First Rule of Libor Club: Don't Talk About Libor Club
Senior Editor, CNBC.com
Curious about how the biggest banks in the United States handle their Libor duties?
Go ahead and ask.
But be prepared to come away no wiser about the London Interbank Offered Rate, or Libor, than when you started.
Mum's the word when it comes to the Libor operations of the largest U.S. banks.
Recall that Barclays investors were blindsided by official revelations that the bank had rigged the key global interest rate known as Libor cost. The British bank was forced to pay $451.4 million in fines. The settlement led to the resignations of its chairman, its chief executive and its chief operating officer.
Shares in the company dived 16 percent the day after the settlements with regulators were announced and have not recovered in the weeks the followed.
So if you are an investor in one of the three U.S. banks that participate in the determination of Libor—JP Morgan Chase, Citigroup, and Bank of America—you probably would like to know if a similar Libor hit may be in the offing.
But to date the banks aren't talking, leaving investors in these banks entirely in the dark when it comes to their Libor operations.
Indeed, when asked about Libor on an earnings conference call Friday, JP Morgan Chase CEO Jamie Dimon declined to provide any specifics. One analyst on the call pointed out that Libor submissions are made from London, the source of the derivative mismarkings the forced JP Morgan to restate first quarter earnings.
It's part of an effort to distance the banks from the Libor scandal, some insiders suggest.
“We don’t want to be a part of the Libor story, so we’re not going to put anything out there that is not already on the record,” said a person at one of the three banks. He spoke on the condition that CNBC not specify which bank.
Some of the basic facts are known. On each business day, shortly after 11 o’clock in the morning someone at each of the banks enters the bank’s Libor submissions into a software application created by Thomson Reuters. The submissions are meant to estimate the borrowing costs of the bank in 10 different currencies at 15 different maturities, from over night to 12 months.
Investigators in the U.S. and the U.K. found that Barclays allowed its submissions to be influenced by traders looking to profit by raising or lowering Libor, depending on the trading position at the time. The investigators also say that Barclays intentionally lowered its Libor submissions during the financial crisis in order to combat what it saw as an inaccurate market perception that the bank’s financial health was waning.
More importantly for investors in other banks, however, U.S. investigators say that Barclays did not act alone in its attempts to manipulate Libor. The Commodities Futures Trading Commission’s settlement with Barclays makes it clear that at least three other banks were allegedly complicit in Libor manipulation. The settlement did not name them specifically, referring to them only as Bank A, Bank B, and Bank C.
In addition to Barclays, JP Morgan , Citi , and Bank of America , fourteen foreign banks participate in Libor. Nearly all of them are under investigation in connection with Libor.
Investors and reporters looking for information about how these banks conduct their Libor operations run into a wall of silence. None of the U.S. banks will provide information as basic as the name of the unit inside the company that handles Libor submissions.
“We are adopting an ostrich strategy, sticking our heads in the ground and hoping the danger passes,” said a person at one of the banks who disagreed with the way the banks were responding to the Libor scandal.
I asked Bank of America, Citi, and JP Morgan Chase to provide answer to four sets of questions about their Libor practices.
1. Who makes the Libor submission for your bank? How many people involved? Who does the submitter report to? How high up in management does decision go? Is it reviewed before or after submitted to BBA? Who signs off on changes?
2. How is the submission calculated?
3. Has this procedure changed over time?
4. Is it under review following Barclays scandal?
Not one of the banks would provide the information requested. Bank of America and JPMorgan declined to comment. Citigroup did not return phone calls.
The veil of secrecy may begin to fray in the coming weeks. Senate Banking Committee Chairman Tim Johnson, the South Dakota Democrat, has instructed the committee staff to begin briefings with the relevant parties about the Libor allegations. A good place to start might be asking the banks these questions that they would prefer to ignore.