The Libor Lag

Why are investigators only now looking into things that happened three and four years ago?

The business papers all report news that the Department of Justice, SEC, and Commodities Futures Trading Commission (and apparently other agencies) are investigating whether the big banks manipulated the critical Libor gauge of interest rates to make themselves look healthier than they really were.

First of all, a big tip of The Audit’s green eyeshade, again, to The Wall Street Journal and particularly Carrick Mollenkamp and Mark Whitehouse, who did some creative enterprise reporting during the financial crisis that showed something might be amiss in the banks’ reporting.

Libor is calculated based on how much it costs banks to borrow. Twenty banks self-report these costs, and the Journal’s reporting found big discrepancies between some banks’ self-reported rates and what other market measures would imply.

It found this then:

At times of market turmoil, banks face a dilemma. If any bank submits a much higher rate than its peers, it risks looking like it’s in financial trouble. So banks have an incentive to play it safe by reporting something similar — which would cause the reported rates to cluster together.

In fact, the Journal analysis shows that during the first four months of this year, the three-month borrowing rates reported by the 16 banks on the Libor panel remained, on average, within a range of only 0.06 percentage point — tiny in relation to the average dollar Libor of 3.18%.

Those reported rates “are far too similar to be believed,” says Darrell Duffie, a Stanford University finance professor.

So the first question I have on today’s news is: Are these agencies investigating what the Journal reported on in 2008 or is there something newer? And more critically: What’s taken the authorities so long? The Journal’s reports ran in April and May of 2008, almost three years ago.

We have to piece together reports to get the full picture.

From the FT we get that the investigations are indeed focusing on possible Libor manipulation during the crisis:

In particular, the investigation was looking at how Libor was set for US dollars during 2006 to 2008, immediately before and during the financial crisis, people familiar with the probes said.

And the FT reports that it’s not just U.S. investigators snooping around here. The U.K. and Japan are also asking the banks questions.

From the Journal we find that the investigations didn’t begin until two years after the paper’s revelations:

The probe began about a year ago with informal inquiries and has subsequently narrowed in focus though it is not clear what the parameters are in the current stage, these people said.

And the FT reports that the first questions were asked just five months ago.

Nobody gives us a hint as to why it might be that investigators are only now asking questions about Libor manipulation.

The New York Times gives us a thin piece that makes it seem that UBS, which is the company that disclosed to investors yesterday that it is being investigated, is the only one under the gun.

But the Journal makes it clear that several American and European banks are being investigated, though not everybody on the Libor panel.

Some 16 banks were contacted, but the U.S. probe appears to be focusing on a smaller group of banks, according to the people familiar with the situation.

Very interesting. I’d think reporters ought to be sniffing around Citigroup, for one, right about now.

But again, one thing I’d like to see explored, though: Why weren’t investigators on this when questions were raised in 2008? Why did it take nearly two and a half years to start poking around? Is this a manpower issue at the investigative agencies? A priorities issue?

This isn’t the only time we’ve seen a strange delay like this lately. Remember that Bloomberg report from a couple of weeks ago:

U.S. criminal investigators will step up probes into possible fraud involving collateralized debt obligations and credit default swaps, a top federal prosecutor in New York said.

Christopher Garcia, chief of the Securities and Commodities Fraud Task Force in the U.S. Attorney’s Office in Manhattan, told white-collar criminal-defense lawyers at a conference today that his office will spend this year investigating possible fraud involving CDOs and CDSs.

The CDO market, the linchpin of the financial crisis, collapsed in 2007. But only now is it becoming a priority.

It sure seems to me like the longer you wait to investigate these things, the harder it is to find out what actually happened.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,