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The Libor-fixing scandal took a new twist yesterday, when the New York Fed revealed that it had informed the Bank of England back in 2008 that some banks may have been misreporting the rates used to calculate the London interbank offered rate.  Turns out that an anonymous Barclays official told a New York Fed official  that his bank was underreporting borrowing costs.
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The Fed released a transcript of a call between New York Fed analyst Fabiola Ravazzolo and an unidentified executive at Barclays from April 11, 2008, in which the Barclays official admitted it wasn't honestly reporting its real borrowing cost.

But he said it was being done to avoid making the the bank appear weak, less than a month after the collapse of investment bank Bear Stearns, and discourage market gossip that would cause its share price to go down, rather than to try to come out on top in trading.

"We know that we're not posting um, an honest Libor," he told Fabiola. "And yet we are doing it, because if we didn't do it, it draws unwanted attention on ourselves."

The Barclays official also offered his opinion that other banks were also under-reporting their Libor submissions.

The transcript was one of several documents the New York Fed released in response to an inquiry by Congressman Randy Neugebauer, chairman of the House Financial Services Oversight Subcommittee.  Read them here.

The disclosure concerned the New York Fed enough that it was escalated all the way to Tim Geithner, who was president of the New York Fed at the time.  In June 2008, Geithner emailed Bank of England governor Mervyn King suggesting that changes were needed to reduce the likelihood of banks fudging the rates at which they borrowed from other banks.

The implications of this are huge.  British authorities have insisted they didn't have enough information at the time to stop the rate fixing.  But now it looks like they had enough to take action in the middle of the three-year scheme.

The New York Fed had actually been tipped off to Libor problems as early as 2007, when a Barclays official told Fed officials that Libor was being set at an artificially low rate.  But there was no specific admission of possible wrongdoing at the time.

I'm currently mining UK sources for a reaction to this development.  Given that the press over there has been out for blood since this scandal broke, it's safe to assume that the calls for King's head to roll will come fast and hard.

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