They're certainly coming thick and fast, aren't they, accusations and findings of rate and market rigging in the financial markets? We've had foreign exchange, precious metals, at least two rigging scandals about Libor and here comes the next one. An investigation into whether the banks rigged the liquidity auctions back at the heart of the financial crisis itself.
The basic thought is that the banks weren't paying enough in interest costs for the emergency liquidity they were getting from the Bank of England. This happened because they were colluding over the prices they offered to pay for that very liquidity. All of which, if true, looks at the very least to be most ungrateful. Here's the State willing to bail you out (and the banks would have gone under without this liquidity) and you're going to cheat said State over the price you pay for the help?
It does have to be said though that this is the beginning: nothing has been proven as yet. And it's also going to be very interesting indeed to see the end result. Was this like one instance of the Libor rigging, something we might largely approve of, or is it going to be like the other Libor rigging incident in which case people should probably be going to jail?
Here's the basic announcement:
The Serious Fraud Office’s investigation into the Bank of England’s crisis-era liquidity auctions is believed to relate to a £180bn funding scheme that was ended by the BoE in 2010.
The SFO confirmed on Wednesday night that it had launched an investigation after the Bank handed it the results of an inquiry launched in the summer and conducted by City barrister Lord Grabiner
The fraud office said the investigation concerned “liquidity auctions during the financial crisis in 2007 and 2008”.
Here's a bit more detail:
The process was simple: the Bank would telephone banks, asking them to say what rate of interest they were willing to pay. Those who offered the highest were deemed to have the greatest need for funding, and thus would receive the loans. To ensure fair prices, each bank was contacted individually. If someone attempted to get funding on the cheap, they would miss out.
Or so the theory goes. Of course, if banks were sharing their bids with each other, this wouldn’t be the case. Theoretically, it would have been possible to lowball the auction, allowing banks to access liquidity cheaper than they should have, at the expense of the Bank.
Let's just take a spin around the Libor riggings first. There's two different stories there. The first is that certain banks, certain teams within banks, rigged the markets so as to produce a profit for their own trading books. This is horrible, illegal, and is being dealt with harshly, as it should be. But there's the second Libor rigging scandal as well. To understand this consider what Libor is. It's the rate at which a bank says it can borrow on the market. It's not the rate at which the bank says it would lend, nor is it a record of actual loans taking place (and nor does anyone have to lend or borrow at the stated rates).
OK, also consider what happened in the depth of that crisis. The interbank market for loans entirely dried up. And Libor is the London Interbank Bid Offer Rate. That is, Libor was measuring, in the depths of that crisis, the rates in a market that effectively didn't exist: the rates at which London banks would lend to each other when no London bank was willing to lend to another one. The actual Libor rate there was therefore something like infinity. And no one at all would have been happy if the banks had been filing Libor rates of infinity. That really, really, would not have been helpful at that time.
As a result of this this part of the Libor rigging is being rather quietly ignored. Yes, people are rightly jumping up and down on the rigging of the rates to benefit specific trading positions. But on this larger one that didn't spread even more panic through the financial system there's a certain deliberate attention to not doing very much about it.
Which brings us back to this alleged rigging of the liquidity auctions. Whether there was any rigging we don't know as yet: all we do know is that there's a case for further investigation. But what's going to be interesting is if there was rigging, what is going to be the official view?
The standard point here (from Walter Bagehot) is that the central bank should in such times be an unlimited provider of liquidity but at a penal interest rate. But do note that while that penal interest rate is invoked it's really a secondary matter. That's to avoid moral hazard in the future. The point in here and the now is that unlimited liquidity. And the truth is that whatever price the banks were offering that liquidity was going to get shoveled out of the door.
We might, it is true, find that there was a cabal of bankers dedicated to ripping off the Bank of England through collusion. At which point book'em Danny'O. Or we might find, as with Libor, people simply not revealing how desperate things were in the hope of not further frightening the horses markets. And the really interesting thing is going to be, well, what's public policy going to be if we find out that it's the latter? What we should do about the former is obvious but what should we do about people who were, shall we say, less than open with the entire and total truth but whose actions helped to calm those frantic markets?
An interesting thing to speculate upon, no?
