What did Bank of England say to Barclays about Libor?
In making false submissions about their borrowing costs, managers at Barclays believed they were operating under an instruction from Paul Tucker, deputy governor of the Bank of England, I have learned.
This belief was fostered after a telephone conversation in the autumn of 2008 between Mr Tucker and Bob Diamond, who at the time ran Barclays' investment bank, Barclays Capital, and is today chief executive of Barclays.
Mr Tucker did not issue this instruction. But he and Mr Diamond have different recollections of their conversation. So what Mr Diamond recalls about this telephone conversation may turn out to be the most explosive and important part of his testimony to MPs on the Treasury Select Committee, which will take place on Wednesday.
In finding Barclays guilty of attempting to manipulate the important Libor borrowing rate, the benchmark rate for bank-to-bank lending, the Financial Services Authority (FSA) made an elliptical reference to this conversation.
The relevant passage from the FSA's judgement against Barclays talks of a "telephone conversation between a senior individual at Barclays and the Bank of England during which the external perceptions of Barclays' Libor submissions were discussed".
I have established that the conversation was between Mr Diamond and Mr Tucker, who is a leading candidate to succeed Sir Mervyn King as governor of the Bank of England.
There is no contemporaneous minute or recording of the meeting, I am told. However Mr Diamond and Mr Tucker have different recollections of it, according to well-placed sources.
A central question, which MPs are likely to probe, is why Barclays' managers came to believe, after the conversation between Mr Diamond and Mr Tucker, that the Bank of England had sanctioned them to lie about what they were paying to borrow when providing data to the committees that set the Libor rate.
The heart of the matter is that in 2008, at the height of the credit crunch, the perception of banks' financial strength was linked to how much they had to pay to borrow. Barclays managers were very worried that the appearance of the bank paying more to borrow than other banks was damaging confidence in its health.
So Barclays so-called "submitters", the managers who gave borrowing data to the British Bankers Association's Libor-setting committees, consistently told these committees that Barclays was paying a lower interest rate to borrow than was actually the case.
What is striking is that even the artificially suppressed quotes for Barclays' borrowing costs provided to the BBA committee were higher than other banks' quotes.
In the febrile conditions of 2008, a great talking point among banks, investors and journalists was why Barclays appeared to be finding it harder and more expensive to borrow than many of its rivals.
It was understandable therefore Mr Diamond and Mr Tucker - who was in charge of the Bank of England's financial stability and markets arms - should discuss all this.
And what is striking is that after their conversation took place, senior Barclays' management on October 29 2008 gave an explicit instruction to reduce Libor submissions.
That said, the FSA's judgement says that Barclays and the Bank of England have subsequently agreed that "no instruction for Barclays to lower its Libor submissions was given during this telephone conversation".
But the FSA continues: "As the substance of the telephone conversation was relayed down the chain of command at Barclays, a misunderstanding or miscommunication occurred. This meant that Barclays' submitters believed mistakenly that they were operating under an instruction from the Bank of England (as conveyed by senior management) to reduce Barclays' Libor submissions".
Presumably therefore MPs will want to hear from Mr Diamond whether he felt Mr Tucker was being sympathetic to the idea that Barclays should misleadingly claim that it could borrow more cheaply than was true.
When MPs ask Mr Diamond about his conversation with Mr Tucker, there are two big questions he will need to answer.
1) Did he believe Mr Tucker was in some tacit or implicit way encouraging Barclays to understate its borrowing costs - even if he was not instructing them to do so?
2) How did junior Barclays managers gain the false impression that Mr Tucker and the Bank of England had instructed them to understate Barclays' borrowing costs?
The second question is a particularly resonant one - in that Mr Diamond has told the regulators that he neither instructed Barclays' managers to understate the bank's borrowing costs nor did he know this is what they were doing.
But if these junior managers knew about Mr Diamond's conversation with Mr Tucker, then there is an implication that Mr Diamond talked to some Barclays executives about how damaging it was for the bank that it was perceived to be paying higher bank-to-bank interest rates than rivals.
So the question is why on earth no Barclays' manager ever sought to tell Mr Diamond or any other senior executive that for months they had been systematically telling the Libor-setting committees that Barclays' borrowing costs were lower than was actually the case?
Regulators found that Barclays "routinely made artificially low Libor submissions to protect Barclays' reputation from negative market and media perceptions concerning Barclays' financial condition" from August 2007 to early 2009 - so from long before and long after the conversation between Mr Diamond and Mr Tucker.