Up to now, Sir Mervyn King has played largely a walk-on part in the Libor scandal, prompting Bob Diamond’s resignation after he warned Barclays that the regulators no longer had confidence in Diamond’s leadership of the bank. Now the Governor of the Bank of England has also been dragged into the drama after email exchanges released by the Bank revealed that he was aware of deliberate misreporting of the rate in June 2008.
Timothy Geithner, who was then the president of the Federal Reserve Bank of New York, emailed Sir Mervyn with a list of recommendations for improving Libor, one of which tackles how to ‘eliminate incentive to misreport’. The Governor forwarded this on to his deputy Paul Tucker, and replied to Geithner that his recommendations ‘seem sensible to us’. Meanwhile transcripts released by the Fed revealed one Barclays employee saying: ‘We know we’re not posting, um, an honest Libor.’
This leaves some extremely awkward questions both for Sir Mervyn and Tucker. They knew about concerns over Libor in 2008, yet other than accepting Geithner’s tweaks to the system, did not appear to pursue the matter with much aggression, as the Wall Street Journal points out. Additionally Tucker’s claim to the Treasury select committee that ‘we were not aware of allegations of dishonesty’ looks shaky. His argument to the committee that ‘we thought it was a malfunctioning market, not a dishonest one’ does not sit well with Geithner’s desire to remove the ‘incentive to misreport’. Both the Governor and Tucker are up before the committee on Tuesday to give evidence on the Bank’s Financial Stability Report, and it would be strange if MPs didn’t take the opportunity to probe them on this issue too.