* Questions over whether Fed did enough over Libor concerns
* May have known as early as August 2007 about flaws
* Geithner calendar included "Fixing LIBOR" meeting in 2008
* Fed says got anecdotal Barclays reports of Libor problems
* Fed says shared suggestions for reform with UK authorities
By Carrick Mollenkamp
July 10 The Federal Reserve Bank of New York may
have known as early as August 2007 that the setting of global
benchmark interest rates was flawed. Following an inquiry with
British banking group Barclays Plc in the spring of
2008, it shared proposals for reform of the system with British
The role of the Fed is likely to raise questions about
whether it and other authorities took enough action to address
concerns they had about the way Libor rates were set, or whether
their struggle to keep the banking system afloat through the
financial crisis meant the issue took a backseat.
A New York Fed spokesperson said in a statement that "in the
context of our market monitoring following the onset of the
financial crisis in late 2007, involving thousands of calls and
emails with market participants over a period of many months, we
received occasional anecdotal reports from Barclays of problems
"In the Spring of 2008, following the failure of Bear
Stearns and shortly before the first media report on the
subject, we made further inquiry of Barclays as to how Libor
submissions were being conducted. We subsequently shared our
analysis and suggestions for reform of Libor with the relevant
authorities in the UK."
The Fed statement did not provide the precise timing of the
communication with the British authorities. Bear Stearns
collapsed in early March 2008 and was then acquired by JPMorgan.
Barclays last month agreed to pay $453 million to British
and U.S. authorities to settle allegations that it manipulated
Libor, a series of rates set daily by a group of international
banks in London across various currencies.
The rates are an integral part of the world financial system
and have an impact on borrowing costs for many people and
companies as they are used to price some $550 trillion in loans,
securities and derivatives.
By manipulating Libor, banks could have made profits or
avoided losses by wagering on the direction of interest rates.
During the enormous liquidity problems in the financial crisis
they could, by reporting lower than actual borrowing costs, have
signaled that they were in better financial health than they
So far, the scandal has been more of a British affair,
prompting the resignation of Barclays top three executives,
condemnation from the British government amid a public outcry,
and questions about the lack of oversight from British
The Bank of England's Deputy Governor Paul Tucker on
Monday even had to deny suggestions that government ministers
had pressured him to encourage banks to manipulate Libor.
But the deepening investigation by regulators in Britain,
the United States, and other countries is expected to uncover
problems well beyond Barclays and British banks.
More than a dozen banks are being investigated for their
roles in setting Libor, including Citigroup, JPMorgan
Chase & Co, Deutsche Bank, HSBC Holdings Plc
, UBS and Royal Bank of Scotland..
Regulators, including the New York Fed, had a responsibility
"to force greater integrity and cooperation," and it had clearly
reviewed the situation and had the resources to investigate,
said Andrew Verstein, an associate research scholar at Yale
University, who has written about Libor. "Obviously they
considered this to be within their orbit."
Many of the requests for improper Libor submissions came
from traders in New York.
As one of the world's most powerful regulators, the New York
Fed has the power to "jawbone" banks to force them to make tough
decisions, said Oliver Ireland, former associate general counsel
at the Federal Reserve in Washington and now a lawyer at
Washington law firm Morrison & Foerster.
Still, he said by the autumn of 2008, the New York Fed's
focus was locked on the impact of the meltdown of Lehman
Brothers and AIG as it sought to prevent a global economic
Barclays said in documents released last Tuesday that it
first contacted Fed officials to discuss Libor on Aug. 28, 2007,
at a time when credit problems arising from the U.S. housing
bust were beginning to mount. It communicated with the Fed twice
Between then and October 2008, it communicated another 10
times with the U.S. central bank about Libor submissions,
including Libor-related problems during the financial crisis,
according to the documents.
In its document listing those meetings as well as ones with
British authorities, Barclays said: "We believe that this
chronology shows clearly that our people repeatedly raised with
regulators concerns arising from the impact of the credit crisis
on LIBOR setting over an extended period."
As a bank doing business in the United States, Barclays U.S.
operations would have come under the Fed's purview. This would
have been even more the case after it acquired the investment
banking and trading operations of the bankrupt Lehman Brothers
in September 2008.
Officials with the New York Fed talked to authorities in
Britain about problems with the calculation of Libor and also
heard from market participants about whether an alternative
could be found for Libor, people familiar with the situation
In early 2008, questions about whether Libor reflected
banks' true borrowing costs became more public. The Bank for
International Settlements published a paper raising the issue in
March of that year, and an April 16 story in the Wall Street
Journal cast doubts on whether banks were reporting accurate
rates. Barclays said it met with Fed officials twice in
March-April 2008 to discuss Libor.
According to the calendar of then New York Fed President,
Timothy Geithner, who is now U.S. Treasury Secretary, it even
held a "Fixing LIBOR" meeting between 2:30-3:00 pm on April 28,
2008. At least eight senior Fed staffers were invited.
It is unclear precisely what was discussed at this meeting
or who attended. Among those invited, along with Geithner, was
William Dudley, who was then head of the Markets Group at the
New York Fed and who succeeded Geithner as its president in
January 2009. Also invited was James McAndrews, a Fed economist
who published a report three months later that questioned
whether Libor was manipulated.
"A problem of focusing on the Libor is that the banks in the
Libor panel are suspected to under-report the borrowing costs
during the period of recent credit crunch," said that report in
July 2008 that examined whether a government liquidity facility
was helping ease pressure in the interbank lending market.
When asked for comment, McAndrews directed questions to a
New York Fed spokeswoman. Dudley could not be immediately
reached for comment.
To be sure, the Fed's reports have sometimes been
inconclusive. One from last month - only shortly before the
Barclays settlement was announced - found that "while
misreporting by Libor-panel banks would cause Libor to deviate
from other funding measures, our results do not indicate whether
or not such misreporting may have occurred."
However, a 2010 draft of a related paper had said that banks
appeared to be paying higher rates to borrow from other banks
during the financial crisis compared with the levels they
One step the New York Fed could have taken in 2008 when
questions initially were raised was to find a way to get its
staff embedded in the Libor calculation process, Yale's Verstein
There, they could use the Fedwire Funds Service - an
electronic system through which banks settle interbank loans
between one another - as a backstop to measure whether banks
were accurately reporting borrowing costs. Then after the
financial crisis had passed, regulators could have helped "urge
on a newer and better system," he said.
The New York Fed was not part of the Barclays settlement,
which was the first major resolution in the Libor probe.
The U.S. Commodity Futures Trading Commission,
the U.S. Department of Justice, and the Financial Services
Authority in Britain, settled with Barclays.
NO ULTIMATE RESPONSIBILITY
The scandal has thrown into sharp relief a potential
regulatory gap: No single regulator appears to have had ultimate
responsibility for making sure rates banks submitted were
On Monday, the Bank of England's Tucker called the issue of
banks improperly submitting rates a "cesspit."
In documents released with the Barclays settlement,
the CFTC said Barclays traders on a New York derivatives desk
asked another Barclays desk in London to manipulate Libor to
benefit trading positions.
"For Monday we are very long 3m (three-month) cash here in
NY and would like the setting to be set as low as possible," a
New York trader emailed in 2006 to a person responsible for
setting Barclays rates.
Darrell Duffie, a Stanford University finance professor who
has followed the Libor issue for several years, said that he
believed regulators were "on the case reasonably quickly" after
questions were raised in 2008.
"It appears that some regulators, at least at the New York
Fed, indeed knew there was a problem at that time. New York Fed
staff have subsequently presented some very good research on the
likely level of distortions in Libor reporting," Duffie said. "I
am surprised, however, that the various regulators in the U.S.
and UK took this long to identify and act on the misbehavior."