It isn’t just Diamond that missed Libor’s warning signs

 
Marc Sidwell
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MICHAEL Fallon of the Treasury select committee voiced a question yesterday that must be on many people’s lips. After passing on Paul Tucker’s message from the Bank of England in October 2008, how did Bob Diamond manage to know so little for so long about the Libor manipulation at Barclays that followed?

Diamond dodged, “I can’t put myself in Jerry’s shoes.” Jerry Del Missier, Barclays’ chief operating officer until the scandal forced his resignation on Tuesday, has already been investigated personally by the FSA, which accepted his actions were the result of misunderstanding Tucker’s telephonic concern, taking it as a nod and wink from the Bank and Whitehall for a Libor squeeze. But that doesn’t answer the obliviousness higher up of what went on thanks to his misapprehension.

Yet the rest of the world is hardly in a position to point fingers. An article suggesting that Libor was out of sync with other market measures appeared in the Wall Street Journal back in May 2008. It didn’t mention Barclays – hardly surprising as the evidence seems to show Barclays as something of a holdout when it came to underreporting its borrowing costs, at least until Tucker’s fateful phone call – but it was on the money about Libor’s problems. The world at large, it is now clear, didn’t pay that story as much attention as it deserved. But it was enough to get the attention of a group of academics, variously specialists in derivatives accounting, conspiracies and manipulations, banking and credit risk.

The investigation of the team showed even deeper grounds for concern than the original article. The draft study by Rosa Abrantes-Metz, Michael Kraten, Albert Metz and Gim Seow was posted by the Social Science Research Network in 2008 (go to its website and search for “Libor manipulation”). Later versions were peer reviewed, discussed at a 2010 conference and published in January of this year by the Journal of Banking and Finance. The conclusions were not exactly hidden.

While the study did not find a smoking gun for effective manipulation of the Libor rate, it did identify “statistical evidence of patterns that appear to be inconsistent with those that are normally expected to occur under conditions of market competition.” What’s rather more embarrassing for all concerned is their observation that “many of these markers were readily available for review by market analysts” at the time.

It’s easy to point the finger at the man in the hotseat, and say “why didn’t you know what was going on?” Diamond has rightly paid for that. But the larger question in this scandal remains why everyone chose to ignore a problem that, until the CFTC cried foul, was apparently hiding in plain sight.

Marc Sidwell is City A.M.’s managing editor.