He Said, She Said
Paul Tucker Testimony: Bank of England Pushes Back
Grilled by Parliament, the Bank of England’s Paul Tucker denied pressuring Barclays to fix interest rates.
In testimony today before the British Parliament, Paul Tucker, the deputy governor of the Bank of England, sought to explain to skeptical lawmakers exactly what he meant to convey to former Barclays CEO Bob Diamond in an October 2008 phone call.
In a testimony peppered with harsh questioning and Tucker’s claims that he couldn’t recall the precise details of various phone calls and meetings, the central question of why Barclays submitted lower rates to the LIBOR panel during the financial crisis devolved into the MPs trying to piece together a chain of misunderstandings between the central bank and Barclays officials that at times resembled a game of telephone.
On the matter of the infamous phone call and Diamond’s note of it, Tucker ably defended himself, but when asked to explain his and the bank’s behavior in response to an earlier allegation of possible rate-rigging, he was on less steady ground.
In Diamond’s testimony last week, he explained his own understanding of this conversation with Tucker, reflected in a contemporaneous note of the call where Diamond wrote that Tucker was relaying the concerns of senior government officials about the rates Barclays was submitting to the LIBOR panel; Diamond also wrote that Tucker had told him that “it did not always have to be the case that we appeared as high as we have recently.” Jerry Del Missier, then a senior investment banker at Barclays who resigned as COO hours after Diamond last week, took this to be an implicit instruction for Barclays to start submitting below-market rates.
Before Tucker’s testimony, Treasury Select Committee chairman Andrew Tyrie described the call as “a nod and a wink” from the Bank of England to instruct Barclays to lower its submitted rates. When asked if Diamond’s understanding of the call was accurate, Tucker claimed that it did “not completely” reflect what he intended to convey.
The way Tucker explained the call was that he was merely warning Barclays that their rates were quite high and that if the market saw the high rates they had to pay to get funding, the bank could very well be “next in line” for state aid after it had earlier refused to accept a government recapitalization.
Emails released today by the Bank of England show that Tucker had been in contact with Barclays executives about their interbank funding for a week before his conversation with Diamond on October 29. On October 22, Tucker sent an email to Diamond and then-Barclays CEO John Varley asking to discuss LIBOR, describing it as “a slightly sensitive point.” Two days later, Tucker emailed four Barclays officials, again including Diamond, saying that he wanted to discuss the “sources and structures” of its funding.
Then, on the 29th, Tucker explained to the MPs, he told Diamond that Barclays ought to pay attention to their LIBOR submissions because the markets were interpreting this data as an indicator of the health of the bank.
Although Barclays had taken advantage of two banking support schemes for British banks, a lending program and a debt guarantee, it rejected the British government’s October 8, 2008, offer to partially nationalize the bank so that it could meet higher capital requirements. Instead, Barclays went abroad for fresh capital, eventually raising over £7 billion pounds from Abu Dhabi and Qatar by the end of the month, only two days after Tucker and Diamond’s infamous phone call.
The other section of the phone call the MPs focused on was when Diamond told Tucker that other banks are submitting LIBOR quotes that “did not represent real transactions.” To Conservative MP Andrea Leadsom, this looked like whistleblowing, evidence of market manipulation provided by the CEO of one of Britain’s largest banks. In response to Leadsom, Tucker said that he did not understand his talk with Diamond “to be a whistleblower conversation at all.”
The MPs brought up a previous time where Tucker may have been made aware of possible rate fixing. Mark Garnier, a Conservative MP, questioned Tucker about a November 15, 2007, meeting of the Bank’s Sterling Money Market Liaison Group. Contemporaneous minutes of the meeting say“[s]everal group members thought that LIBOR fixings had been lower than actual traded interbank.” Tucker claimed only that he could remember “this part of the discussion in broad terms” and that he wanted the British Banking Administration, which collects and distributes the LIBOR number, to “please address these questions.”
Tucker, however, admitted that he did not see the divergence between the actual rates at which banks were lending to each other and their LIBOR submissions as evidence that banks were deliberately lowballing to disguise their real borrowing costs. He instead saw the divergence as a result of banks getting it wrong because the market was “dysfunctional and sporadically illiquid.” What he heard in meeting did not “send alarm bells ringing”; Tucker also said that he didn’t understand banks who were submitting inaccurate submissions to be “a bunch of crooks.”
And while he surely thought the same the next time he heard of possibly inaccurate LIBOR submissions less than a year later from Bob Diamond, in retrospect, the emails and minutes portray a Bank of England that had some lingering concerns about LIBOR, but neither the wherewithal or inclination to actively pursue them.
They were instead overwhelmed by the severity of the crisis hitting the British and global banking system and refrained from investigating LIBOR further or trying to switch to a system that relied on actual trading data, not estimates from banks. When asked if it was possible that LIBOR manipulation could still be occurring, Tucker responded, “I can't be confident of anything after learning of this cesspit.” The Treasury Select Committee seemed to think the same of the Bank of England.