Careful about the market (and political) implications of a decision to investigate LIBOR

How the UK regulator and British banks opposed the US investigation into Libor rigging

The latest update to the secret history of interest rate rigging, at the bottom of the timeline, lays out evidence that the UK watchdog, which later fined banks hundreds of millions of pounds for rigging interest rates and expelled dozens of traders from the industry, didn’t want to see it investigated. Was this because it knew all about what critics say was the real fraud practice - lowballing - and had not seen anything wrong with it? Or was it because it was aware of the ‘political’ implications of an investigation?

Have a listen, if you haven’t already, to part 4 of The Lowball Tapes. The evidence suggests officials of the FSA were a) fully aware of lowballing and b) knew the regulator had done nothing about it and c) knew there were ‘political implications’ - a striking comment to make given what we know about Downing Street’s concerns, shared with other world leaders tackling the banking crisis in October 2008, to get Libor and Euribor down. Officials of the FSA nevertheless put the Office of Fair Trading off the scent, making it very clear there was no need for an investigation - and there were high risks. The British Bankers Association’s then Libor manager John Ewan reported that the FSA didn’t think that Libor was within the ‘ambit’ of US regulators.

The British Bankers Association wrote in January 2009 to the US watchdog the CFTC saying its investigation into Libor manipulation was misguided. Their letter was first seen and approved by a very senior regulator at the FSA. That’s quite a thing given that the FSA, two years later started extracting hundreds of millions of dollars in fines on the basis of what US regulators subsequently did - and de-registering individuals for something that is now not regarded as against any rules by the US courts. The FSA/FCA’s been asked about this but declined to comment in detail for Rigged.

The FSA was in constant, daily dialogue with the UK Treasury and - especially in later 2008 - Libor was a subject of daily discussion. Did the watchdog realise the UK governent, among others, had been involved in encouraging banks to lowball? Read the last few cells of the timeline, inspect the evidence and judge for yourself.