by: Simon Johnson
July 20, 2012
On June 1, 2008, Timothy F. Geithner – then president of the Federal Reserve Bank of New York – sent an e-mail to Mervyn A. King and Paul Tucker, then respectively governor and executive director of markets at the Bank of England. In his note, Mr. Geithner transmitted recommendations (dated May 27, 2008) from the New York Fed’s “Markets and Research and Statistics Groups” regarding “Recommendations for Enhancing the Credibility of Libor,” the London Interbank Offered Rate.
The recommendations accurately summarized the problems with procedures surrounding the construction of Libor – the most important reference interest rate in the world – and proposed some sensible alternative approaches.
This New York Fed memo stands out as a model of clear thinking about the deep governance problems that allowed Libor to become rigged.
At the same time, the timing and content of the memo raises troubling questions regarding the Fed’s own involvement in the Libor scandal – both then and now.
According to the recent order against and settlement with Barclays by the Commodity Futures Trading Commission, the Libor “market” had by 2005 become a hotbed of collusion and price-fixing, in which reported interest rates were being manipulated both up and down to the advantage of individual traders and, sometimes, to benefit the banks that employed them.
These activities were widespread, representing – depending on your reading of the details – some combination of a complete breakdown of compliance and control at Barclays and presumably other banks (mentioned but not yet named by C.F.T.C.) and a pattern of apparent criminal fraud.
The New York Fed was apparently aware of Libor-rigging at some level in 2007 and serious concerns – although presumably not the full details of what the C.F.T.C. later established – had reached the most senior levels of the Federal Reserve System by early 2008.