Libor Trial Hears Global Banks Submitted Skewed Data 

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Numerous banks told the British Bankers’ Association they deliberately submitted inaccurate data, court at Tom Hayes trial is told

A succession of global banks told a British trade association in 2005 and 2006 that they and their rivals were deliberately submitting inaccurate data for inclusion in the London interbank offered rate, or Libor, in some cases to boost the interest rates that borrowers had to pay on their loans, a court heard Monday.

Officials at the British Bankers’ Association, which was responsible for Libor, paid visits to the London offices of more than a dozen big banks in spring 2005 and 2006 to get their opinions on how the Libor-setting process worked. Numerous banks told the BBA officials that they or their rivals were submitting skewed data, according to internal BBA notes shown at the trial of former bank trader Tom Hayes.

Despite those warnings, the BBA official in charge of Libor, John Ewan, testified Monday that he didn’t act on the concerns because he didn’t recognize them as a serious problem at the time. He said he couldn’t recall whether he asked the banks for more information about the problems with the rate. Years later, the problems with Libor would mushroom into a global scandal.

In May 2006, for example, Bank of America Corp. officials told the BBA visitors, including Mr. Ewan, that the bank was deliberately inflating its Libor submissions by about 4 basis points, or 0.04 percentage points, because it improved the bank’s financial performance. A year earlier, two J.P. Morgan Chase & Co. officials told the BBA that everyone knew that Libor was too high but said the bank executives “do not want the BBA to attempt to ’correct’ this,” according to the BBA notes.

The warnings continued into 2007 and became more explicit. “It was implied that it is in the interest of most of the contributors to set their contributed rates at a few points higher,” Mr. Ewan wrote after meeting Credit Suisse executives in May 2007. “This is because it makes their loan books a bit more profitable.

Because Libor underpins interest rates on trillions of dollars of mortgages, student loans and auto loans world-wide, slightly higher Libor rates would translate into higher revenue from interest payments on those loans.

Until now, most of the focus on banks’ misconduct in the Libor-rigging saga has been on banks deliberately understating their submissions to make the banks look healthier than they really are, and on bank traders trying to skew the rates to advantage their portfolios of derivatives. The notion that banks were deliberately inflating their rates to wring more money out of borrowers is new.

Some bank executives told Mr. Ewan that they were under pressure from Japan’s central bank and finance ministry to keep the yen iteration of Libor in positive territory, even if a negative submission “would be reflective of reality,” according to the BBA notes of a June 2005 meeting with Citigroup executives. Another meeting that month with executives at a Japanese bank turned up similar concerns.

Officials in National Australia Bank’s London office said they believed that banks might be relying on outside brokers to determine where they set Libor. Mr. Ewan, now an employee of Thomson Reuters in London, apparently interpreted that as a joke. “Without wanting to point fingers, NAB suspect that some contributors are not sufficiently active in the cash markets to know where the market is at when they quote,” according to the BBA notes. “They jokingly suggested that these people ring [a major broker], ask where the market is and then submit that as a quote.”

Mr. Hayes is on trial for conspiring to defraud, partly by allegedly using brokers to skew other banks’ yen Libor submissions. He has pleaded not guilty. He is the first person to stand trial for Libor-rigging offenses. He previously told The Wall Street Journal in a text message that “this goes much much higher than me.”

Source: WSJ – Libor Trial Hears Global Banks Submitted Skewed Data

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