Three years after the remarks, it emerged that traders at more than a dozen banks had routinely been trying to fix the official Libor rate in order to boost their own bonuses and profits Photo: EPA
By Katherine Rushton
Originally published in The Telegraph.
Senior Fed official first flagged Libor issue at a policy meeting in April 2008, newly released documents reveal
The US Federal Reserve knew about Libor rigging three years before the financial scandal exploded but did not take any firm action, documents have revealed.
According to newly published transcripts of the central bank’s meetings in the run-up to and immediate aftermath of the collapse of Lehman Brothers, a senior Fed official first flagged the issue at a policy meeting in April 2008.
William Dudley expressed fears that banks were being dishonest in the way they were calculating the London interbank offered rate – a global benchmark interest rate used as the basis for trillions of pounds of loans and financial contracts.
“There is considerable evidence that the official Libor fixing understates the rates paid by many banks for funding,” he said.
He added that a newspaper report, which lifted the lid on some degree of manipulation, appeared to have triggered “an outbreak of veracity among at least some” bankers, who started reporting accurately the interest rates they offer each other, which are used to calculate Libor.
Three years after his remarks, it emerged that traders at more than a dozen banks, including Lloyds, Royal Bank of Scotland and Barclays, had routinely been trying to fix the official Libor rate in order to boost their own bonuses and profits.
The scandal impacted the finances of tens of millions of ordinary households and businesses, and dealt a devastating blow to the banking industry. Financial institutions have paid more than $5bn (£3bn) in fines to settle the matter with regulators in the US, UK and the European Union. A dozen individuals have been criminally charged, and many others lost their jobs – including Barclays’ chief executive Bob Diamond and chairman Marcus Agius, who both resigned over the issue.
The transcript of the Fed’s April 2008 meeting raises questions about why the central bank did not move to properly tackle the scandal. There was no official regulator for Libor at the time, and officials at the US Federal Reserve tried to blame British authorities for allowing the benchmark interest rate to get out of control in the first place.
The Fed may have been more than usually willing to gloss over the racket because of the other economic crises it faced at the time. The transcripts, published on Friday, show the members of the Federal Open Market Committee struggling to grasp the scale of the financial meltdown in 2008.
Two days after US officials decided to let Lehman Brothers collapse in September 2008, Fed chairman Ben Bernanke was optimistic that it would be able to limit the fallout. “I think that our policy is looking actually pretty good,” he said. “Our quick move [to reduce interest rates in early 2008], which was obviously very controversial and uncertain, was appropriate.” As things turned out, an early cut in interest rates was far from sufficient to prevent the crisis that followed.
The Fed declined to comment on the transcripts or why it had not taken firm action.
However, as the crisis unfolded, Mr Bernanke evolved into an assured crisis manager, the transcripts show. They also reveal how far-sighted his successor, Janet Yellen, was in predicting the financial crisis, back when she was president of its regional bank in San Francisco.
Mrs Yellen, who took over as Fed chairman this month, saw the US economy “at, if not beyond, the brink of recession” in January 2008, the documents disclose. Most of the Fed’s members were relatively upbeat or neutral about the economic outlook, but Mrs Yellen cut a Cassandra figure, as she predicted that deteriorating credit conditions and a slowdown in the labour market were likely to slow down growth.