DealBook: New York Fed Was Warned About Rate Inaccuracies in 2007

1:51 p.m. | Updated

A Barclays employee notified the Federal Reserve Bank of New York in April of 2008 that the firm was underestimating its borrowing costs, following potential warning signs as early as 2007 that other banks were undermining the integrity of a key interest rate.

In 2008, the employee said that the move was prompted by a desire to “fit in with the rest of the crowd” and added, “we know that we’re not posting um, an honest Libor,” according to documents that the agency released on Friday. The Barclays employee said that he believed such practices were widespread among major banks.

In response, the New York Fed began examining the matter and passed their findings to other financial authorities, according to the documents.

Related Links

• Documents: New York Fed’s documents
• Bank of England Supported Geithner’s Rate Advice
• Geithner Tried to Curb Bank’s Rate Rigging in 2008 (July 12, 2012)

But the agency’s actions came too late and failed to thwart the illegal activities. By the time of the April 2008 conversation, the British firm had been trying to manipulate the interest rate for three years. And the practice persisted at Barclays for about a year after the briefing with the New York Fed.

Friday’s revelations shed new light on regulators’ role in the rate manipulation scandal. The documents also raise concerns about why authorities did not act sooner to thwart the rate-rigging.

Andrew Harrer/Bloomberg News“I’m pleased that the New York Fed responded to my request in a timely and transparent fashion,” Representative Randy Neugebauer said.

Among those in the spotlight is Timothy F. Geithner, then the president of the New York Fed, who briefed other regulators about the problems in May and June of 2008. Still, questions remain about whether Mr. Geithner, who is now the Treasury secretary, was aggressive enough in rooting out the problem, a matter he will most likely address in Congressional testimony later this month.

Regulators have faced increased scrutiny in recent weeks, after Barclays agreed to pay $450 million to settle claims that it reported bogus rates to deflect scrutiny about its health and bolster profits. The case is the first major action stemming from a broad inquiry into how big banks set key interest rates, including the London interbank offered rate, known as Libor.

Lawmakers are pressing regulators to explain their actions surrounding Libor. Politicians in Washington and London are worried about the integrity of Libor, which serves as a benchmark interest rate for trillions of dollars worth of loans to consumers and corporations, as well as more sophisticated financial products.

This week, the oversight panel of the House Financial Services Committee sent a letter to the New York Fed seeking transcripts from several phone calls involving regulators and Barclays executives. The New York Fed released documents and e-mails on Friday in response to the request.

“I’m pleased that the New York Fed responded to my request in a timely and transparent fashion. We’re reviewing the documents now, and once we’ve thoroughly examined them, we’ll decide how to proceed,” said Congressman Randy Neugebauer, the chairman of the House Financial Services Subcommittee on Oversight and Investigations.

Mr. Neugebauer added: “As much as $800 trillion in financial products are pegged to Libor, so any manipulation of this rate is of serious concern. We’ll continue looking into this matter to determine who was involved in this practice and whether it could have been prevented by regulators.”

The documents released Friday indicate that Barclays had been notifying regulators about its concerns regarding the accuracy of the interest rate since 2007. In August of that year, a Barclays employee e-mailed a New York Fed official, saying “Draw your own conclusions about why people are going for unrealistically low” rates.

Barclays wrote in a September report, “Our feeling is that Libors are again becoming rather unrealistic and do not reflect the true cost of borrowing.”

But the New York Fed felt at the time that the reports were only anecdotal and did not provide definitive proof of widespread manipulation. At the same time, it was consumed with trying to save the global financial system in the wake of Bear Stearns’s near collapse.

The regulator said in a statement, “In the context of our market monitoring following the onset of the financial crisis in late 2007, involving thousands of calls and e-mails with market participants over a period of many months, we received occasional anecdotal reports from Barclays of problems with Libor.”

British regulators have said that Barclays never explicitly told financial authorities that it was understating its interest rates.

But the documents produced on Friday call that assertion into question.

“Where I would be able to borrow in the interbank market … without question it would be higher than the rate I’m actually putting in,” the Barclays employee told the New York Fed in the April 2008 conversation.

That same day, New York Fed officials wrote in a weekly briefing note that banks appeared to be understating the interest rates they would pay.

“Our contacts at Libor contributing banks have indicated a tendency to underreport actual borrowing costs,” New York Fed officials wrote, “to limit the potential for speculation about the institutions’ liquidity problems.”

After the April 2008 conversation, the New York Fed started notifying other American regulators, including the Treasury Department. Timothy F. Geithner, then the New York Fed’s president, reached out to British authorities as well, notably Mervyn King, the governor of the Bank of England.

The Bank of England and other British regulators have taken fire from lawmakers in that country over when it became aware of problems with Libor and why it failed to end the misconduct.

In a 2008 memo, Mr. Geithner suggested that British regulators “strengthen governance and establish a credible reporting procedure” and “eliminate incentive to misreport,” according to documents.

By early June 2008, Mr. Geithner and Mr. King had come up with recommendations to fix the Libor calculation process and passed them along to the British Bankers’ Association, the trade group that oversees the interest rate. Angela Knight, the chief executive of the organization, wrote in an e-mail that the New York Fed’s suggestions would be factored into a review of new rules for Libor.

“Changes are being made to incorporate the views of the Fed,” Ms. Knight, who is stepping down from her position at the end of the summer, said in the e-mail. “There is no show-stopper as far as we can see.”

The trade body published its initial findings days after receiving Mr. Geithner’s recommendations, though it did not complete the report until the end of 2008.

The association is now conducting a further review into how Libor is set, though a separate British government inquiry also is being established to improve the governance of the rate after the recent scandal.

Mark Scott contributed reporting

Article source: http://dealbook.nytimes.com/2012/07/13/barclays-informed-new-york-fed-of-problems-with-libor-in-2007/?partner=rss&emc=rss