WASHINGTON — An unidentified employee of U.K. bank Barclays PLC told the New York Federal Reserve Bank more than four years ago that the bank was filing false reports on a key interest rate, according to documents released by the regional central bank Friday.
The documents show that a summary of this admission was quickly circulated throughout the U.S. government, including the Federal Reserve and the Treasury Department, in 2008.
The London interbank offered rate, or LIBOR, is now at the center of a sweeping industrywide, cross-border investigation into the setting of interbank lending rates.
The U.K. bank Barclays PLC was fined $450 million for fixing LIBOR. Other banks across the world including Citigroup, JPMorgan Chase, the Royal Bank of Scotland and Deutsche Bank have said they also are being investigated.
Morgan Stanley analysts say the LIBOR scandal hits banks three ways – through fines, like the one Barclays paid; litigation risk; and less certainty on future earnings as regulators and politicians demand LIBOR and broader industry structure change.
In a note published Thursday, they said they expect fines equaling about 9 percent of 2012 earnings per share and litigation risk of roughly $400 million per bank.
The New York Fed released the documents in response to inquiries from members of Congress about the role of Treasury Secretary Timothy Geithner, then the head of the New York Fed, and its questions about LIBOR.
According to a New York Fed, information that there were problems with LIBOR started in fall 2007, but were mainly anecdotal reports and “mass-distribution emails.”
In December 2007, Barclays told the New York Fed in a phone call that, in general, LIBOR submissions appeared unrealistically low.
On April 11, 2008, a New York Fed analyst asked a Barclays employee in detail about the extent of problems with LIBOR.
“The Barclays employee explained that Barclays was underreporting its rate to avoid the stigma associated with being an outlier with respect to its LIBOR submissions, relative to other participating banks,” the New York Fed statement said.
The analyst – Fabiola Ravazzolo, according to one transcript released – reported the comment to senior New York Fed management and the comment was mentioned in a weekly briefing prepared by the New York Fed staff for the Fed Board of Governors in Washington and the Treasury Department.
On May 1, Geithner raised the subject of LIBOR with the President’s Working Group on Financial Markets, consisting of the heads of U.S. regulatory agencies.
The New York Fed gave a detailed briefing to Treasury officials on May 6.
Geithner then approached U.K. regulators with their concerns about LIBOR.
In a June 1, 2008, memo to Bank of England Governor Mervyn King, released by the BOE, Geithner proposed six reforms of LIBOR, including steps to establish a “credible” reporting procedure and eliminating incentives to misreport.
King responded June 3 that Geithner’s recommendations for improvements to the calculation LIBOR “seem sensible.”
The emails show that the BOE passed the recommendations on to the British Bankers’ Association.
In a statement, the BOE said that “no evidence of deliberate wrongdoing had been cited” at the time of the correspondence between King and Geithner.
What is Libor and why does it matter?
The interest rate at the center of a banking scandal provides the architecture for trillions of dollars in contracts around the world, including mortgages. The rate is called LIBOR, short for London interbank offered rate. A British banking trade group sets it every morning after international banks submit estimates of what it costs them to borrow money.
American and British regulators fined one of those banks, Barclays, $453 million in June for manipulating LIBOR between 2005 and 2009 by submitting false reports of borrowing rates. Other banks, including Citigroup and JPMorgan Chase, are being investigated.
HOW IT WORKS, WHAT IT AFFECTS: LIBOR is the benchmark most often used to set the interest rate for adjustable-rate mortgages, according to Zillow, a real estate information service.
Take what is commonly known as a 5/1 ARM: That means the mortgage rate is fixed for five years, then adjusts once a year after that.
A bank could specify that the rate adjusts each year to LIBOR plus 2.5 percentage points. On Friday, the one-year LIBOR rate was 1.07 percent. So a mortgage adjusting today would have an interest rate of 3.57 percent for the next year.
Rates for fixed-rate mortgages of 15 or 30 years are usually based on the 10-year U.S. Treasury note.
LIBOR is used in a similar way to determine interest rates for some credit cards and student loans and for what it costs corporations to borrow money. LIBOR and a related European rate influence more than $500 trillion in global contracts.The Associated Press