The Federal Reserve Bank of New York was warned as early as mid-2008 that banks may have been misreporting their Libor borrowing rate to aid their own trading positions, much earlier than previously known.
Tim Geithner, then president of the New York Fed and now US Treasury secretary, was told by a senior colleague in a May 2008 email of her concerns about banks' deliberate misreporting.
The email was part of an internal push among some at the New York Fed to press the Bank of England and the British Bankers' Association to reform the benchmark lending gauge, known as the London Interbank Offered Rate.
It is the first indication that officials at the New York Fed had grown suspicious that banks may have been misreporting Libor to improve their trading results. Officials already had suspected banks were under-reporting their borrowing costs to mask the state of their financial health.
The email from Hayley Boesky to Mr Geithner – with three senior colleagues, Meg McConnell, Matthew Raskin and William Dudley, copied in – are among unreported emails seen by the FT that show New York Fed officials linking the incentive for banks to misreport borrowing rates to the bank's derivatives positions.
The plea by Ms Boesky, sent a few days before Mr Geithner made Libor reform recommendations to Sir Mervyn King, governor of the BoE, is perhaps the first indication that senior US officials suspected traders may have been influencing banks' Libor submissions.
"These individuals report to the head of [the] money markets desk, who often reports to the same person who oversees the derivatives book. They verify the posting with the boss to make sure it suits their derivatives position," Ms Boesky wrote on May 23 2008.
The US Congress has launched an inquiry into Libor. In July, the New York Fed made public selected documents related to alleged Libor-rigging by Barclays, which had just reached a $450 million settlement with US and UK authorities. Barclays admitted to taking requests from its own derivatives traders and those at other banks into account when making submissions to Libor and Euribor, the euro equivalent, from 2005 to 2007.
The New York Fed documents played down the possibility of a link between alleged rate manipulation to traders' derivatives positions. Rather, in those documents New York Fed officials linked Libor misreporting to banks' fears of appearing financially weak.
A global investigation spanning multiple continents now threatens as many as 20 banks and inter-broker dealers that may have been involved in manipulating interbank rates influencing hundreds of trillions of dollars' worth of financial instruments from 2005 to 2009.
Regulators across the globe probe alleged manipulation by US and European banks of the London interbank offered rate and other key benchmark lending rates
Other emails seen by the FT at the New York Fed raised concerns about the possible influence of derivatives traders.
On May 1 2008, Deborah Leonard, a senior New York Fed official, speculated in an email to colleagues about what she referred to as the "lying premium" theory about Libor submissions. She said there could be an "incentive to lie" by banks if a large number of derivatives used a particular Libor rate as a reference.
In a June 3 2008 email, Matthew Raskin of the New York Fed noted to colleagues that a pending BBA proposal on Libor best practice stated that rates should be "submitted by members . . . with responsibility for management of a bank's cash, rather than a bank's derivatives book", and that "rates must . . . not [be] set in reference to information given by brokers".
Mr Raskin wrote in his email: "While these statements are meant to describe the current state of Libor, they are not consistent with practices described by panel members we've spoken with, nor with market perceptions of the process."
Other authorities seem to have shared these concerns. In a July 14 2008 email, one Fed official noted that the "principal concern" at the International Monetary Fund "centered on who at the banks provided the Libor quotes – i.e. making sure the rates come from funding desks as opposed to derivatives traders".
A New York Fed spokeswoman said it had determined by "early 2008" that Libor was unreliable, and briefed officials in the US and UK in an effort to address the flawed rate-setting process in London and possible "conflicts of interest" at the banks.
"The New York Fed developed tough reform proposals including plans for independent audit of Libor submissions to prevent Libor misreporting, whatever the reason, and pressed the UK authorities to adopt them."
A Treasury spokeswoman said: "The record confirms that as president of the New York Fed, Secretary Geithner helped to identify the problems with Libor, briefed Treasury and US regulatory agencies on the issue, and pressed for reform by the British Bankers' Association of the Libor rate-setting process in London, and we welcome the significant international enforcement effort that followed."
A representative of Ms Boesky declined to comment.