Libor bloodletting isn't over

A Barclays note suggesting the Bank of England may have condoned its low borrowing estimates is likely to fuel growing outrage around the scandal.

The biggest fraud in modern financial history claimed another scalp overnight, with the forced resignation of Barclays boss Bob Diamond, amid a growing uproar over the bank’s admission that it rigged Libor – a key benchmark used in setting interest rates on financial contracts worldwide.

Diamond’s resignation came after the bank’s chairman, Marcus Agius, received late night phone calls on Monday night from both the head of the Bank of England, Mervyn King, and the head of the Financial Services Authority, Lord Adair Turner. Both men argued that Diamond had to go.

The resignation of the brazen 60-year old American leaves one of Europe’s largest banks rudderless. Agius, who had announced his own resignation on Monday, will now stay on as the bank conducts an urgent search for a new chief executive and a new chairman.

The blood letting comes after Barclays last week agreed to pay a £290 million ($US453 million) fine – the largest ever in the City of London – to settle a UK and US probe that revealed the bank’s traders blatantly manipulated Libor to disguise the high cost of the bank’s own funding and to boost the profits of certain traders.

The cost of the fraud is massive. Libor, the London Interbank Offered Rate, is used as the reference point for an estimated $US360 trillion in financial contracts and loans. Even a one basis point difference in the Libor (0.01 per cent) represents a cost of $36 billion.

But if Diamond – who paid himself more than £20 million last year – has his way, the Libor bloodbath won’t stop with him. He’s clearly trying to drag Paul Tucker – a deputy governor at the Bank of England, and the leading candidate to become the central bank’s new boss – into the scandal.

Overnight, Barclays released Diamond’s file note of a 2008 conversation he held with Tucker – one of only three file notes that he made in his entire career – which suggested that the Bank of England may have known of – and even condoned – the bank’s repeated 'lowball' submissions to the rate-setting process during the financial crisis.

In the note, Diamond said that Tucker told him he had "received calls from a number of senior figures within Whitehall to question why Barclays was always toward the top end of the Libor pricing." After Diamond explained the bank’s pricing, he said that Tucker repeated that the calls he was receiving from the UK government were "senior”, adding that "while [Tucker] was certain that we did not need advice, [but] that it did not always need to be the case that we appeared as high as we have recently."

Tucker’s conversation with Diamond, which took place at a time when a number of UK banks had to be bailed out and there was intense speculation that Barclays might also need help, had an immediate effect. On the day of the conversation, Barclay’s estimate for three-month Libor was 4 per cent, the next day it dropped to 3.4 per cent.

Tucker has not made his version of the conversation public, but both Barclays and the settlement documents from the case said that neither man believed the conversation was an instruction to the bank to reduce its daily submissions to the Libor setting process.

Instead, a Barclays executive, Jerry del Missier, who also resigned overnight, "misinterpreted” the conversation, and instructed his subordinates to lower the estimates that Barclays made of its borrowing costs, which went towards setting the Libor rate.

But the Bank of England isn’t the only one in the firing line. Many analysts are pointing out that Barclays may have been the first major bank to face penalties as a result of the Libor scandal, but it is unlikely to be the only one. As US and UK authorities continue their probe, other global banks could well find themselves caught up in the swirling Libor scandal.