U.S. criminal probe in Libor scandal: report
SAN FRANCISCO (MarketWatch) -- The U.S. Justice Department is building a criminal case against big banks and individuals who manipulated a key global interest rate, according to a media report.
The investigation focuses on how banks set the London interbank offered rate, known as Libor, the New York Times reported over the weekend Potential wrongdoing might ensnare traders at
Libor is based on rate submissions from a relatively small and select panel of major banks, including Barclays (BCS) .
On Friday, Federal Reserve Bank documents released showed an unidentified employee of the U.K. bank told the New York Federal Reserve Bank in 2008 that the bank was filing false reports on a key interest rate.
The documents show that a summary of the admission was quickly circulated throughout the U.S. government, including the Federal Reserve and the Treasury Department, in 2008.
The New York Fed released the documents in response to inquiries from members of Congress about the role of Treasury Secretary Timothy Geithner, then the head of the New York Fed, and its questions about Libor.
Barclays continued reporting false Libor submissions until 2009, according to the Commodity Futures Trading Commission.
Geithner and Fed Chairman Ben Bernanke are expected to be asked about the Libor scandal in coming Senate testimony.
A group of a dozen Democratic lawmakers asked the Justice Department to examine whether regulators failed to stop "wrongdoing that they knew, or should have known about."
According to a New York Fed, information that there were problems with Libor started in the fall of 2007, but were mainly anecdotal reports and "mass-distribution emails."
In December 2007, Barclays told the New York Fed in a phone call that, in general, Libor submissions appeared unrealistically low.
On April 11, 2008, a New York Fed analyst asked a Barclays employee in detail about the extent of problems with Libor. "We [Barclays] just fit in with the rest of the crowd if you like," the bank's staffer said in a phone call. "We know that we're not posting um, an honest Libor."
"The Barclays employee explained that Barclays was underreporting its rate to avoid the stigma associated with being an outlier with respect to its Libor submissions, relative to other participating banks," the New York Fed statement said.
The Fed analyst -- Fabiola Ravazzolo, according to one transcript released -- reported the comment to senior New York Fed management and the comment was mentioned in a weekly briefing prepared by the New York Fed staff for the Fed Board of Governors in Washington and the Treasury Department.
On May 1, Geithner raised the subject of Libor with the president's Working Group on Financial Markets, consisting of the heads of U.S. regulatory agencies. The New York Fed gave a detailed briefing to Treasury officials on May 6.
Geithner then approached U.K. regulators with their concerns about Libor.
In a June 1, 2008 memo to Bank of England Governor Mervyn King, released by the BOE, Geithner proposed six reforms of Libor, including steps to establish a "credible" reporting procedure and eliminating incentives to misreport.
King responded on June 3 that Geithner's recommendations for improvements to the calculation Libor "seem sensible."
The emails show that the BOE passed the recommendations on to the British Bankers' Association.
In a statement, the BOE said that "no evidence of deliberate wrongdoing had been cited" at the time of the correspondence between King and Geithner.
The British Bankers' Association never adopted Geithner's main recommendations, said Michael Kraten, a professor at the Providence College School of Business.
"They made some minor changes but never went to the heart of it," Kraten said in an interview.
The submissions from the banks to the BBA remain completely unaudited, he said. "They are taking it on faith," Kraten noted.