Secret Recording Implicates Bank of England In Libor Rigging

While it may seem like yesterday, it was nearly five years ago that the Libor scandal first broke, and with it brought scandalous suggestions that none other than the Bank of England was implicated.

As we first reported in July 2012, according to Barclays then CEO Bob Diamond, it was high level individuals at the BOE who may (or may not) have been aware that Libor had been "manipulated" and were (or were not) also active in the setting process:

• BARCLAYS SAYS BANK OF ENGLAND CALLED ON OCT. 29, 2008 ON LIBOR


• BARCLAYS SAYS DIAMOND MADE NOTE OF CALL; RECEIVED CALL FROM PAUL TUCKER


• BARCLAYS SAYS TUCKER SAID `CERTAIN" BARCLAYS DIDN"T NEED ADVICE; SAID LIBOR DIDN"T ALWAYS NEED TO BE SO HIGH

And yet, concerned about how deep the rabbit hole would go if a central banker was implicated, Diamond tried to cover it up:

• BARCLAYS SAYS DIAMOND DIDN"T BELIEVE HE HAD GOT INSTRUCTION

Even as:

• BARCLAYS SAYS DEL MISSIER CONCLUDED INSTRUCTION HAD BEEN GIVEN; TOLD RATE SETTERS TO LOWER RATES

The note in question was represented below:

Needless to say, when it comes to the central bank nothing happened: a few BOE personnel were reassigned, some quietly lost their jobs, and nobody was prosecuted or charged. Certainly, nobody went to prison.

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Fast forward nearly five years later, when the Libor scandal may have reemerged after a secret recording that implicates the Bank of England in Libor rigging has been uncovered by BBC Panorama.

According to the BBC, the 2008 recording adds to evidence the central bank repeatedly pressured commercial banks during the financial crisis to push their Libor rates down, just as suggested by Bob Diamond in 2012.

The recording calls into question evidence given in 2012 to the Treasury select committee by former Barclays boss Bob Diamond and Paul Tucker, the man who went on to become the deputy governor of the Bank of England. In the recording, a senior Barclays manager, Mark Dearlove, instructs Libor submitter Peter Johnson, to lower his Libor rates.

Dearlove tells him: "The bottom line is you"re going to absolutely hate this... but we"ve had some very serious pressure from the UK government and the Bank of England about pushing our Libors lower." To which Johnson objects, saying that this would mean breaking the rules for setting Libor, which required him to put in rates based only on the cost of borrowing cash.

Mr Johnson says: "So I"ll push them below a realistic level of where I think I can get money?"

His boss Mr Dearlove replies: "The fact of the matter is we"ve got the Bank of England, all sorts of people involved in the whole thing... I am as reluctant as you are... these guys have just turned around and said just do it."

The phone call between Mr Dearlove and Mr Johnson took place on 29 October 2008 the BBC notes, the same day that Tucker, who was at that time an executive director of the Bank of England, phoned Barclays boss Diamond. Barclays" Libor rate was discussed.

Diamond and Tucker were called to give evidence before the Treasury select committee in 2012. Both said that they had only recently become aware of lowballing, despite Diamond"s abovementioned tacit admission, which he then tried to cover up.

In its report, Panorama says it played the October 2008 recording to Chris Philp MP, who sits on the Treasury committee.

He told the programme: "It sounds to me like those people giving evidence, particularly Bob Diamond and Paul Tucker were misleading parliament, that is a contempt of parliament, it"s a very serious matter and I think we need to urgently summon those individuals back before parliament to explain why it is they appear to have misled MPs. It"s extremely serious."

Responding to the recording, Diamond told the BBC: "I never misled parliament and… I stand by everything I have said previously." Tucker did not respond to our questions. Peter Johnson, the Barclays Libor submitter, was jailed last summer after pleading guilty to accepting trader requests to manipulate Libor.

Two traders who made requests for Mr Johnson to move Libor up or down, Jay Merchant and Alex Pabon, were found guilty last June of conspiracy to defraud along with another submitter, Jonathan Mathew.

However, the jury could not reach a verdict on two other traders then on trial, Ryan Reich and Stelios Contogoulas. The Serious Fraud Office requested a retrial which concluded last week. Both Mr Reich and Mr Contogoulas were unanimously acquitted. Panorama also played Contogoulas the October 2008 recording. He said he believed that if it had been played during the criminal trials it might have affected the outcomes.

He said: "That"s the thing, you know in these trials that we went through they separated everything, separated trading requests and lowballing. So anything that has to do with this they don"t go in. So you"re asking me do I think that if all this was in would it make a difference? Probably, is the answer."

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Another notable "criminal" to emerge from the Libor scandal was Tom Hayes, the UBS and Citi-based Libor manipulating protagonist of the recent book "The Spider Network", and who was arguably at the center of the prosection"s LIbor case. He has repeatedly claimed that the real culprits are not those - like him - who executed the Libor rigging, but the ones at the very top who have the instructions to do so.

Like, as the case may be, the Bank of England.

Yet while some junior people went to prison, nobody in the corner office, and certainly nobody at the BOE has faced any criminal consequences from their actions.

The BBC adds that the Serious Fraud Office, which brought the Barclays prosecutions told Panorama that evidence of lowballing, was provided to the recording. They also say they are still investigating lowballing and that they follow the evidence "as high as it goes and aim to charge the most senior people wherever there is a realistic prospect of conviction".

The Bank of England said: "Libor and other global benchmarks were not regulated in the UK or elsewhere during the period in question.... Nonetheless, the Bank of England has been assisting the SFO"s criminal investigations into Libor manipulation by employees at commercial banks and brokers by providing, on a voluntary basis, documents and records requested by the SFO."

Ironically, it is precisely that it was unregulated that may have given the Bank of England the green light to assume it can manipulate it with impunity.

It remains to be seen if, nearly a decade after the Libor manipulation took place, any central banker will go to prison over it.

Hayes: "A Lot Of What I Know Even The DOJ Is In The Dark”

An exclusive excerpt from the hot new financial and legal thriller "The Spider Network" by David Enrich

The small ski resort town, nestled in the mountains outside the city of Karuizawa, was a popular destination for day trips for Japanese families. Bustling during the day, it was mostly quiet this Saturday night. Clouds cloaked the moon.

A chartered bus pulled up outside a bar, its windows aglow. A light snow was falling. Out into the peaceful evening stumbled dozens of rowdy bankers, some toting tall cans of Asahi and Kirin. Most of them were drunk. They quickly took over the small bar.

The drinkers were employees of the American bank Citigroup, one of the world’s largest and most troubled financial institutions. A year earlier, at the beginning of 2009, American taxpayers had finished pumping a staggering $45 billion into Citigroup to bail out the collapsing behemoth. Now the transfused recipient was treating dozens of its investment banking employees to a weekend getaway. The bankers were housed nearby in a sprawling luxury hotel, each employee’s room designed in Japan’s typical spare style.

These festivities weren’t so spartan. The point was to foster camaraderie, and that was happening in spades. The party had begun on the hundred-mile ride on the bullet train out from Tokyo. After a day of hitting the slopes, Citigroup ferried the bankers to a bowling alley, where they drank and bowled and drank some more. Their bus had then deposited the intoxicated crew at this bar, before leaving the partiers behind to fend for themselves.

One of the fiesta’s ringleaders was a wiry, curly-haired American named Chris Cecere. You wouldn’t know it from his behavior now, but he was one of the sharpest people in Tokyo’s cutthroat financial markets. A foul-mouthed veteran of the doomed Wall Street firm Lehman Brothers, Cecere had only worked in Japan for a year or so, but he had quickly assembled a team of rock-star traders. His mandate was to push the already risk-hungry Citigroup into brave new financial frontiers.

That wasn’t all Cecere was pushing. This snowy night, he was practically pouring shots down the throat of his subordinate, a disheveled British thirty-year-old named Tom Hayes. Slim and nearly six feet tall, Hayes was a brilliant mathematician, one of the most prolific, aggressive traders in Tokyo, if not the world. As with Cecere, he didn’t look or act the part. Bespoke suits and expensive shoes were found nowhere in his wardrobe. Specks of dandruff dusted his shoulders. He was far happier with a glass of orange juice or a mug of hot chocolate than a pint of beer, a preference that once earned him the nickname “Tommy Chocolate.”

Hayes found social situations uncomfortable to the point of painful—this one included. Before departing for the ski weekend, he had grumbled to his fiancée that he didn’t want to go. She told him he didn’t have a choice. Hayes’s life revolved around work, and Citigroup was his new family. He had only started there a couple of months earlier, and it was important that he make a good impression on his colleagues. So far, he was off to a promising start in that regard. His new bosses bathed him in praise, introducing him around Citigroup’s global organization as their newest trophy asset. Only hours before they showed up at the bar, a top Citigroup executive, Brian Mccappin, had described Hayes as “a star” who represented the future of the firm’s enormous business in Tokyo. Mccappin proclaimed that their division would further shift its trading approach to take advantage of their new hire’s extraordinary talent. Hayes was certainly being paid like a star. After years of feeling like he was getting stiffed by six-figure payouts at his former employer, the Swiss bank UBS, he had pocketed a roughly $3 million cash signing bonus when he joined Citigroup.

Mccappin, the CEO of Citigroup’s investment bank in Japan, came along to the bar that night, along with Cecere and Hayes. A native of the gritty English city of Birmingham, Mccappin was tall, with a chubby, dimpled face. A talented singer at thirteen, he and a friend had formed a band called Deadline that sometimes performed at a pub frequented by workers, including Mccappin’s father, emptying out of a nearby Rolls-Royce plant. After Deadline split, some of its members went on, years later, to form Ocean Colour Scene, which briefly rose to fame touring with Oasis. By then Mccappin had moved on to other things, but that didn’t stop him from occasionally claiming that he’d been a founding member of the infinitely more familiar band.

At the time Hayes arrived at Citigroup, the main outlet for Mccappin’s stymied musical ambitions was karaoke, and he was a frequent and enthusiastic practitioner. As Mccappin belted out tunes this night, Hayes grudgingly accepted shot after shot of Jägermeister from Cecere. He struggled to swallow the sweet herbal concoction, fighting an increasingly powerful gag reflex. But he kept throwing the shots back, unwilling or unable to withstand Cecere’s schoolboy pressure. Hayes didn’t want to disappoint his boss. The earlier part of the day had been easier: Hayes was an expert skier, who embraced risk as eagerly on a black-diamond trail as he did on a frenzied trading floor, and he thrived in the deep powder of the Karuizawa resort. Now, though, beads of sweat started tingling on his scalp. The room began to spin. Hayes staggered to the bathroom and vomited. Then he rejoined the party.

****

Three years later, in January 2013, I was sitting on a sofa in my cramped apartment in London’s Clerkenwell neighborhood. Centuries earlier, the area had been the stomping ground of knights who were about to embark on crusades to the Holy Land. In a nod to that history, the narrow alleyway that my wife and I shared with a Belgian beer hall was named Jerusalem Passage. The neighborhood had been repopulated by trendy design studios, sushi bars, and art galleries.

It was just after 8 p.m. when my iPhone buzzed with a text message from a number I didn’t recognize. “I’ll meet you tomorrow but I need to be certain I can trust you,” the text read. “This goes much much higher than me and a lot of what I know even the DOJ is in the dark.”

The message was from a terrified, and very sober, Tom Hayes.

* * *

This piece was excerpted from David Enrich’s new book, “The Spider Network: The Wild Story of a Math Genius, a Gang of Backstabbing Bankers, and One of the Greatest Scams in Financial History."