July 17, 2012

BoE Governor Pushed for Barclays Chief’s Ouster

Ex-Barclays executive says BoE encouraged rate cuts; central bank cites misunderstanding

The British Parliament got an earful over the last couple of days as testimony continued in the LIBOR-fixing scandal. Mervyn King, governor of the Bank of England (BoE), said Barclays was so blase about the issue that he pushed for CEO Bob Diamond to step down. Jerry del Missier, former Barclays chief operating officer, said he saw nothing wrong with adjusting the bank’s LIBOR submission, since the instruction to do so had come from the BoE. And banks in the investigation faced other woes.

Reuters reported Tuesday that King told Barclays that Diamond must go after the rigging of LIBOR submissions came to light. Diamond had had no intention of resigning, instead intending to head up reforms. However, King was quoted saying, "The Barclays board ... was deeply reluctant to face up to the concerns. It became clear to me that they hadn't really taken on board the loss of confidence."

King also said that Barclays had to create a new bank and a new culture so that it could move beyond the LIBOR issue, and that a Financial Services Authority (FSA) letter in April to Barclays had already expressed concerns about the bank’s culture. When King met with Marcus Agius, Barclays chairman, on July 2, he said, he clarified the magnitude of the problem with the existing culture at the bank.

He was quoted saying, "All of us involved had built up genuine concern that it is possible to sail close to the wind once. You can sail close twice or maybe even three times. But when it gets to four or five times it becomes a regular pattern of behavior [and you] ... have to ask questions about the navigational skills of the captain." After King’s intervention, Diamond did indeed step down.

On Monday, del Missier’s testimony to the House of Commons Treasury Select Committee had told something of a different story, as he cited the intervention of Paul Tucker, deputy governor of the BoE, as the reason he instructed bank personnel to adjust Barclays’ LIBOR submissions.

Tucker, on the other hand, had testified that he spoke to Diamond over concerns about the bank’s financial health and funding costs because of the high interest rates the bank was submitting, and not to discuss interest rates or to suggest that they be manipulated lower. Diamond had said in his own testimony that del Missier misinterpreted what he, Diamond, had told him about the conversation.

Del Missier said in the report, "I passed the instruction on to the head of the money-market desk. I relayed the content of the conversation I had with Mr. Diamond and fully expected the Bank of England views would be fully incorporated in the LIBOR submission. I expected that they would take those views into account."

He added, "At the time it did not seem an inappropriate action given that this was coming from the Bank of England … I only know what I clearly recall from my conversations with Mr. Diamond. I acted on the basis of the phone conversation that I had."

Not just Barclays but also the BoE and the FSA are in the spotlight over the issue. Politicians are demanding to know why no substantive action was taken earlier, particularly since evidence has surfaced that the LIBOR had been manipulated for years and that in May 2008 Timothy Geithner, the U.S. Treasury secretary who at the time was president of the New York Fed, e-mailed King with recommendations to make LIBOR less prone to manipulation.

King said that the Fed never sent any evidence that LIBOR was being misreported. In the report, he said, “Mr. Geithner was sending that to us as a suggestion for how these rules should be constructed and we agreed with him, but neither of us had evidence of wrongdoing.” King added, “The first I knew of any alleged wrongdoing was when the reports came out two weeks ago.”

Bloomberg reported that Tracey McDermott, acting head of enforcement at the FSA, told the parliamentary committee Monday that seven banks are being investigated for submitting false rates. The banks were not identified.

More than seven are under investigation by a number of official bodies worldwide. According to Reuters, the banks facing inquiries are Bank of America, Barclays, BTMU Capital, Citigroup, Credit Suisse, Deutsche Bank, HBOS (a unit of Lloyds Banking Group that is the holding company for the Bank of Scotland and other banks), HSBC, JPMorgan Chase, Lloyds, Rabobank, the Royal Bank of Canada (RBC), the Royal Bank of Scotland (RBS), UBS, West LB and Norinchukin.

Some of those banks face other troubles. According to a report by the U.S. Senate Permanent Subcommittee on Investigations, HSBC was involved in money laundering, evaded sanctions on Iran and did business with terrorists. Bloomberg reported that both the bank and U.S. regulators will be questioned at a Tuesday hearing.

“HSBC sets up a U.S. bank affiliate as its gateway into the U.S. financial system and lets its global network of affiliates abuse that gateway,” Sen. Carl Levin, D-Mich, who heads the subcommittee, was quoted saying. “The failure of accountability here is dramatic.”

The criminal investigation, meanwhile, over losses at JPMorgan's Chief Investment Office headed into stormy waters. The decision last week by the bank to notify U.S. authorities that it had found evidence in an internal investigation of efforts to hide losses also resulted in the bank’s decision to restate its first-quarter earnings—the day before it was to report results for the second quarter.

Three unidentified sources told Reuters there may be evidence of wrongdoing in the office. Two of the sources said that the criminal probe was looking at personal trading in the CIO and whether bank shares were sold prior to the original announcement of the $2 billion loss.

Now, however, the investigation is looking at whether three JPMorgan employees in London committed fraud in reporting on their transactions. Outside counsel WilmerHale, which is handling the internal investigation, found that "traders may have been seeking to avoid showing the full amount of losses." The bank is cooperating.

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