Barclays Kinda-Sorta Claims Bank Of England Told It To Manipulate Libor

In the fast-exploding Barclays rate-fixing scandal, Bob Diamond may have just produced a smoking gun -- one that could have the power to take a Bank of England official down with him.

Diamond stepped down as CEO of the giant British bank Barclays on Tuesday, just a couple of days after the bank's Chairman, Marcus Agius, also submitted his resignation. Chief operating officer Jerry del Missier, in the job for just a month, also took a dive on Tuesday. All were the casualties of the bank's recent admission that it repeatedly manipulated a key short-term interest rate called Libor -- sometimes in an effort to make itself look healthier, other times in an effort to make money on credit derivatives.

The bank doesn't have much of a defense, but it claims that it was kinda-sorta told by the Bank of England not to let Libor get too high during the financial crisis, in an attempt to ease fears Barclays would be next to go belly-up. And today it released a document on its web site that purports to back that claim up.

That doesn't excuse the bank's serial manipulation to simply make money on derivatives -- as seen in a series of incriminating emails stretching over years before the bank's conversation with the Bank of England. But it could possibly help explain some of why Barclays did what it did, while also pushing some of the blame away from the bank.

First, a quick refresher: Libor is an interest rate that is used to set loan rates around the world, including here in the U.S., including adjustable mortgage rates and auto loans. A handful of big banks set it every day by announcing what they're having to pay to borrow in short-term lending markets.

It's way too easy to manipulate the rate -- just tell the world whatever number you want. In fact, just about everybody else was probably manipulating the rate, too. There are allegations that, during the crisis, many banks conspired to push Libor too low, to make it look like they weren't having any trouble borrowing money, when, in fact, the market was closing up on them. Lots more banks may be about to get in trouble over this.

But for now Barclays is alone in the hot seat. On Tuesday, just ahead of a scheduled appearance on Wednesday by Diamond before a parliamentary committee investigating the scandal, the bank produced a brief explaining its side of the story. Included in that brief is an email written by Diamond on October 29, 2008, noting a phone conversation he had that day with Paul Tucker, a deputy governor of the Bank of England, the UK's version of the Federal Reserve.

The note -- one of only three such "notes to file" Diamond wrote in his entire career, according to the Financial Times -- claims that Tucker said people were starting to worry that Barclays was paying high borrowing costs in the short-term lending markets. What's up with that? Tucker asked. Are you in some sort of trouble?

No, no, of course not, Diamond said, according to the note. Other banks are setting Libor too low, he said, claiming that Barclays was alone in being honest about its borrowing costs. And Tucker responded, according to the email, that there was no need for Barclays to keep Libor all crazy high.

One interpretation of this conversation is that there was a nudge-nudge wink-wink from Tucker that the Bank of England would sure like Libor to be a little lower so people would stop freaking out about banks. That sounds, if you strain your ears just right, like the Bank of England was telling Barclays to manipulate Libor.

Barclays doesn't quite go as far as to accuse the Bank of England of doing exactly that. The bank says that Diamond didn't think he got any instructions from Tucker to manipulate Libor. It also says that, even though Diamond told a couple of his underlings, including del Missier, about the call with Tucker, he didn't instruct them to manipulate Libor either.

England's Financial Services Authority didn't think much of this defense, saying it didn't think the Bank of England had told Barclays to manipulate Libor. The Bank of England says it's "nonsense" to suggest it turned a blind eye to, or encouraged, Libor manipulation.

It certainly seems this email is not nearly strong enough to get Barclays off the hook for Libor manipulation -- otherwise, we wouldn't be seeing every top executive that can fog a mirror getting chucked out the window with extreme prejudice. At the same time, it's ambiguous enough that the Bank of England is still going to have to answer some questions.

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