By SIMON NIXON
Just how bad is the Libor scandal? That may partly depend on papers expected to be released by the New York Fed.
Some bankers argue the scandal is overblown because the system for setting the London interbank offered rate was always flawed. Sixteen banks submit estimates of the price at which they believe they can borrow. Libor is the average, excluding the four highest and four lowest. In the crisis, there were so few transactions that some submissions were questions of judgment. As a banker quips, it became the London interbank nonoffered rate.
But U.S. and U.K. investigations clearly rejected any idea that this absolved Barclays . The U.K. bank was fined $450 million partly because it falsified Libor submissions even as it complained to regulators that rivals were low-balling theirs. Given some banks were submitting lower rates than Barclays even though they had lost market access, investigators must decide in those cases where judgment ends and deliberate falsehood begins.
What would take the crisis to another level is if U.K. authorities were aware of this low-balling and failed to act. That is where the Federal Reserve Bank of New York can help. It says Barclays alerted it to issues with Libor, leading to the New York Fed sharing its concerns with the Bank of England in the spring of 2008.
The New York Fed hasn’t said whether this analysis included allegations of misconduct. If it did, it would raise questions as to why U.K. banks continued low-balling Libor for months. The BOE denies knowing of any allegation of misconduct. Deputy governor Paul Tucker says the BOE believed Libor was « a malfunctioning market, not a dishonest one. »
The New York Fed’s disclosures may help clear up to what extent U.K. authorities were either complicit or incompetent.
Write to Simon Nixon at email@example.com
Wall Street Journal