David Blanchflower’s comments come as interest rate fixing scandal described as potentially fraudulent by central bankers
There are no longer any UK bankers who are credible candidates to become the next governor of the Bank of England, economist David Blanchflower declared on Tuesday as the interest rate fixing scandal was described by central bankers on both sides of the Atlantic as potentially fraudulent.
As the current Bank of England governor, Sir Mervyn King, told MPs the Barclays board had been in a “state of denial” about its dealings with regulators, Blanchflower concluded that the only remaining candidate to take over from King next year is Lord O’Donnell, the former cabinet secretary, who has a PhD in economics.
More emails were released on Tuesday which appeared to show a close relationship between the former Barclays boss Bob Diamond and deputy governor of the Bank of England Paul Tucker. In one message Tucker thanked Diamond for being a “brick” in an email in December 2008.
Blanchflower, a member of the Bank of England’s monetary policy committee between 2006 and 2009, had previously cited Lord Green, now a trade minister and a former boss of HSBC, and John Varley, former chief executive of Barclays, as potential candidates. But Green may now face questions over why HSBC failed to adhere to rules to prevent money laundering when he was chief executive and then chairman.
“The last thing you want is a governor who might become tainted by the scandal. That would be hugely embarrassing for the government,” said Blanchflower. “It’s also tricky for [chancellor George] Osborne. He needs to make an appointment that won’t rebound on him at once, or in the future.”
King is due to step down in June 2013, when his second five-year term finishes. The process of appointing his successor is not meant to begin until the autumn, but there has already been plenty of discussion in the City and Westminster about potential candidates who could run Britain’s central bank. Two – Tucker and Financial Services Authority chairman Lord Turner – were sitting alongside King during Tuesday’s hearing with MPs when the governor indicated that the Libor scandal could amount to fraud.
As he defended his actions in the affair, insisting he had not known about the deliberate attempts to manipulate the key interest rate, King appeared to suggest that fraud had taken place. While “everyone was concerned” about Libor during the 2008 banking crisis, it was “a million miles away from saying that is the same as deliberate deceitful manipulation of submissions in order to make financial gain. That is my definition of fraud.”
With the Serious Fraud Office investigating any possible criminal cases in the UK, Ben Bernanke, head of the Federal Reserve, agreed there might be criminal offences.
In an appearance before the Senate committee on banking, housing, and urban affairs, Bernanke agreed that many Americans have lost out through the “unacceptable behaviour” of some individuals. He added that “based on what I’ve read about it”, some of the emails between traders as they discussed fixing the Libor appeared to be evidence of fraud.
Speaking to MPs for the first time since the Libor scandal erupted almost three weeks ago, King was greeted with scepticism when he said he did not know the detail of the Libor rigging until Barclays’ £290m fine was announced.
The governor told MPs there had been “genuine and deep” concerns about the relationship between Barclays’ bosses and the bank’s regulators before the fine was imposed. MPs heard on Monday how Andrew Bailey, the FSA’s top banking regulator, regarded Barclays as having a “culture of gaming” with the regulator.
More details emerged of the behind the scenes efforts by the authorities to force Diamond to quit. Lord Turner said the regulators had urged the Barclays board to oust Diamond after seeing the public reaction to the Libor fine.
It was King who held the meeting with Agius – and the most senior non-executive director of the bank Sir Michael Rake – that eventually led to Diamond’s resignation on 3 July, almost a week after the fine was announced. “I wanted the chairman to be very conscious of the concerns the regulators had raised. When I met them, the two of them, they had not taken on board the loss of confidence the regulators had with Barclays,” said King.
But he took issue with the claim by committee chairman Andrew Tyrie that he was handing Agius a revolver to shoot his chief executive. “I don’t like these firearms analogies, and they are false,” King said. “The question was left absolutely with them.”
Committee member John Mann insisted the Bank should be tough: “This is not some academic tutorial. Barclays jobs are at risk and so is UK financial stability. We need Sir Mervyn King to be ruthless with bad bankers.”
Tucker was also in the spotlight after the release of email correspondence in which he thanked Diamond for being “an absolute brick through this” following his promotion to deputy governor in December 2008. Diamond had emailed him to say: “Congratulations, well done man. I am really proud of you.”
Tucker drew an incredulous reaction when asked about emails from the Federal Reserve Bank of New York suggesting changes to the Libor system to avoid the “deliberate misreporting” of the rate in 2007. “It did not set alarm bells ringing,” Tucker said.
Emails revealed how Tucker had encouraged co-operation at the highest level for a review of Libor being conducted by the British Bankers’ Association, which ran the rate setting system, in 2008.
But Bernanke laid some of the blame on the BBA for failing to act on the Fed’s concerns. Bombarded with questions about the Libor scandal during his appearance, he told senators the Fed realised in April 2007 that the Libor was not being reported accurately, and passed its concerns to the BBA and Bank of England. He could not say “with full confidence” the Libor is reliable because “the British Bankers’ Association did not adopt most of the recommendations made by the New York Fed”.
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