Huffpost Business
The Blog

Featuring fresh takes and real-time analysis from HuffPost's signature lineup of contributors

Mark Gongloff Headshot

Libor Fraud Was Happening In 1991, Trader Says, 17 Years Before Timothy Geithner Claims He Knew

Posted: Updated:

Tim Geithner claims he learned of Libor manipulation when the rest of us commoners did, in 2008. New evidence keeps coming out suggesting he should have known much, much earlier.

The latest example -- which puts the earliest time-stamp on Libor manipulation we've seen yet -- is a Financial Times op-ed by former Morgan Stanley trader Douglas Keenan. He claims that Libor, a key short-term bank lending rate that affects mortgages and other interest rates throughout the economy, was being jerked around for fun and profit as long ago as 1991.

Let that sink in for just a minute: Libor was being manipulated 17 years before the financial crisis and Geithner's babe-in-the-woods discovery of it, according to Keenan. Geithner wasn't in charge of the New York Fed at the time, but if this was widespread knowledge years before his arrival, it makes you wonder how he could not have heard about it for so long.

Now here's another Keenan allegation that will blow your mind. He notes that the guy running Morgan Stanley's rate-trading desk back then was none other than Bob Diamond. Yes, the same Bob Diamond that ended up becoming Barclays CEO, only to step down because his bank manipulated Libor like most people change socks.

Keenan doesn't say he has any evidence that Diamond was some sort of Libor-manipulatin' Ninja back in 1991. But Keenan does say that it was widespread knowledge even then that banks lied habitually about Libor.

He found this out when, in his early days on the trading desk, he noticed that Libor fixings -- set by a panel of banks, who declare, on a hilarious honor system, what their borrowing costs are -- were noticeably different from what financial markets predicted they should be:

Futures contracts on three-month Libor were -- and are -- traded on the London International Financial Futures Exchange (Liffe, now part of NYSE Euronext). There was a standard contract for the month of September. That contract had its rate settled on the third Wednesday of the month, at 11 o'clock.

In 1991, I had live trading screens that showed the Libor rates. In September of that year, on the third Wednesday, at 11 o'clock, I watched those screens to see where the futures contract should settle. Shortly afterwards, Liffe announced the contract settlement rate. Its rate was different from what had been shown on my screens, by a few hundredths of a per cent.

That few hundredths of a percentage point doesn't sound like a very big deal, but it adds up, day after day after day, on hundreds of trillions of dollars' worth of loans and derivatives contracts. Keenan says it was costing him money on his trades, and he complained to Liffe about it, getting nowhere.

Then he complained about it to his new buddies on the trading desk, who all laughed and laughed at him (emphasis mine):

I talked with some of my more experienced colleagues about this. They told me banks misreported the Libor rates in a way that would generally bring them profits. I had been unaware of that, as I was relatively new to financial trading. My naivety seemed to be humorous to my colleagues.

Imagine how hilarious Tim Geithner's naivete must seem to them! He had, after all, been in charge of the New York Federal Reserve since 2003. That organization runs point in the financial markets for the Fed and thus has intimate knowledge of and involvement in interest rates, including Libor. New York Fed officials talk all the time to people in the market. Somewhere along the way you might think they'd have heard about Libor manipulation.

In fact, they definitely heard about it at least once, in 1998, from Fed analyst Jeremy Berkowitz, who wrote a paper raising alarms about the accuracy of Libor and the ease with which it could be manipulated. Anecdotes in his paper dated back to 1996.

As Business Insider's Simone Foxman wrote, the report "suggests that the Fed was already ... concerned about the effects of inaccurate reporting by banks about their lending practices ten years before the financial crisis. Further, acknowledgments that a very small contingent of banks potentially could manipulate rates suggests that the Fed may very well have seen this coming."

And yet somehow Geithner only found out about Libor manipulation in 2008, a decade later.

This is an extraordinary missed opportunity, if it's true. Although it's hard to imagine what Geithner would have done about Libor manipulation had he learned earlier, considering his "actions" after his late discovery of it. He apparently didn't tell British regulators that the New York Fed had direct evidence that Barclays had admitted to not submitting an "honest" Libor. He didn't raise alarm bells in the market about the possibility that Libor was not accurate. He didn't tell U.S. banks to cool it with the Libor fraud.

What's more, he allowed Libor to be used in loans to banks under the Term Asset-Backed Securities Loan Facility and to American International Group, rubber-stamping Libor's legitimacy and potentially costing taxpayers millions, if not billions, of dollars.

Geithner's response raises questions about just how cozy he and other regulators have been with the banks they're supposed to be regulating -- and makes it even harder to believe his claim of utter cluelessness about Libor manipulation before 2008.