvent than they really were. Neither the SFO, the Hayes trial jury, nor the Court of Appeal accepted these arguments: he was convicted and sentenced to 14 years, reduced to 11 years on appeal.
The preliminary hearing of another ongoing civil case against Lloyds Bank has brought other LIBOR issues into sharper focus. Last week, the BBC reported that: “The Bank of England attended a meeting in which senior executives of major banks discussed inaccurate LIBOR rates, at the start of the credit crunch (2007), according to an email cited in court. The BoE warned the bankers not to discuss the meeting in public, according to the email. The email suggests the executives acknowledged LIBOR was inaccurately low and discussed raising it.”
So why does this revelation matter?
The email disclosed at the recent preliminary hearing was sent from Mark Preston, then head of markets at Lloyds TSB, to a senior fellow banker, Truett Tate, then an executive director of Lloyds TSB.
It revealed that Sir Paul Tucker, then Deputy Governor of the BoE, had met Preston together with senior executives from Barclays, HBOS, HSBC and RBS. According to Preston’s email, they specifically discussed lowballing by the banks at this meeting. The email recounted that it was agreed between the BoE and the banks who were present that LIBORs were inaccurately low and that there was a case for fixing them “considerably higher.” Thereafter, LIBOR submissions were allegedly set considerably higher.
Critically, the email was dated 15th August 2007.
But on 9th July 2012, Sir Paul told MPs at a Treasury Select Committee hearing that he knew nothing about allegations of lowballing until that year. “I was not aware of allegations of lowballing until the last few weeks,” he said. “We would not have dreamt of using LIBOR as part of the pricing structure for Bank of England operations had we had doubts about what is now referred to as lowballing or highballing, or anything else.”
Beyond contradicting Sir Paul’s evidence to the Select Committee, the email would also appear to support the continued assertions made by Hayes, namely that the BoE and senior management at UK banks were complicit in fixing LIBOR. In a letter to the Times in October, Hayes wrote: “Lowballing was not done at the behest of traders, but rather senior management of banks with the involvement of the Bank of England.”
While the email does not exculpate Hayes, it does potentially point the finger more widely at others in very senior positions. The FT reported in October that Sir Paul, who stepped down from the BoE in 2013, was questioned by the SFO this year, and is being advised by Slaughter and May. “He attended the interview voluntarily and was not questioned under caution, meaning he is not a suspect,” according to the FT report.
In a highly unusual probe for the BoE, his interview with the SFO formed part of its investigation into lowballing, and in particular whether “BoE officials told lenders to bid for liquidity funding at a particular rate to minimise questions about the health of their balance sheets, thereby rigging liquidity auctions held by the central bank in late 2007 and early 2008,” the FT explains.
The SFO only began its investigation after being given a report by the BoE, which had uncovered potential wrongdoing and launched an internal inquiry. It is understood that altogether the SFO has interviewed ten BoE officials, including Sir Paul Tucker and his fellow deputy governor at the time, Sir John Gieve. The SFO director, David Green QC, now has to determine whether there is sufficient evidence for a reasonable chance of conviction and also whether it would be in the public interest to bring such a prosecution. A decision on whether to bring charges is expected before the end of the year.
Meanwhile Lloyds Bank settled with British and US regulators in 2014 over its involvement in LIBOR, paying total fines of $370m. Like Barclays and every other bank which was fined, Lloyds said that LIBOR manipulation was neither known about nor condoned by its senior management.
It was Aristotle who first observed that “The only stable state is the one in which all men are equal before the law”, which was later paraphrased and then cynically amended by Orwell in Animal Farm to: “All animals are equal but some animals are more equal than others.”
For those bank traders who have already been convicted of Libor manipulation, and are now serving their sentences in our prisons, Green’s decision will be eagerly awaited. If no senior banker is ultimately charged as a result of the SFO’s continuing LIBOR investigations, while multiple bank traders continue to face trial, then equality before the law will be truly compromised.
Dominic Carman, journalist, writer and legal commentator.