Bill Dudley was stumped.
In the early days of the 2008 financial crisis, the New York Fed executive couldn’t understand why Libor, a key international interest rate, wasn’t reacting the way it should have — seeing how the Federal Reserve just cut interest rates in the US.
Dudley was talking to Richmond Fed Governor Jeffrey Lacker on Oct. 7, 2008, according to Federal Reserve transcripts of the key meetings released Friday, and expressed frustration at Libor not responding to the Fed’s move to cut rates to 1.5 percent.
Neither knew at the time, of course, that bankers, five years later, would be charged with conspiracy to rig Libor.
The following edited conversation, in retrospect, is very telling:
Lacker: “Bill, you said you were struck by the feeble reaction of markets to expanding our credit programs?”
Dudley: “Yes. The markets didn’t take as much solace as I would have hoped, given the degree of escalation of those provisions.”
Dudley: “Well, for example, I would expect that Libor-OIS spreads might narrow rather than widen.”
Lacker: “I want to ask you about the Libor spread. It’s pretty striking, but I’m wondering, do you have data on the quantity of borrowing that’s going on in that market and what that Libor figure really represents? We have a bank in our District that reports on the Libor panel but reports borrowing at 100 to 150 basis points below [the current rate].”