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A Barclays bombshell for the Bank of England

People use a line of Barclays cash dispensers in central London, June 28, 2012.


Bob Diamond is going down fighting. The outgoing Barclays chief executive has implicated the Bank of England and potentially the government in the Libor scandal that claimed his scalp and that of one of his lieutenants on Tuesday. He has lobbed a grenade that the BoE must now attempt to defuse.

The inflammable material is contained in evidence Barclays has submitted to a committee of U.K. lawmakers due to question Mr. Diamond on Wednesday. It includes a contemporaneous note by Mr. Diamond summarizing a conversation with Paul Tucker about understated Libor submissions back in October, 2008. Mr. Tucker, deputy head of the BoE, is seen as the front-runner to be the next governor. On one reading, Mr. Diamond's note suggests Mr. Tucker implicitly endorsed Barclays' Libor submissions, possibly with the nod of government.

In Mr. Diamond's version of events, Mr. Tucker relayed queries from "senior figures within Whitehall" – home to the offices of the Prime Minister and the Chancellor of the Exchequer – as to why Barclays' Libor submissions were so high. Mr. Tucker supposedly added that "it did not always need to be the case that [Barclays] appeared as high as [it has] recently."

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This exchange seems to be the one that the Financial Services Authority mentioned in its report on Libor-rigging last week. So there's little doubt a conversation took place. The note may not be an accurate summary. But if it is, it is open to damaging interpretations.

If Mr. Tucker said Barclays' Libor submissions didn't need to appear so high, what could he have meant other than that the bank should lower them? And why did Mr. Tucker mention Whitehall if not to legitimize such misstatements? Perhaps there are other explanations, but Mr. Tucker will now have to respond.

Moreover, the Diamond memo potentially contradicts the FSA account of the exchange. The regulator states that "no instruction for Barclays to lower its Libor submissions was given during this telephone conversation." Well, there's explicit instruction and implicit instruction. The BoE won't like being dragged into this. But Mr. Tucker needs to provide some clarity – fast.

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