Libor Scandal: Barclays 'In Denial' Over Dealings With Regulators

Barclays was in a 'state of denial' about its dealings with regulators, according to Sir Mervyn King, Governor of the Bank of England, as he came under fire from MPs on Tuesday during the latest bout of accusation and counter-accusation over the Libor scandal.

As emails were released showing the close relationship between the former Barclays boss Bob Diamond and deputy governor of the Bank of England Paul Tucker, King accused Barclays of repeatedly sailing 'close to the wind' in its dealings with regulators before Diamond's departure. Tucker had thanked Diamond for being a 'brick' in an email in December 2008.

In a hearing at the Treasury select committee, Lord Turner, the chairman of the Financial Services Authority, was also criticised as he conceded the regulators had urged the Barclays board to remove Diamond after seeing the public reaction to the £290m Libor fine, rather than because Diamond was no longer regarded as 'fit and proper' to run a bank.

King, speaking to MPs for the first time since the Libor scandal erupted a fortnight ago, was greeted with scepticism when he said he did not know about the Libor rigging until the Barclays fine was announced.

The governor told MPs there had been 'genuine and deep' concerns about Barclays' relationship with its regulators in the runup to the fine and MPs had heard on Monday how Andrew Bailey, the FSA's top banking regulator, regarded Barclays as having a 'culture of gaming' with the regulator.

King, sitting alongside Tucker and Turner, who are both regarded as potential successors when he leaves next June, repeatedly accused Barclays of 'sailing close to the wind'. He said: 'It is possible to sail close to the wind once, maybe twice or … three times – four or five times you do have to ask questions about the navigational skills of the captain on the bridge'.

But Andrew Tyrie, the MP who chairs the select committee, accused the regulators of acting on a 'whim' in meeting with the Barclays chairman, Marcus Agius, to encourage him to force Diamond out. Turner admitted that he had met Agius on the third day after the Libor fine was announced to call for changes in the culture at the bank. Both Turner and King admitted to being surprised to learn that the chairman quit over that weekend, rather than Diamond.

The decision of Agius to resign – albeit 'honourable' according to Turner and King – sparked King to call in Agius and Sir Michael Rake, the most senior non-executive director on the Barclays board, to spell out on the Monday that the regulators had lost confidence in Diamond. Agius had told the committee last week about this meeting with King but did not mention any conversations with Turner.

Diamond's resignation was announced on 3 July, in a sudden move that forced Agius to become executive chairman only the day after he had announced his intention to quit.

'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.

King said he was clear that the concerns were about the 'executive management' of Barclays and that the bank now needed to create a 'new culture'.

The governor said that the departure of Agius would put 'any future chairman into an impossible position' as it would have needed the incumbent to either back Diamond or replace him.

His deputy Tucker was also in the spotlight after the release of email correspondence in which he thanks 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 sparked an incredulous reaction when asked about emails from the Federal Reserve Bank of New York asking about the 'deliberate misreporting' of Libor in 2007. 'It did not set alarm bells ringing', Tucker said.

King insisted that he had not known about the Libor rigging until two weeks ago when the Barclays fine was announced, even though there had been correspondence with US regulators in June 2008.

He described the Libor rigging as similar to the cricket betting scandal as 'the games weren't being fixed', but the number of no balls in an over were pre-arranged that had no influence on the outcome of the match. Libor was similar because the higher or lower submissions were so small that it made it difficult to detect the impact on the rate.

This article was written by Jill Treanor, City editor, for guardian.co.uk on Tuesday 17th July 2012 13.16 Europe/London