Picture this: Evidence comes to light that the White House made calls to the Federal Reserve Bank, urging its governors to persuade major banks to commit fraud. Sound like a big deal?

That's analogous to what just came to light in the Barclays (NYSE: BCS) brouhaha. Now-former CEO Bob Diamond launched a Hail Mary last week, not-so-subtly suggesting that Paul Tucker of the Bank of England had pushed the bank to submit fudged LIBOR bids.

Not all that surprisingly, Tucker's recollection of the flavor of the conversation differs from Diamond's. When asked whether he was pressured by government officials to get Barclays to submit false LIBOR bids, Tucker resolutely repeated "Absolutely no." He asserted that the conversation was simply to remind Diamond that high borrowing rates for the bank could be read as a distress signal by the broader market. Tucker further pointed out that he had the same conversation with other banks that were not in a position to submit LIBOR bids.

Reacting to Tucker's testimony, Reuters blogger Felix Salmon tweeted:

Aha! Tucker testimony makes sense. Barclays refused capital from the UK govt -- and the govt was worried that choice was a very bad one.

And he followed up with:

Essentially, Tucker was putting Diamond on notice that the Libor submissions implied that Barclays' decision to refuse capital was a bad one.

That explanation would seem to put Tucker at least somewhat in the clear and turn the heat back up on Barclays -- not that the fraud would have been excusable if somebody from high up had asked really nicely.

But it's still questionable whether Tucker's testimony fully passes the sniff test. While he reacted strongly to the apparent gaming of LIBOR -- calling it a "cesspit" -- he also asserted that he was not aware at all that LIBOR may have been unreliable at the time. The Wall Street Journal wasn't convinced, noting that "doubts about Libor's integrity were widespread by mid-2008" and reminding readers that the paper ran a series of articles on the issue in the spring of that year. Barclays also pointed out last week that it had raised concerns about LIBOR submissions with the Bank of England and the Financial Services Authority on 15 occasions in 2007 and 2008.

Is it possible that Tucker missed all of this? That would make the BoE look pretty out of touch. Or perhaps the BoE saw the concerns but paid them no mind? That would make it look pretty bungling, considering what's now come to light.

This is all interesting and could make for some pretty splashy copy if it turns out that there was, after all, some government and BoE prodding going on at Barclays. However, even if Tucker's and the BoE's hands are clean (as much as they can be, at least) in this ordeal, there are at least two very critical issues that could seriously shake markets:

  1. Is there any chance that Barclays was really the only bank playing this game? Bank of America (NYSE: BAC), Citigroup (NYSE: C), JPMorgan Chase (NYSE: JPM), and UBS (NYSE: UBS) are among the 17 other banks that submit bids for U.S. dollar LIBOR. Keep an eye out for what investigators turn up as they look into these other major banks.
  2. Should the global financial markets continue to rely on LIBOR? In the wake of the global financial meltdown, not to mention this latest LIBOR-focused scandal, is there any reason to rely on squishy trading-desk submissions from big banks? There's a growing call for LIBOR to be overhauled to focus on actual transactions rather than the "Um, yeah, we're pretty sure we could borrow at this rate [snicker]" that it's currently based on.

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