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.Reuse content