March 26, 2023

DealBook: Bank of England Says New York Fed Gave No Warning on Rate-Rigging

Mervyn A. King, left, the Bank of England governor, and Timothy F. Geithner, the Treasury secretary, in Paris in 2011.Pool photo by Charles PlatiauMervyn A. King, left, the Bank of England governor, and Timothy F. Geithner, the Treasury secretary, in Paris in 2011.

LONDON – American authorities did not warn British officials about the rate-rigging scandal at the height of the financial crisis in 2008, according to documents released by the Bank of England on Friday.

The e-mails from the British central bank shed new light on conversations between Mervyn A. King, the Bank of England governor, and Timothy F. Geithner, who was head of the Federal Reserve Bank of New York at time of the discussions.

The documents will increase pressure on American and British officials, who have come under mounting scrutiny from politicians about why they did not respond more quickly to potential illegal activity at some of the world’s largest banks.

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Paul Tucker, the deputy governor of the Bank of England, talked to Barclays and a number of other global banks during 2008 about potential problems with how the London interbank offered rate, or Libor, was set, according to documents released on Friday. Despite the conversations, some traders and senior executives at Barclays continue to alter the rate until 2009.

The e-mails outline the Bank of England’s discussions with both the New York Fed and the British Bankers’ Association, the London-based trade body that oversees Libor. The conversations center on concerns about how the rate was set.

Libor Explained

The documents also called on the British Bankers’ Association to conduct a review, including input from international government agencies, to ensure the credibility of the rate.

“I don’t see that a group of junior bankers in London can decide this without a global debate,” Mr. Tucker wrote in an e-mail in May 2008.

The call for a review into Libor in 2008 came after Mr. King and Mr. Geithner had talked about potential problems with the rate during a meeting in Basel, Switzerland, in early May 2008.

This discussion was followed by a flurry of e-mails a month later in which Mr. Geithner, who is now the Treasury secretary, recommended changes to the rate, which is used as a benchmark for more than $360 trillion financial products worldwide.

The suggestions included ‘‘strengthen governance and establish a credible reporting procedure’’ and ‘‘eliminate incentive to misreport,’’ according to documents released by the New York Fed.

Mr. King told Mr. Geithner that he supported the suggestions. Yet the New York Fed did not make any allegations of wrongful behavior connected to Libor, according to documents released on Friday. Mr. King told a British parliamentary committee on Tuesday that Mr. Geithner’s suggestions did not represent a warning about the potential manipulation of Libor.

‘‘At no stage did he or anyone else at the New York Fed raise any concerns with the bank that they had seen any wrongdoing,’’ Mr. King said. ‘‘There was no suggestion of fraudulent behavior.’’

Other senior British officials also said that they did not believe that the New York Fed had raised concerns about possible illegal activity connected to Libor.

Mr. Tucker, who is a potential successor to Mr. King, held several conversations with the New York Fed in May and June, 2008 about the American suggestions for change the rate-setting process, according to the documents released on Friday.

Despite the discussions, the recommendations ‘‘didn’t set off alarm bells,’’ Mr. Tucker told British politicians on Tuesday.

In the wake of a public outcry against the Libor scandal, Mr. King wrote to central bank chiefs this week, inviting them to discuss Libor reforms at meeting scheduled for September.

Questions about the rate, however, had been raised as far back as 2007.

Barclays acknowledged to the New York Fed in April 2008 that it was reporting artificially low rates to mask its relatively high borrowing costs. The British bank also raised questions about whether other institutions were providing correct submissions to Libor. The concerns about the integrity of the rate were passed to Mr. Geithner and other top American officials, according to documents released last week.

American authorities began an investigation into potential manipulation of Libor at some of the world’s largest banks in 2008. The Financial Services Authority, the British regulator, opened its own inquiry in early 2010.

In the first settlement related to the international investigation, Barclays agreed to pay around $450 million to American and British authorities after some of the firm’s traders and senior executives were found to have altered the rate for financial gain.

Regulators’ failure to question the rate-setting process stemmed from a widespread view that Libor was a low-risk area of the financial services industry, according to parliamentary testimony from senior British officials.

The British Bankers’ Association continues to have receive minimal oversight from British authorities. The country’s government has started an investigation into how the rate is set.

‘‘There was no indication between 2005 and 2007 that the Financial Services Authority perceived the submission produced for Libor as a risk area,’’ the regulator’s chairman, Adair Turner, told a British parliamentary committee.

Mr. Turner did acknowledge that the chance of ‘‘deliberate manipulation was just waiting to happen.’’

The Federal Reserve chairman, Ben S. Bernanke, put it more bluntly during testimony before the Senate Banking Committee this week, saying he lacked ‘‘full confidence’’ in the accuracy of the rate-setting process.

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DealBook: Who Won and Lost the Gundlach-TCW Face-Off?

Jeffrey Gundlach, of DoubleLine Capital and a well-known bond manager, denied in a Los Angeles court that he used trade secrets.Pool photo by Reuters VideoJeffrey Gundlach of DoubleLine Capital in a Los Angeles courtroom in August.

It looked like a war, sounded like a war, felt at times like a war.

But in the end, the long, drawn-out legal battle between Jeffrey E. Gundlach, the colorful mutual fund maven, and his former firm, Trust Company of the West, may have been nothing more than a white-collar tempest in a teapot.

Mr. Gundlach, a fixed-income investor who rose to prominence as the chief investment officer at TCW, as Trust Company of the West is known, was fired by the firm in 2009. Shortly afterward, TCW sued Mr. Gundlach, who is known in certain circles as “the bond king,” and three of his associates, accusing them of stealing trade secrets and plotting to set up a competing firm, DoubleLine Capital.

What could have been a run-of-the-mill employment dispute blossomed into a full-blown ordeal, however, when Mr. Gundlach counter-sued TCW, alleging that the firm owed him and his associates hundreds of millions of dollars in unpaid fees.

So began the civil case that captivated the world of mutual funds – a world where, let’s be honest, the bar for captivation is relatively low.

In September, after a six-week trial that involved dozens of witnesses, a jury found that Mr. Gundlach and his associates had breached their fiduciary duty and had misappropriated trade secrets, though it awarded Mr. Gundlach $66.7 million in damages in the countersuit, while awarding no damages to TCW.

On Thursday, that mixed verdict got even more complicated, when both parties agreed to settle their claims out of court.

That settlement, the terms of which are confidential (both TCW and DoubleLine declined to elaborate on the details), will put to rest both TCW’s suit against Mr. Gundlach and vice versa, marking an end to one of the oddest legal face-offs of the year.

So, you may be asking, who won and lost L’Affaire Gundlach? Well, without knowing the terms of the settlement, let us try to help separate the wheat from the chaff.

The Winners


Lawyers: The law firms representing Mr. Gundlach and TCW – Munger Tolles Olson and Quinn Emanuel Urquhart Sullivan, respectively – will each walk away from the case with millions of dollars in fees, even though the case ended in an out-of-court settlement. Those millions should buy a lot of Hawaiian shirts.

Mr. Gundlach: While testifying at his own trial, Mr. Gundlach got to detail, for admirers and skeptical alike, the story of his improbable rise to the upper echelons of fixed-income investing. From his tenure in a rock band after college to his decision, inspired by an episode of “Lifestyles of the Rich and Famous,” to become an investor, Mr. Gundlach’s colorful biography should pique the attention of book publishers and documentarians.

DoubleLine and TCW: Executives at both DoubleLine, Mr. Gundlach’s new firm, and TCW are likely both breathing a sigh of relief after settling their two-year tie-up. DoubleLine, whose assets have zoomed to about $20 billion this year from $7 billion last year, can now focus its full energies on beating the markets. And at TCW, a settlement will allow the team from Metropolitan West Asset Management, which it acquired to replace Mr. Gundlach’s team, to escape the bond king’s shadow at last.

Nicknames: There was no shortage of good nicknames revealed during the trial between Mr. Gundlach and TCW. Among them: “the Pope,” “the Godfather” (both of which Mr. Gundlach called himself), “the B-team” (which Mr. Gundlach called Philip A. Barach, his co-manager), “dumb and dumber” (which Mr. Gundlach used to refer to Marc I. Stern and Robert A. Day, TCW’s chief executive and founder), and “Autobot,” a nickname given to Jeffrey Mayberry, who worked with Mr. Gundlach at TCW, by Rachel Cody, a co-worker. (The name referred to the protagonist of the “Transformers” franchise.)

Marfa, Tex.: The trial between Mr. Gundlach and TCW was full of colorful tidbits, but none as interesting as an all-expenses-paid private jet trip taken by Mr. Gundlach and several TCW co-workers in 2009 to Marfa, Tex. There, TCW’s lawyers said, Mr. Gundlach indulged his art obsession by visiting the Chinati Foundation, a contemporary art museum founded by Donald Judd. The trip, which TCW’s lawyers attempted to use to prove that Mr. Gundlach had been secretly plotting to take his team with him for months before he was fired, wound up as free publicity for the Chinati Foundation and the rest of Marfa, a town of approximately 2,000 residents near the Mexican border.

Judge Carl J. West: a baronial figure with a white mustache, Judge West of the Los Angeles County Superior Court presided with gusto over a six-week trial that seemed, at times, more like a middle school grudge match. According to reports, Judge West is retiring from the bench next year, making the Gundlach/TCW trial a fitting feather in the cap of a long and by all counts successful judicial career.


The Losers

Société Générale: the French bank bought a controlling stake in TCW in 2001, but may regret doing so now that the firm has become known, outside fixed-income circles, just as much for its lawsuits as its returns. Under pressure to raise capital and sell off non-core assets to cope with the hazards of the European debt crisis, Societe Generale has even been rumored to be shopping TCW for a potential sale. (The bank has denied it plans to sell the firm.)

Humility: Mr. Gundlach is many things, but meek is not one of them. (“How many other people have been able to put together a $14 billion asset management company in two years in the history of the industry? Zero,” he crowed to DealBook earlier this year.) And experts say that the egos involved in the Gundlach/TCW case may have held off a settlement for longer than necessary.

“There was a lot of money on the table,” Jill E. Fisch, a law professor at the University of Pennsylvania, told DealBook on Friday. “Obviously, the fact that someone wanted to take it to trial means that egos, and not just dollars, were at stake.”

Courtroom voyeurs: When news that Mr. Gundlach’s case was going to trial surfaced, some finance watchers perked up. Among the accusations leveled against Mr. Gundlach by TCW were claims that he had kept a secret stash of pornography and drugs in his office. But in July, before a jury could hear about these claims, Judge West ruled that the lurid evidence would not be admitted in court, saying that it was immaterial to the case.

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