You can pause intro music down below.
Piggybankblog posted on 09/13/12
Piggybankblog posted picture
Cross linked with wsj.com
LONDON—Four years before a scandal erupted over banks’ attempts to manipulate an important interest rate, the head of a private association of giant banks suggested that perhaps the group shouldn’t be responsible for what had come to be known as “the world’s most important number.”
At an April 25, 2008, meeting with officials at the Bank of England, Angela Knight, head of the British Bankers’ Association, argued that the London interbank offered rate, or Libor, which serves as the basis for interest rates on trillions of dollars of loans and financial contracts, had become too big for her organization to manage, according to minutes of the meeting and a person who was there.
Her suggestion went nowhere. Even as Libor’s deep flaws became apparent, regulators resisted a greater oversight role, the BBA’s member banks clung to control of Libor, and BBA executives bickered with one another over whether to hang onto the lucrative business, according to people who were involved and a Wall Street Journal review of hundreds of pages of emails, meeting minutes and other documents.
This summer, the Libor mess exploded into a global scandal after Barclays BARC.LN+0.44% PLC admitted that its executives and traders tried to manipulate Libor. Top Barclays executives lost their jobs and U.K. regulators faced criticism for failing to prevent the problem. At least a dozen other banks remain under scrutiny. British and U.S. authorities are conducting criminal investigations.
Regulators in the U.K. and U.S. now contend that the BBA failed to protect Libor’s integrity and that a private banking association shouldn’t oversee a crucial cog in the global financial system. British policy makers are considering moving Libor under the jurisdiction of regulators.
A BBA spokesman declined to discuss details of the organization’s handling of the controversy. “Since the inception of Libor, the BBA has consistently worked to safeguard and maintain the integrity of the benchmark, including active engagement with” international authorities, he said. “There has been clear consensus for this approach from all senior stakeholders in the banks and within the BBA.”
Established in 1919, the BBA has a staff of about 70 and represents more than 200 banks, from 60 countries, doing business in the U.K. Its main roles include lobbying on banks’ behalf and trying to promote the industry’s reputation. As a private association, it is essentially unregulated.
The BBA created Libor in 1986 as a tool to help its members set interest rates on big corporate loans that are issued collectively by multiple banks. Banks were struggling to figure out what interest rates to charge on such loans. So the BBA started conducting a daily survey of how much it cost banks to borrow from each other—an important determinant of how banks set rates on many loans. The average became Libor.
Libor wasn’t originally intended to become enmeshed in a large chunk of the world’s financial contracts. But its popularity quickly grew. Soon banks were crafting derivative products that relied on Libor as a reference rate.
Libor eventually became ubiquitous—the basis of interest rates on everything from corporate loans and derivatives to mortgages and credit cards. The BBA took to calling it “the world’s most important number”—a phrase that has popped up repeatedly this year in lawsuits about the rate’s alleged manipulation.
The rapid growth wasn’t an accident. In 2005, the trade group hired John Ewan, at the time a 29-year-old financial researcher with a biology degree. His mission was to put Libor “on a secure commercial footing,” according to Mr. Ewan’s LinkedIn profile. He launched the product in new currencies and increased its licensing to third parties, boosting the revenue steam produced by Libor for the not-for-profit group.
With Libor’s influence came problems. They started cropping up in late 2007 as the financial crisis got under way.
On Nov. 15, 2007, at a meeting convened by the Bank of England, several bank executives expressed concern that Libor looked artificially low, signaling that banks might be understating their borrowing costs to mask their financial problems, according to minutes of the meeting. Mr. Ewan assured participants that the BBA had rigorous quality-control measures to prevent any problems, the minutes indicate.
On April 16, 2008, The Wall Street Journal published a front-page story highlighting the mounting concerns about Libor. Hours later, the BBA responded by sending a memo to banks reminding them to “submit honest rates,” according to an internal Bank of England memo. Over the next week, the BBA launched what its executives described as a “charm offensive,” according to the Bank of England memo, reaching out to investors and journalists to dispel concerns.
Nevertheless, Ms. Knight, a former Conservative Party lawmaker who had joined the BBA as chief executive a year earlier, suggested to the Bank of England that Libor might not belong in her group’s hands. BBA member banks resisted.
In mid-May, the BBA held a meeting of the Foreign Exchange & Money Markets Committee, a long-standing BBA-organized panel whose primary role is to make decisions about Libor. The committee is made up of banking-industry officials whose names and affiliations the BBA won’t disclose. The meeting’s agenda was how to improve Libor.
“We need to adopt a minimal approach,” said one executive, identified in a transcript as Representative 2 of “Bank B.” “Too big a change would cause an explosive reaction.”
Another bank representative argued that the BBA should deal with banks that report artificially low data “by just picking up the phone…and have a conversation behind closed doors.” The transcript indicates that other bank representatives agreed.
In emails with senior British central bankers and regulators, Ms. Knight pushed for them to take on an advisory role, sitting on the committee overseeing Libor. Their participation, Ms. Knight hoped, would lend credibility to Libor and deter banks from trying to fudge the rate, according people familiar with the matter.
On June 2, 2008, Ms. Knight emailed a top Bank of England official, Paul Tucker, to say she had spoken with the Federal Reserve Bank of New York, run at the time by current U.S. Treasury Secretary Timothy Geithner. The New York Fed had offered a detailed list of suggestions on how to improve Libor, which the BBA said it would seriously consider.
The Fed has “agreed subject to caveats and getting the framework right to have a role in the new structure both in advising their views and in developing the [oversight] panels,” Ms. Knight wrote to Mr. Tucker. “I would like the Bank to participate similarly.”
The Bank of England declined the invitation. It preferred having “a panel of senior bankers overseeing the BBA process (from within the BBA),” according to an email from Michael Cross, a senior official in the central bank’s markets division, to his central-bank colleagues.
The New York Fed later backed out as well. Both central banks asked the BBA to not even mention in its report on the topic that they had been consulted, according to email between central bankers and the BBA. Officials at both central banks worried that any involvement with Libor could be construed as an official endorsement of the rate or of the BBA’s review, according to people familiar with the matter.
In November 2008, the BBA published its final report detailing plans to clean up Libor. It called for an expansion of the BBA’s rate-oversight committee and stepped-up auditing of the rate data provided by banks, which is used to calculate Libor. But the process was still firmly in the control of the BBA and its members, and regulators remained uninvolved.
BBA officials subsequently toyed with selling Libor or spinning it off into a wholly independent entity, according to people familiar with the process. The organization drew up plans to license Libor to an independent third party that would pay a fee to administer the rate instead of the BBA.
But when BBA staffers pitched the idea to industry executives, they got the impression that the big banks—which paid most of the BBA’s bills through their membership fees—wanted Libor kept in-house so that they could continue to influence it, according to people familiar with the talks. BBA officials and industry executives also worried that the lack of explicit support from regulators for licensing Libor to an outside group would make it tough to find a willing third party.
As a result, the idea ultimately was abandoned.
Tension over what to do with Libor spilled into the BBA’s drab open-plan office in central London, with heated debates between Ms. Knight and Mr. Ewan, according to people who heard the exchanges. Ms. Knight wanted to scale back the BBA’s role. Mr. Ewan advocated further expansion, touting the potential revenue from broadening Libor’s reach.
In late 2009, the BBA incorporated a new legal subsidiary to house Libor. One person involved in the decision says the BBA hoped to shield itself from potential liability and improve Libor’s governance through an independent board.
The new entity, BBA Libor Ltd., was run from the BBA’s offices. Its incorporation documents listed five of its nine directors as BBA executives, including Ms. Knight and Mr. Ewan.
The plan was to eventually move BBA Libor to separate offices and make the board more independent. But as government investigations of Libor intensified, those plans were shelved at the advice of the BBA’s outside lawyers, say people involved in the discussions.
Last year, the BBA commissioned a confidential review of how Thomson Reuters, which is responsible for compiling the daily data from banks that makes up Libor, was ensuring its quality. The review uncovered holes in the process, which was staffed by a small group of back-office workers in a small city in southwestern England, say people familiar with the review.
A Thomson Reuters spokesman said that after the BBA review last year, “some additional minor recommendations were made to improve the mechanical processes around Libor calculation, and Thomson Reuters welcomed them.”
The BBA’s attention, meanwhile, was shifting to other priorities. Ms. Knight and her staff were trying to fend off tougher British and European banking regulations and to broker cease-fires with British politicians who blamed banks for the country’s economic malaise. From 2010 through the first half of this year, even as government probes of Libor progressed, the BBA’s board of directors didn’t have substantive discussions about Libor, according to board members. They perceived Libor as a nonissue because it was run out of a subsidiary.
Ms. Knight, meanwhile, was increasingly in conflict with BBA members—especially Barclays—over political and regulatory issues unrelated to Libor. Barclays’s chairman, Marcus Agius, also chaired the BBA’s board. In 2011 and early this year, BBA officials exchanged emails warning that the “Blue Eagle”—a nickname for Barclays based on its logo—was seeking to oust Ms. Knight. In April, she announced that she planned to resign in coming months.
“I’m disappointed if there is any perception that Barclays or I had an issue with Angela Knight,” Mr. Agius said recently. “This was certainly not the case.”
By this spring, U.S. and British investigations of Libor had uncovered evidence that banks tried to manipulate the rate. The issue burst into the public eye on June 27, when U.S. and British authorities announced a roughly $450 million settlement with Barclays over its attempted manipulation. The involvement of top Barclays executives set off a political storm.
On the morning of Monday, July 2, Barclays announced that Mr. Agius was resigning as chairman, meaning he would also step down from his BBA post.
About an hour later, the BBA held its regular weekly staff meeting, known as “Monday prayers”—a reference to the morning assemblies at posh British schools where students pray and sing hymns. The mood was dour.
The staff was blindsided by Mr. Agius’s resignation but figured they would be able to find a replacement within a week. Ms. Knight told her colleagues to be prepared for the Libor scandal to “get worse,” according to an attendee.
They decided to cancel summer parties the BBA had planned for lawmakers and industry bigwigs. “We regret the short notice but our industry needs to think long and hard about its collective behaviour and I am sure you understand this is not the time for such an event to take place,” Ms. Knight emailed invitees later that day.
At a BBA board meeting in early July, Ms. Knight informed directors that the Libor investigations had largely exhausted the group’s limited budget and cash reserves, say people who heard her remarks. Barring a cash infusion, she said, the BBA would likely need to lay off staff.
Days later, on July 13, Mr. Ewan left the BBA for a job at Thomson Reuters.
The BBA replaced Ms. Knight with a former journalist, Anthony Browne, who took over on Sept. 1. It has yet to find a new chairman. Chairmen of multiple banks turned down the job, say people familiar with the search.
The British government recently com0missioned a study on Libor’s future. The regulator spearheading the inquiry, Martin Wheatley, is expected to publish his recommendations in late September. In a recent speech, he said it seems “untenable” to have Libor overseen by an unregulated institution.
“I am not confident that the BBA’s historic role has been good,” Mr. Wheatley said. “I think it still remains an open question as to whether, from an industry perspective, it’s still the best body to continue with that function.”
My name is John Wright AND I AM FIGHTING BACK!
All Rise! The Honorable Judge Wright has left The Courtroom of Public Opinion!
Your donation makes a difference in my life.
PRIVACY NOTICE: Warning – any person and/or institution and/or Agent and/or Agency of any governmental structure including but not limited to the United States Federal Government also using or monitoring/using this website or any of its associated websites, you do NOT have my permission to utilize any of my profile information nor any of the content contained herein including, but not limited to my photos, and/or the comments made about my photos or any other “picture” art posted on my profile.
You are hereby notified that you are strictly prohibited from disclosing, copying, distributing, disseminating, or taking any other action against me with regard to this profile and the contents herein. The foregoing prohibitions also apply to your employee , agent , student or any personnel under your direction or control.
The contents of this profile are private and legally privileged and confidential information, and the violation of my personal privacy is punishable by law. UCC 1-103 1-308 ALL RIGHTS RESERVED WITHOUT PREJUDICE