Saturday, August 18, 2012

A second post on the LIBOR crisis

Alphaville provide some choice snippets from a House of Commons Treasury Select Committee report on the LIBOR hearing: 

"The FSA and the Bank of England were engaged in crisis management, alert to the possibility of further bank failures, rather than LIBOR manipulation. This is understandable, given the circumstances of the financial crisis, but with the advantage of hindsight constitutes a failing by the authorities."

"The evidence suggests that the Bank of England was aware of the incentive for banks to behave dishonestly, yet did not think that dishonesty was occurring. Nor did it appear to have asked the FSA to check to see if such dishonesty was occurring. With hindsight this suggests a naivety on the part of the Bank of England. They were certainly relatively inactive. This confirms evidence from other Treasury Committee inquiries of the dysfunctional relationship between the Bank of England and the FSA which existed at that time to the detriment of the public interest."

"It remains possible that the entire Tucker-Diamond dialogue may have been a smokescreen put up to distract our attention and that of outside commentators from the most serious issues underlying this scandal."

"Barclays did not need a nod, a wink or any signal from the Bank of England to lower artificially their LIBOR submissions. The bank was already well practised in doing this." 

In an earlier post on the issue, I commented:

"Conditions were created that allowed for a rigged game to be played at the expense of the public. The scandal succinctly highlights how we can be taken for suckers if we choose to keep our eyes closed and blindly trust the system. There is no great architect. But there are dark corners where the free market cannot shine its light. We must either we find a better torch or tear down the structure and start afresh. Without the light you can't see what's going on. And bad things hide in dark places"

We should view the FSA more like the torch and the Bank of England as the torch bearer, since the BoE could have asked the FSA to investigate the LIBOR set-up.

Could our venerated central bank really have been so naive as to assume that all was well in the LIBOR market? The answer is no. The LIBOR market structure was clearly lacking the requirements for the creation of an efficicent price (interest rate). It cannot be "naivety" on the part of the central bank for this implies a lack of experience or natural innocence, and the imperfect structure of the LIBOR market had existed for too long to go unnoticed. The layman didn't know this until it came to light in the presses, but the BoE is constantly involved in the LIBOR market. It is at the heart of what they do and they understand. They know it now and they knew it then. So the word "naivety" is inappropriate. It should be closer to "stupidity".

From the Bank of England's "About" section:

"Standing at the centre of the UK's financial system, the Bank is committed to promoting and maintaining monetary and financial stability as its contribution to a healthy economy."

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