The British Bankers’ Association was given weekly warnings in 2008 that the process of setting the Libor interest rates was being distorted.
A former member of the Libor compilation team at Thomson Reuters says it regularly warned senior BBA staff about the problem.
Its reports regularly highlighted the implausible rate submissions of several banks involved in the Libor process.
The BBA denied these had amounted to warnings of wrong-doing.
‘Not very effectual’
Each day the six-man team at Thomson Reuters would calculate the various Libor interest rates, based on estimates submitted by staff from a panel of banks about how much it would cost them to borrow in the financial markets, in various currencies and for various durations.
The highest and lowest estimates were discarded as outliers and the average rate derived from the remaining ones, and then published.
The warning reports from the Libor team were passed to John Ewan, the BBA’s head of Libor, who now works for Thomson Reuters.
The former member of the rate-compilation team – who wishes to remain anonymous – told the BBC that Mr Ewan was given weekly reports, detailing the oddities.
“He [John Ewan] was the watch-keeper at the time,” the rate-compiler said, “we would tell him of our concerns.”
The rate-compiler explained the process.
“At the end of the week we would send details of these oddities in a report to the BBA,” the person said.
Every couple of months a bigger report would be sent to the BBA saying ‘there is something wrong with some of these banks’, the rate-compiler added.
Mr Ewan told the Libor team he would look into the repeated evidence of unusual Libor submissions, which were coming increasingly frequently from several banks.
“I wouldn’t say he took no action,” the Libor rate-compiler assured the BBC.
“He took notice of them. Action was taken. But the BBA was not very effectual at the time.”
The team where the rate-compiler worked was contracted by the BBA to calculate the Libor rates each day on its behalf.
At the height of the financial crisis in 2008 the authorities in the UK and the USA became worried that the daily Libor-setting process was becoming meaningless.
The banks were having great trouble borrowing money in the wholesale financial markets.
Last month the rate-fixing scandal became public when Barclays was fined £290m by the authorities on both sides of the Atlantic.
This was party due to toning down its Libor submissions in 2007 and 2008 to avoid giving the impression it was in financial stress and having to pay higher rates than its rivals to borrow funds.
The member of the Libor compilation team told the BBC that, for six months in 2008, it became very obvious that something fishy was going on.
“Definitely, it was a daily thing,” the former employee said.
“For three-month Libor, one bank might say 4.5%, Barclays 5%, UBS 3.5%.”
“We would ask ‘what’s all that about?’ and phone them up,” the compiler said.
The process of checking the implausible rates even threatened to disrupt the normal publication of the Libor data, with the normal 11:00am deadline slipping to as late as midday.
“You would see the publication times getting later and later,” the rate-setter said.
“We would get calls from half eleven onwards [from bank dealing rooms] asking ‘where are the rates?”
The former employee told the BBC that the suspicious rate submissions to the Thomson Reuters team became particularly obvious after the collapse of the US investment bank Bear Stearns in March 2008, which had to be bailed out by the Federal Reserve Bank of New York.
“After that all bets were off,” the Libor rate-compiler said.
“You’d be making calls for half an hour each day, saying ‘you’ve quoted this, other banks are higher, do you want to revise your rate?”
“A number of banks were quoting wildly differently,” the person pointed out.
The rate-compiler said it became obvious to quite a few money-market traders that something was fishy, because the team would receive calls from traders querying the quotes submitted by other banks.
“It is not possible to hide what was happening,” the compiler said.
“I think all the guys who were contributing on a daily basis and involved in the trades would have known.
“They would have been saying: ‘He’s quoting nonsense, why should I be quoting a real rate if he is quoting nonsense?” the rate-compiler explained.
And how many people in bank dealing rooms would have been aware of all this?
“Across 16 banks you’ve got to be looking at 150 to 160 people [maybe] half that were involved in day to day trading and querying [other banks quoted rates],” the person said.
Why so long?
So far all the public scrutiny has been of Barclays, which became the first bank to confess its role and be punished.
With international investigations continuing into other banks, the former Libor rate-compiler confirmed that the authorities are on the right track.
The person told the BBC that about four or five banks seemed to be consistently submitting suspicious rate estimates.
“Other individual banks were at it. A good half were playing the game [by the rules], the others were doing false submissions,” the compiler said.
“[A foreign bank] was the one we were most concerned about.
“Barclays is the first of many – where are the rest of them?” the person asked.
What amazes the former rate-compiler most is that it has taken four years for the problem to be exposed.
“I don’t understand why it has taken so long,” the person said.
“If they sat half a dozen ex-traders together in a room, I am sure within 20-30 minutes you would get all the dark secrets.”
In response to these points, the BBA acknowledged that it had been told of some misgivings by the Libor team.
“As part of the process Thomson Reuters queries rates which fall outside normal tolerances,” said a BBA spokeswoman.
“In 2008 reports from Thomson Reuters were submitted to the independent foreign exchange and money market (FX&MM) committee which was then able to request further information from submitting banks.
“The BBA was at no time aware that rates were being manipulated but, as a result of the overall picture [of which Thomson Reuters’ reports played a part] of a widely dysfunctional market – the BBA launched its 2008 consultation,” she added.
During 2008, the BBA initiated a review of the Libor-setting process, a review which it is now known was initially regarded by the Bank of England as wholly inadequate.
From the perspective of someone working in the Libor team, the rate-compiler said the BBA did not seem on the ball.
“I think the BBA was totally ineffectual,” the former employee said.
“It should have known what was happening and should have been jumping up and down.
“No-one was standing up and saying ‘this is wrong’,” the rate-compiler added.