The curious case of the high low submissions

One of the two charges against Barclays in the Libor fixing scandal is that during the banking crisis it submitted, on the instructions of senior management, artificially low quotes in order not to stand out as a poor credit risk by comparison with the rest of the Libor panel.

Barclays has today issued nine pages of "supplementary information", starting with a further statement of contrition.  The document explains that the instruction to lower the quotes was issued by Jerry del Missier, then President of Barclays Capital, following a telephone call on 29th October 2008 between Bob Diamond and Paul Tucker, the Deputy Governor of the Bank of England.  Barclays reports that there was some misunderstanding between Diamond and del Missier about exactly what Tucker had said.  (This is all consistent with paragraph 176 of the FSA report.)  Both Diamond and del Missier resigned from Barclays today.

Barclays' document includes a chart of its rankings relative to the rest of the panel submitting 3-month dollar Libor quotes during November 2008, at the peak of the liquidity crisis following the failure of Lehman Brothers in September that year.  It was almost always the highest quote of the 16-bank panel.

The Guardian has helpfully published an interactive chart of dollar Libor up to the end of 2008.  It shows that  the spread to the fixing of Barclays' quotes for the 3-month rate more than halved on 30th October, and fell to zero at the beginning of December.  Barclays' chart is true but not the whole truth.  And James Mackintosh of the FT has this chart of sterling Libor showing a quicker and more dramatic change.  (The FSA report says, somewhat opaquely, that "After 6 November 2008, changes in market conditions affected Barclays’ LIBOR submissions such that the instruction became redundant.")  Nevertheless, it does seem unfair to give Barclays a kicking for this dishonesty when they were lying less than most of the rest of the panel.

The Bank of England knew in October 2008 that Libor fixings were artificially low, not just from market data but because Barclays (and very possibly other banks) were telling them so.  But there's no sign that they did anything much about it.  We need to know if and when the BoE took action to tell the banks to tell the truth about interbank rates.  If the BoE did nothing, it seems quite reasonable for Barclays and others to suppose that the BoE was more concerned about financial stability than about accurate Libor fixings.  There are many situations in life when an untruth is expected and as such not immoral.  It's not clear to me that this wasn't one of them.

I repeat however that Barclays' manipulation of Libor submissions for trading advantage was truly scandalous.  There's no injustice about the consequences of that.