LIBOR rigging during bailout cost Britain billions
LIBOR rate rigging during the bank bailouts cost Britain millions if not billions of pounds.
Panic started on 13th September for Northern Rock customers as the BBC announced that the Rock had a liquidity problem. The day later, the Bank of England announced its measures; it would become the “lender of last resort.” Its motive was that retail and ordinary people had £24 billion worth of deposits in the bank, according to the BBC.
This decision to lend the Rock money through special liquidity support fund was decided on by the Bank of England, the HM Treasury and the Financial Service Authority. On the 14th September 2007 the Bank of England announced they give Northern Rock a loan of £27 billion. They determined the bailout would be set at the LIBOR rate plus a penalty of 1.0%, as set out “Run on the Rock”, a Parliamentary Report. This penalty was to punish the bank for needing the bailout and deter other banks getting into this situation. It was also set out as a good deal for the British public.
On day of the bailout, the news agency Bloomberg reported the LIBOR rates for that day, the previous day and two days before. These were:
11th September 07 6.90%
13th September 07 6.88%
14th September 07 6.82%
These fluctuations in the LIBOR were not an accident: a FSA inquiry has found Barclays guilty of LIBOR fixing in 2007 to 2009, and other enquiries and legal cases are ongoing. In America, Timothy Geithner the US Treasury Secretary admitted that LIBOR fixing was going on during the bailouts and this would have cost US taxpayers heavily. His excuse was “”You have to choose a rate, and we did what everybody did — use the best rate available at the time.” In the same way as it cost the American it hit the British taxpayers.
When the crisis went on, taxpayer money to Northern Rock and other banks continued to flow, rising massively. How much the LIBOR manipulation affected this one deal gives an indication of the fraud’s impact on the bailouts. The calculations are based on it being paid off in one year. If the rate payable back to Britain was LIBOR+ 1% it would have cost Northern Rock the following amounts on the three days with figures:
11th September 07 27million x(6.90 +1)% = £2 133 000
13th September 07 27 million x (6.88+1)% = £2 127 600
14th September 07 27 million x (6.82 +1)% = £2 111 400
Therefore if the bailout was calculatted on the 11th rather than the 14th it would have been worth an extra £21,600. This massive drop saved the banking industry this money – costing the taxpayer.
In the scale of frauds, this £21,000 may not seem like the biggestever: however, this was just what happened on day one of the bailouts.
The following factors show how this figure can be used as a starting point to understand how LIBOR fraud cost Britain billions just through the bailout:
- This first deal £27 million represents only a fraction of the total support from the Treasury. The National Audit office reports this peaked at £1.162 trillion – 430 times more than the first deal.
- LIBOR rigging activity during the rest of the bailout were causing LIBOR rates to be mainly set down, which is one of the three major points that the FSA found Barclays guilty of. A conversation between the FSA and Barclays was interpreted as a direct signal for Barclays submissions to be set down.
- Pack mentality meant that by submitting false rates banks engaged in LIBOR fixing encouraged any banks that were not fixing the rates to alter their submissions to follow.
This means that if the £21,000 first day bailout cost on LIBOR was lower than the impacts of subsequent fixes: then the final cost is far more than £1 billion pounds, on top of all the bailout loans paid for by the taxpayers.
Although authorities in Britain could claim they were not fully aware of the LIBOR fixing in 2007 – they had been warned. An anonymous London based Barclays employee tipped of the US Fed, sending an email to Fabiola Ravazzolo. He works at the US regulator’s financial-stability department. This was received over two weeks before the Northern Rock deal.
Then Governor of the Bank of England, Mervyn King, described to BBC4 the importance of the penalty rate. He asserted that it would deter other banks from getting themselves into liquidity problems; however with the LIBOR rigged this penalty was weakened. The banks were penalising the government in the opposite direction.
By Steve Rushton