Publication of a Timothy Geithner memo has put the Bank of England in a tight spot. Geithner, then president of the New York Federal Reserve, wrote to Mervyn King, the BoE governor, in June 2008 proposing reforms to prevent “deliberate misreporting” of the London Interbank Offered Rate (Libor). That’s hard to square with evidence given this week to British members of parliament by King’s deputy, Paul Tucker, that he only recently found out about allegations of Libor “low-balling”.
Parliamentarians will presumably grill King when he appears before them next Tuesday. One puzzle is why he was so keen to force the resignation of Bob Diamond, Barclays’ chief executive, last week. It will be a little hard for King to say Diamond was aware that low-balling might be taking place but didn’t address it adequately. After all, a similar criticism could be levelled against King himself.
Tucker is in an even hotter seat. That’s because King asked him to follow up Geithner’s memo, and because the deputy governor also had a conversation with Diamond five months later. Some within Barclays interpreted that conversation as an instruction from the BoE to low-ball the bank’s Libor submissions to avoid the appearance that it was in trouble.
The BoE says Geithner’s memo did not cite any evidence of deliberate wrongdoing. However, the memo did recommend that best practices should be established to prevent “accidental or deliberate misreporting” — and suggested that adherence to those practices should be vetted by banks’ auditors. The memo also proposed changes to eliminate the incentive banks had to misreport Libor as a way of hiding their vulnerability.
When Geithner wrote this memo, he had evidence that Barclays was making dishonest Libor submissions. He didn’t convey that evidence to King in this memo. Even so, it is hard to read this as anything other than a warning that deliberate misreporting might be occurring. While that’s not quite the same as saying it was going on, Tucker looks like he was at best not very open when he told MPs that he only became aware of allegations of low-balling in the last few weeks.
MPs will get a second chance to grill Tucker next week. Until the Libor scandal blew up, he was the front-runner to succeed King as governor next year. He will have to put in a pretty good performance to keep his candidacy on track.
