Libor: The figures of merit

When the Treasury select committee quizzed Sir Mervyn King and Lord (Adair) Turner recently about the Libor rate fixing scandal, both had their excuses ready in response to one of the obvious questions - why did they take no action when told by the New York Fed that some UK banks were falsifying Libor submissions? “Not my responsibility, Guv,” they chimed in unison.

Both claimed it was the responsibility of the British Bankers’ Association, as Libor was its baby, although in addition Sir Mervyn flagged up that the FSA was the banking regulator - not the Bank. Passing the buck to the BBA might have been justified if banks were self-regulating. Silly me but for all these years I have been labouring under what must be a misapprehension that the previous government gave the FSA statutory responsibility to regulate banks.

In fact, the Market Conduct Sourcebook in the FSA Handbook says that regulated markets are obliged to ensure “fair and orderly trading, governed by transparent, non-discretionary rules.” Presumably Lord Turner would acknowledge that part of a regulator’s job is to ensure its rules are not broken.

Perhaps he would explain how trading in the hundreds of trillions of pounds of Libor-based contracts can be “fair” when Libor rates are being deliberately falsified. Likewise, how the “non-discretionary rules” requirement was adhered to when Libor rate submitters made up rates as they went along, rather than submitting their view of the actual rate as required by BBA rules.

Clearly the primary responsibility for the Libor manipulations must be with the banks who submitted false rates. But how extraordinary that when the Bank of England is warned by what is probably the most powerful regulator in the world that some UK banks are making fraudulent Libor submissions, and passes that information to the FSA, it is completely ignored by the latter and apparently not followed up by the former.

The only implication I can draw from this is that either the FSA, and to a lesser extent the Bank of England, condoned the fraud and were thus complicit in it, or they were grossly incompetent.

Manipulation

The manipulation of Libor begs the question about what other figures are being manipulated, not necessarily fraudulently. In fact, most regular monthly statistics on the housing and mortgage market are manipulated, or to use the technical term, seasonally adjusted, with the Bank of England being one of the biggest culprits.

Now of course seasonal factors do affect some statistics but so do many other things. For example mortgage availability obviously has a major impact on mortgage approvals and mortgage lending. This and many other factors, such as interest rates and the state of the economy, affect house prices, some much more than seasonal factors do.

So if one is going into the manipulation game why only manipulate house prices by the inexact art of seasonal adjustments? Why not, for example, adjust monthly house price statistics to reflect variations in interest rates? Pick a number that whoever is manipulating the statistics thinks is a “normal” interest rate. Then when rates are below that level reduce the actual monthly house price index before publishing it on the basis that the low interest rate has artificially inflated prices, and vice versa.