A Shabby Statement

The BBC is claiming a 'scoop' for the Panorama programme last evening, in which they showed - with no serious room for doubt - that in August 2008 the Bank of England, in the person of an Executive Director, put pressure on the leading British banks [through their senior executives] to instruct the members of their staff who reported on interest rates to the British Bankers' Association to hand in deliberate underestimates of the actual cost of inter-bank borrowing. The result of the banks obeying that 'advice' was that the London Inter-Bank Offer Rate of interest [LIBOR] as it was officially stated was lower than the actual cost of inter-bank lending. This was intended to give a signal to traders in general to regard the falsified lower rate as a 'benchmark' for their own trading in the coming days. Thus, it was hoped, some of the pressure would be taken off the banks at the height of the financial crisis. This was massively important, because trillions of pounds-worth of financial contracts, worldwide, used LIBOR as their reference interest rate.

The BBC struggled to make this complex story palatable to an untutored audience in a half-hour programme, but a clearly-evidenced incidence of attempted market manipulation was sufficiently well explained for the public to take the point.

The Bank of England then made matters vastly worse, by making a statement to the effect that the subject-matter of the programme had not been 'regulated' in 2008. Nobody suggested that the preparation of LIBOR had been 'regulated', either well or badly, by the Bank in 2008. The programme simply stated that the Bank had applied pressure to market participants. It was implied that the intervention had had a beneficial effect on the evolution of the crisis. The Bank's shabby little statement, besides being entirely irrelevant, drew attention to their willingness to deploy tangential language rather than answer valid questions.

For two centuries, it had been understood - and often written - that the Bank of England exercised great influence on financial markets by the raising or lowering of the Governor's eyebrow. The Governor of the Bank just needed to give a hint that some activity was approved, and some activity was not approved, for the closed community of the City [until the 'big bang' of 1968] to obey. Anyone who did not, was not a Gentleman and could be ostracised or even denied facilities by the rest of the market. The replacement of the gents by cads in the very short period of frenetic development in the wholesale financial market led inexorably to the crisis. By 2008 no non-verbal signal by the Governor or any of his team could influence the market: so the precedent had to be set of actually browbeating people on the telephone. It had to be done, from the perspective of the Bank: so it was done. It should frankly and simply be admitted.