America wakes up to the Libor scandal

US lawyers and politicians are belatedly stirring, says Stephen Foley in New York

When the Libor rate-rigging scandal erupted two weeks ago, with the admissions by Barclays and the £290m fine on the British bank, boy did it erupt – in Britain.

Despite the size of the settlement and crowing by the Commodities Futures Trading Commission, the regulator here, that it had bounced sleepy UK authorities into action, Barclays' travails looked like a quaint foreign story. On this side of the Atlantic, it was not seized upon by bank-bashers on Capitol Hill, or partisan point-scorers, or even the media especially.

One commentator, arguing that it was the British uproar, rather than the American shrug, which was the correct response, wailed: "What will it take to get the same response here?"

The answer, it seems, might only be time. If there were any bank chief executives who breathed a sigh of relief that the ferocious politicians of the US and the litigious players in the financial markets here seemed becalmed, they are rethinking that complacency.

In the last 48 hours, the Libor scandal has taken on an American political dimension, with the publication of correspondence between the current US Treasury Secretary, Tim Geithner, and the Bank of England's Governor, Mervyn King, and with a thunderous letter signed by senior Democrats demanding a thorough investigation and prosecutions. It is an odds-on bet that bank bosses will be called to Capitol Hill to explain the shenanigans of traders who tried to manipulate Libor for personal gain and to rake over the awful months of the credit crisis, when Barclays – and probably others – lied about their borrowing rates for fear of triggering a panic.

Barclays' shares are down about 16 per cent since its settlement, while the American banks who are part of the Libor-setting process – JPMorgan Chase, Citigroup and Bank of America – are broadly flat.

Glenn Schorr, a banking analyst at Nomura, reckons that could change. "We're not sure that this potentially large problem is fully priced in," he told his clients.

Barney Frank, the No 2 member of the powerful House Financial Services Committee is among the politicians calling for bank executives to be hauled before Congress. The Obama administration received a letter on Thursday signed by a dozen Senators, five of whom sit on the Senate Banking Committee, demanding a full account of what the authorities knew and what the manipulation of Libor might have meant for ordinary Americans' mortgage rates, credit card bills and small business financing.

"This scandal calls into further question the integrity of many Wall Street banks and whether our prosecutors and regulators are up to the task of regulating them," they wrote. "Restoring integrity to our financial system is critical to restoring confidence in our economy.... Just like the banks and executives they oversee, regulators who were involved should be held to account for any failures to stop wrongdoing."

The New York Federal Reserve yesterday released details of its correspondence with the UK authorities over Libor during the credit crisis.

Mr Geithner, now the most senior member of the Obama administration's economics team, but at that time the chairman of the New York Fed, raised concerns about the "accidental or deliberate" manipulation of Libor in 2008, it was revealed. The Fed was so concerned about the apparent faking of Libor in April 2008 that within weeks it had drawn up proposals on how to restore its integrity and forwarded them to Sir Mervyn and Mr Tucker.

The Bank of England passed them on to the British Bankers Association, which oversees the calculation of Libor rates from an average of 16 banks' public submissions. According to the New York Fed, its officials understood that, with interbank lending getting more scarce as the crisis worsened, the borrowing rates being submitted to the BBA were "increasingly hypothetical" and that Barclays had become alarmed at market gossip which pointed to its high Libor submissions as evidence that the bank was in trouble.

In April 2008, one Barclays employee admitted to a Fed official: "We know we're not posting an honest Libor.... We just fit in with the rest of the crowd."

Suggestions that Libor was being manipulated downwards abounded in 2008, and lawsuits from market participants who believed they lost out as a result have been working their way through US courts for more than two years.

These received a boost from the emails published as part of the Barclays settlement. One lead plaintiff, the city of Baltimore, believed it lost out because derivatives deals it had in 2008 were related to the Libor rate. Dozens of other municipalities are also involved.

The success of these suits will depend on whether banks are found to have been successful in their attempts to manipulate Libor and if the fake rate did feed through to specific gains or losses on derivatives – but even defending them could cost tens of millions of dollars in legal fees.

Barclays' former chief executive Bob Diamond, before he was forced to resign, raged privately at having become the public face of the Libor scandal, despite his belief that other banks were faking Libor rates earlier in the crisis, and despite being the first to co-operate in the investigation.

By the time the scandal is played out, on a transatlantic stage, his may not be the only red face.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Arts and Entertainment
Over their 20 years, the band has built a community of dedicated followers the world over
music
News
Staff assemble outside the old City Road offices in London
mediaThe stories, the writers and the changes over the last quarter of a century at Britain's youngest paper
Life and Style
The Oliver twins, Philip and Andrew, at work creating the 'Dizzy' arcade-adventure games in 1988
techDocumentary looks back at origins of the computer-games industry
Arts and Entertainment
Krall says: 'My hero player-singer is Elton John I used to listen to him as a child, every single record
music
Arts and Entertainment
The Wu-Tang Clan will sell only one copy of their album Once Upon A Time In Shaolin
musicWu-Tang Clan and The Sexual Objects offer fans a chance to own only copies of their latest albums
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Tax Assistant

Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...

Recruitment Genius: Outbound Sales Executive - OTE £25,000

£16000 - £25000 per annum: Recruitment Genius: This is an exciting opportunity...

Ashdown Group: Java Developer / J2EE Developer - Watford - £45,000 - £47,000

£45000 - £47000 per annum + bonus + benefits: Ashdown Group: Java Developer / ...

Ashdown Group: Marketing Product Manager - (Financial Services) - SW London

£35000 - £38000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

Day In a Page

Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

What the six wise men told Tony Blair

Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

25 years of The Independent on Sunday

The stories, the writers and the changes over the last quarter of a century
Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

Homeless Veterans appeal

As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

Smash hit go under the hammer

It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

The geeks who rocked the world

A new documentary looks back at origins of the computer-games industry
Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

Belle & Sebastian is taking a new direction

Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea
America: Land of the free, home of the political dynasty

America: Land of the free, home of the political dynasty

These days in the US things are pretty much stuck where they are, both in politics and society at large, says Rupert Cornwell
A graphic history of US civil rights – in comic book form

A graphic history of US civil rights – in comic book form

A veteran of the Fifties campaigns is inspiring a new generation of activists
Winston Churchill: the enigma of a British hero

Winston Churchill: the enigma of a British hero

A C Benson called him 'a horrid little fellow', George Orwell would have shot him, but what a giant he seems now, says DJ Taylor
Growing mussels: Precious freshwater shellfish are thriving in a unique green project

Growing mussels

Precious freshwater shellfish are thriving in a unique green project
Diana Krall: The jazz singer on being friends with Elton John, outer space and skiing in Dubai

Diana Krall interview

The jazz singer on being friends with Elton John, outer space and skiing in Dubai
Pinstriped for action: A glimpse of what the very rich man will be wearing this winter

Pinstriped for action

A glimpse of what the very rich man will be wearing this winter
Russell T Davies & Ben Cook: 'Our friendship flourished online. You can share some very revelatory moments at four in the morning…'

Russell T Davies & Ben Cook: How we met

'Our friendship flourished online. You can share some very revelatory moments at four in the morning…'
Bill Granger recipes: Our chef serves up his favourite Japanese dishes

Bill Granger's Japanese recipes

Stock up on mirin, soy and miso and you have the makings of everyday Japanese cuisine
Michael Calvin: How we need more Eric Cantonas to knock some sense into us

Michael Calvin's Last Word

How we need more Eric Cantonas to knock some sense into us