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July 9, 2012, 10:30 pmBank Scandal Turns Spotlight to RegulatorsBy BEN
PROTESS <http://dealbook.nytimes.com/author/ben-protess/> and MARK
SCOTT<http://dealbook.nytimes.com/author/mark-scott/>

*10:04 a.m. | Updated *

As big banks face the fallout from a global investigation into interest
rate manipulation, American and British lawmakers are scrutinizing
regulators who failed to take action that might have prevented years of
illegal activity.

Politicians in both London and Washington are questioning whether
regulators allowed banks to report false rates in the run-up to the 2008
financial crisis and afterward. On Monday, Congress stepped into the fray,
requesting information about the role of the Federal Reserve Bank of New
York, according to people close to the matter. The Senate Banking Committee
on Tuesday also announced it was looking into the issue.

The focus on regulators and other financial institutions has intensified in
the last two weeks after the British bank
Barclays<http://topics.nytimes.com/top/news/business/companies/barclays_plc/index.html?inline=nyt-org>agreed
to pay $450 million to resolve an enforcement case. British and
American authorities accused the bank of improperly influencing key
interest rates to deflect concerns about its health and bolster profits.

The Barclays settlement is the first action stemming from a broad
investigation into how banks set key benchmarks, including the London
interbank offered
rate<http://topics.nytimes.com/top/reference/timestopics/subjects/l/london_interbank_offered_rate_libor/index.html?inline=nyt-classifier>,
or Libor. The pricing of $350 trillion of financial products, including
credit cards, mortgages and student loans, is pegged to Libor and other
such rates.

Authorities around the world are now considering action against more than
10 big banks, including
UBS<http://dealbook.on.nytimes.com/public/overview?symbol=UBS&inline=nyt-org>,
JPMorgan<http://dealbook.on.nytimes.com/public/overview?symbol=JPM&inline=nyt-org>and
Citigroup<http://dealbook.on.nytimes.com/public/overview?symbol=C&inline=nyt-org>.
The banks also face a raft of civil litigation from municipalities,
investors and other financial firms that claim they lost money from the
misreporting of rates. These lawsuits could end up costing the banking
industry tens of billions of dollars, according to analysts.

On Monday, the oversight panel of the House Financial Services Committee
sent a letter to the New York Fed seeking transcripts from at least a dozen
phone calls in 2007 and 2008 between central bank officials and executives
at Barclays.

"Some news reports indicate that although Barclays raised concerns multiple
times with American and British authorities about discrepancies over how
Libor was set, the bank was not told to stop the practice," Representative
Randy Neugebauer, a Texas Republican and the head of the House oversight
panel, said in the letter, which was reviewed by The New York Times.

The political firestorm also escalated in London on Monday, where a British
parliamentary committee grilled a top Bank of England official over his
knowledge of wrongdoing at Barclays. British politicians chided Paul
Tucker, deputy governor at the Bank of England, the country's central bank,
for not taking a more active role in Libor.

In November 2007, Mr. Tucker led a meeting in which some officials raised
concerns that banks were underreporting Libor submissions to temper
concerns about their health, a process known as lowballing. It was in the
earliest stages of the market turmoil that would culminate in the 2008
financial crisis, and banks were loath to report high rates that pointed to
weak financial footing.

"This doesn't look good, Mr. Tucker," Andrew Tyrie, the head of the
parliamentary committee, said on Monday, referring to minutes of the
meeting. "We have what appear to any reasonable person as the lowballing of
rates."

The Barclays settlement with the Commodity Futures Trading Commission,
Justice Department and Financial Services Authority of Britain has been a
black mark for the bank. The scandal has already prompted the resignation
of the bank's chairman, Marcus Agius; its chief executive, Robert Diamond;
and a top deputy, Jerry del Missier.

As it tries to control the damage, Barclays is framing a defense around the
notion that regulators approved the actions. Last week, the bank released
information about dozens of conversations with the Bank of England, the New
York Fed and other government agencies.

In one call with the Financial Services Authority, a Barclays manager
acknowledged that the bank was understating its Libor submissions. "So, to
the extent that, um, the Libors have been understated, are we guilty of
being part of the pack? You could say we are," the Barclays manager said,
according to regulatory documents.

The bank also discussed its Libor rates twice with the Bank of England in
fall 2008, according to documents Barclays released last week. Additional
evidence has emerged that the British central bank first held discussions
about Libor with Mr. del Missier a year earlier, in late 2007, said a
person briefed on the matter, who spoke on condition of anonymity.

Authorities are also focused on Barclays' conversations with the New York
Fed, including discussions between senior bank employees and officials from
the Fed's trading desk, according to another person briefed on the matter,
who also requested anonymity.

In the letter to the New York Fed, Mr. Neugebauer requested transcripts of
the calls by Friday.

"The role of the government is to ensure that our capital markets are run
with the highest standards of honesty, integrity and transparency," Mr.
Neugebauer said on Monday. "The interest rate manipulation scandal clearly
demonstrates that these principles were violated by Barclays and, from what
we understand, other banks as well. My request to the New York Fed is a
preliminary step to understanding what role, if any, the regulators played
in this scandal."

Among the officials that the Senate Banking Committee plans to question
during hearings this month include Federal Reserve Chairman Ben Bernanke
and Treasury Secretary Timothy Geithner, who ran the New York Fed during
the crisis.

"I am concerned by the growing allegations of potential widespread
manipulation of Libor and similar interbank rates by some financial
firms.," Senator Tim Johnson, the South Dakota Democrat who leads the
committee, said in a statement on Tuesday. "At my direction, the Committee
staff has begun to schedule bipartisan briefings with relevant parties to
learn more about these allegations and related enforcement actions."

In a statement, a New York Fed spokeswoman said that during the financial
crisis "we received occasional anecdotal reports from Barclays of problems
with Libor." Ultimately, the New York Fed made "further inquiry of Barclays
as to how Libor submissions were being conducted" and offered "suggestions
for reform of Libor" to British authorities.

Under sharp questioning by British political leaders on Monday, Mr. Tucker,
considered a front-runner to succeed Mervyn A. King as the next head of the
Bank of England, defended the central bank and his professional future.
Committee members focused their questioning on a conversation that Mr.
Tucker had with Mr. Diamond in October 2008.

According to an e-mail trail, Mr. Tucker contacted Mr. Diamond, saying he
was "struck" that Barclays was paying a high interest rate on its loans.

Mr. Tucker testified that his conversations with Mr. Diamond were meant to
convey that the financial markets were questioning whether the British bank
had access to capital.

Barclays last week also released documents saying that at least some bank
executives believed Mr. Tucker had instructed them to lower the Libor
submissions. That belief, some regulators say, stemmed from a
"miscommunication," rather than instructions from Mr. Tucker. The bank also
never explicitly told regulators that it was reporting false interest rates
that amounted to manipulation, according to regulatory documents.

Mr. Tucker on Monday flatly denied that he authorized, or even knew about,
any improper actions. "We were not aware of it, other than what is starting
to come out in these investigations," he said.

Underscoring the point, he noted that the Bank of England used the rate to
set its Special Liquidity Scheme, in which the government lent local banks
more than $310 billion from 2008 to 2011.

Still, British politicians criticized Mr. Tucker for not taking a more
active role in policing the banks. When asked whether he was confident that
the Libor manipulation had stopped, Mr. Tucker wavered.

"I can't be confident about anything after learning about this cesspit," he
replied.


-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
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