THERE is a contradiction at the heart of the Bank of England, which may be laid bare today. It is this: the Bank is above the markets and yet intimately involved in them. The twin spheres – Sir Mervyn King’s lofty world of monetary policy and econometrics and his deputy Paul Tucker’s world of market-makers, bankers and brokers – occasionally collide. The results are explosive.
The Bank’s governor has held up his hands in horror at the behaviour of Barclays’ traders. Sir Mervyn called it “shoddy” and “deceitful”. The idea that the Bank might have known about, let alone sanctioned, any manipulation or recalibration of Libor is anathema. If Sir Mervyn passed Bob Diamond in Threadneedle Street, we are led to believe, he would struggle to recognise him.
The truth, I suspect, is more complex. In fact, the Bank’s Markets Division, led by Tucker from 2002 to 2009, knew all about Libor and how it operates and, indeed, when it ceases to operate. For the latter, when banks decline to lend to each other in times of crisis, it was no surprise to anyone in the Division that it became, in the jargon, “dislocated from itself”.
Nor did such dislocation go unrecorded in Threadneedle Street. The Bank’s Money Markets Liason Group, a busy cog in the great machine of the Bank, has met regularly over the years to discuss the ups and downs of Libor. Witness its minutes in September 2009, which recorded “errors in the inputting of Libor submissions”, but that the “fixings would not be recomputed unless the process as a whole had been compromised”. These are not minutes with top secret stamped on them, they record the everyday business of the Bank.
Or at least part of it. Sir Mervyn takes a decidedly de haut en bas view of the markets. “He simply regards them as rather grubby”, one of the Treasury’s highest officials told me recently, leaving some of his colleagues to fight in the trenches.
There is, therefore, a disconnect at the Bank and it is a large one. It has led to confusion and misunderstanding in the markets, in banks like Barclays and its peers.
The Libor imbroglio is but one example. Look to the gilts market for another. The Bank’s mighty QE programme was unleashed in March 2009 with barely any consultation with gilts traders, let alone with the Debt Management Office. The results: utter chaos on the first day’s trading, followed by naked market manipulation which created artificial spikes in the market. The Bank saw everything and did nothing. Whether Libor, gilts or, indeed, gold, the Bank needs to decide where it stands in the market and whether it takes responsibility for some of its mistakes.
Dan Conaghan is the author of The Bank – Inside the Bank of England (Biteback Publishing). He has worked in the City for the past 15 years, latterly in the bond market.