Business Forum: Lesson learned? Ask for it in writing

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If we take Bob Diamond and Paul Tucker at their word, part of the Libor scandal at Barclays Plc can be chalked up to a series of comic misunderstandings. It's a bit much to swallow, but the spectacle sure has been fun to watch.

Both men agree that on Oct. 29, 2008, while the financial system was on the brink, Mr. Tucker, who is the Bank of England's deputy governor, called Mr. Diamond on the phone. Mr. Diamond, who resigned recently as Barclays's chief executive officer, was head of the company's investment-banking business at the time.

In Mr. Diamond's version, Mr. Tucker told him "he had received calls from a number of senior" U.K. government officials asking "why Barclays was always toward the top end of the Libor pricing," according to a file note Mr. Diamond wrote that day. Mr. Tucker said "while he was certain we did not need advice, that it did not always need to be the case that we appeared as high as we have recently," according to the memo. Mr. Tucker, testifying before a U.K. parliamentary panel, said that last sentence of Mr. Diamond's note "gives the wrong impression." He wasn't nudging Barclays to underreport its Libor submissions, he said. Rather, he said he was expressing concern Barclays was paying too much to borrow money -- and sending signals to the markets that it was desperate for funding, at a time when Barclays was widely viewed as the next big U.K. bank to need a government bailout.

Libor, or the London interbank offered rate, is the now-infamous interest-rate benchmark used in hundreds of trillions of dollars of transactions globally, from loans to derivative contracts. Each day, in surveys overseen by the British Bankers' Association, major banks estimate their borrowing costs. It has been an open secret for years that banks routinely misstated their numbers.

Last month, Barclays agreed to pay $453 million to settle U.S. and U.K. claims that it manipulated its Libor submissions as far back as 2005 -- years before the phone call in question. Sometimes the bank low-balled its costs to make itself look healthier. Other times, it filed false rates to make trading positions more profitable. On some occasions, its traders colluded with other banks, Barclays admitted. In his October 2008 file note, Mr. Diamond also wrote that he asked Mr. Tucker "if he could relay the reality, that not all banks were providing quotes at the levels that represented real transactions."

Mr. Tucker told members of Parliament's Treasury Committee that he didn't take that statement to mean there was cheating going on. He said he thought it meant "when they come to do real transactions, they will find they are paying a higher rate than they are judging they would need to pay."

Barclays's departing chairman, Marcus Agius, released an April 10 letter from the chairman of the U.K.'s Financial Services Authority, Adair Turner, expressing doubts that Barclays could be trusted.

There's no mystery why Mr. Tucker's 2008 phone call to Mr. Diamond is receiving so much attention. The notion that a central banker may have prodded a big bank to lie about its numbers rings true. Recently, in Europe and the U.S., bank regulators and other government officials have seemed to be in cahoots with the industry they oversee.

In May 2008, the U.S. Office of Thrift Supervision let IndyMac Bancorp Inc. backdate a capital contribution so it would appear on its books in the prior quarter. IndyMac failed two months later, costing the Federal Deposit Insurance Corp. almost $11 billion. When banks were teetering in 2008 and 2009, regulators and lawmakers in Europe and the U.S. browbeat accounting-standard setters into making emergency rule tweaks so banks could show smaller losses.

Now it turns out the New York Fed says it received "occasional anecdotal reports from Barclays of problems with Libor" in 2007, according to a statement it released July 10. The district bank wasn't a party to Barclays's settlement.

Here's a lesson that hopefully has been learned from all this: If you ever think someone in business is telling you to lie, ask that person to put it in writing.

bizopinion

Jonathan Weil is a Bloomberg View columnist: jweil6@bloomberg.net.


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