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Maybe Bob Diamond Manipulated Libor For Queen And Country?

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When you run a bank and things get tough one thing you might do is say "things aren't tough, they're great!" This is always sort of a lie, with a wide range around how much of a lie it is, but it can also be self-fulfilling. A bank is basically a big pile of stuff built on a thin foundation of confidence, so if you convincingly say "things are great" then the confidence thickens and things are great.* If you go on CNBC and say "honestly, we have no idea how we'll make it through the week," you won't.

There is a small deep hole here because most of the time when you need to go on CNBC and say "things are great, we have enough liquidity to last us until 2045," you are lying in some sense, because if everyone pulls their repos etc. etc. then you actually have enough liquidity to last you until 4:45, and if you don't convince everyone of the former then the latter happens. And if you tell everyone a thing that rapidly turns out to be wildly inaccurate, you look ... well, "bad" is one word, "guilty of securities fraud" is another four. One component of the wage premium paid to bank CEOs is probably for this small deep hole risk, though so far the hole is smaller than it is deep.

I don't know if that has anything to do with Bob Diamond. After spending several years overseeing an operation that on a near-daily basis manipulated interest rates, and that was then caught red-handed sending dozens of emails about it, he sort of had to resign didn't he?** It's unclear what Diamond knew when - and it's hard to care that much; another part of the comp premium for bank CEOs really ought to be that if it turns out you were supervising a massive criminal enterprise, even unawares, you gotta go - but there's some evidence he had an inkling. Here is DealBook:

In the fall of 2008, Paul Tucker, deputy governor of the Bank of England, spoke with Mr. Diamond about the high Libor submissions, according to one of the people close to the case. The conversation prompted Mr. Diamond to relay the central bank’s concerns to his top deputies.

While Mr. Diamond never specifically told anyone to influence Libor, at least one of the deputies acted on the discussion, regulatory records show. After talking with Mr. Diamond, the deputy then instructed employees that the Libor submissions should be lowered to be “within the pack.”

This makes a creepy kind of sense doesn't it? The bulk of the hilariously horrible emails about Barclays' Libor-fixing are of the form of rates-derivatives trader emails Libor submitter to say "do me a favor bro" and the submitter does him a favor and then they all high-five and chest-bump and stuff. That sort of bro-y interpersonal favor-trading doesn't sound like the sort of thing that senior executives would be involved in.***

But creating the impression that Britain's solvent-est bank was as solvent as everyone else on the Libor panel does seem like the sort of thing that might preoccupy its CEO, and its regulator.**** And much flak is in fact now being caught by Paul Tucker for maybe saying that, though:

The FSA report judged that “no instruction for Barclays to lower its Libor submissions was given during this telephone conversation”. The DoJ report says that even though more junior staff believed the BoE had instructed Barclays to lower their Libor submissions, “that was not the understanding of the senior Barclays individual [Diamond] who had the call with the Bank of England official [Tucker]”.

I guess? It's fun to imaginatively reconstruct this conversation, and hard to have much confidence in your reconstruction. I submit, though, that it would be weird for junior staff to "believe the BoE had instructed Barclays to lower their Libor submissions" if the BoE had said "whatever you do, make sure your Libor submissions are accurate." It would be somewhat less weird if the BoE had said "huh, sure is a shame that your Libor submissions are so high, might make people lose confidence in you, obviously you don't want to submit anything wrong but, well, anyway, something to think about, nice chatting with you, later." (Update: this is somewhere in the middle, no?)

One thing to think about is: how much would you fault Tucker, and Diamond, if that reconstruction turned out to be more or less true? Lowering Barclays' Libor submissions was an oblique but potentially effective way for Barclays to say "we're fine, the market will fund us, no problems here," and while it had no direct effect - Barclays couldn't borrow at the rate it submitted just because it said it could - it may have had some indirect effect of lulling markets into believing that Britain's banks were in good shape. Which in October of 2008 had some value to Barclays and, probably, to the BoE. Maybe it even helped Barclays make it through the crisis relatively unscathed but for the whole, y'know, massive interest rate fraud thing.

My own guess is that Barclays wouldn't be such a piñata if that was all it had done: if it had lied about Libor just to boost confidence in itself, with perhaps a nudge-and-wink assist from the BoE, there might well be a shrug of "well everyone kind of knew that." (Certainly the BoE did; Mervyn King went around saying that Libor was "the rate of interest at which big banks don't lend to each other," which I'm sure he regrets a bit now.) Propping up confidence in a bank's viability, even dishonestly, is a venial sin - as long as the bank remains viable.

The problem for Barclays was that its traders also manipulated Libor not to preserve confidence in the bank and the banking system, but to boost the P&L on their own trades. That sort of outright zero-sum fraud, documented in voluminous terrible emails, is harder for regulators and the public to tolerate. The irony is that those manipulations probably didn't have all that much effect, relatively speaking: they were on the order of a half basis point every now and then (er, every day, whatever), and more crucially Barclays' traders at least thought they were shooting against other banks manipulating Libor the other way. So the net effect on rates may have been small. Whereas in the depths of the financial crisis, Barclays was pushing down its submissions to be "in the middle of the pack" at the same time that other banks had incentives to do the same, and probably did. "Everybody's doing it" then made the problem worse, not better - though it might also have made it easier to forgive.

Barclays CEO Robert Diamond Resigns [WSJ]
Barclays Executives Are Said to Know of Low Rates [DealBook]
Diamond testimony crucial for BoE deputy [FT]
Will Diamond Bob bring others down with him? [FT Westminster]

* Some have expressed skepticism about your ability to do that, for a generic you. Also consider whether manipulating Libor is a way around Bagehot's dictum: if banging on about how creditworthy you are is self-defeating, quietly saying "look how much credit we're getting and at such good terms" may be the only option left.

** Exercise for the reader: how many other bank CEOs will fall into that category? How many will resign? This guy perhaps conflates "Barclays" and "Bob Diamond" too much but he is not entirely wrong:

Barclays "has not been well served or rewarded for its co-operation with the regulators," said Ian Gordon, an analyst at Investec Securities in London.

But don't act so surprised, Ian; first place is often problematic when it comes to regulatory investigations. See e.g. Goldman's priority in time and size in Abacus-style-CDO fines.

*** Though it's also the sort of thing that, if I were a bank CEO, I would assume existed unless proven otherwise by actually impermeable Chinese walls, enforced compliance policies, etc. Bro-y interpersonal favor-trading is the natural state of traders; if the particular favors that they're trading are illegal, you have to actually stop them doing it, not just look shocked when you find out they did.

**** Also BoE does monetary policy and I stick by my theory that 2008-era Libor manipulation was a form of unofficial monetary easing that central banks might not have been all that broken up over.