Bankers, traders and investors complained to US and UK central banks and regulators that false information was being supplied for the setting of a critical London lending rate as early as 2007.
But only the Commodity Futures Trading Commission, the US regulator, jumped on the issue and started demanding information about the setting of Libor, the London interbank offered rate, which is the benchmark for $360tn in mortgages, credit cards and other contracts worldwide.
The CFTC started investigating in May 2008. It was contacted by a whistleblower, and by spring 2010 it had enlisted the UK Financial Services Authority with strong evidence of attempted manipulation.
The spiralling investigation has since pulled in nearly a dozen regulators and more than 20 banks and interdealer brokers on three continents. Barclays last week signed the first big settlement, paying a record £290m to US and UK authorities for attempting to manipulate Libor and similar rates set in Brussels and Tokyo.
Lawyers said the CFTC’s more aggressive reaction highlights a key difference between markets regulators, who generally crack down hard on any suggestion that investors are being misled, and prudential regulators and central bankers who are more focused on protecting the broader system.
Bart Chilton, a CFTC commissioner, said: “Regulators all too often just assumed that market participants would do what was expected. In 2008, we all got a slap in the face wake-up call that told us we had to change, and we did.”
Some central bankers admit there has long been a recognition that the Libor mechanism was both flawed and open to abuse.
“Everyone knows it’s not a proper reflection of banks’ borrowing costs,” says one senior regulator.
Certainly the CFTC’s dogged probe contrasts sharply with the slow-moving response to early complaints during the financial crisis. Back then, bankers, traders and media outlets repeatedly complained that Libor rates were not reflecting the near shutdown in unsecured lending.
Some suggested that banks were “lowballing”, or understating, their daily estimates of the rate at which they could borrow in order to reassure the market of their financial strength.
Bob Diamond, Barclays chief executive, went further in a letter to parliament, saying his bank “raised issues” with the Bank of England, the FSA, and the US Federal Reserve, as well as the British Bankers, Association, which sponsors Libor.
He also wrote that his bank had lowered its Libor estimates “to protect the bank” from “inaccurate speculation” that it was experiencing liquidity problems.
Barclays’ settlement with the CFTC quotes a manager from the bank talking about the issue to the FSA in 2008 during a call about liquidity.
“To the extent that, the Libors have been understated, are we guilty of being part of the pack? You could say we are . . . I would sort of express us maybe as not clean clean, but clean in principle,” the settlement quotes the manager saying.
An FSA source said the comments during liquidity discussions were not viewed at the time as attempts to blow the whistle on misbehaviour. The CFTC has publicly praised the FSA’s work once it joined the probe.
The Bank of England said: “It is nonsense to suggest that the Bank of England was aware of any impropriety in the setting of Libor. If we had been aware of attempts to mainpulate, we would have treated them very seriously.”
The Fed declined to comment.
The BBA said it had launched an investigation into whether Barclays’ complaints were properly handled.
In 2008, the media speculation prompted a formal review that led the BBA to expand the number of banks on the rating setting panel and add governance safeguards. But the basic rate-setting process of asking banks for daily estimates remained unchanged.
Sir Mervyn King, BofE governor, said he had tried to encourage the BBA to move towards a process that used actual trades, which would have limited the opportunity for manipulation. The bank did not participate formally in the 2008 review, even as an observer.
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