Note: Governor Carney's response can be found here.
As you will be aware, Lord Grabiner was retained by the Bank last year to review the conduct of its staff in relation to the recent foreign exchange fixing scandal.
He came in on January 21st to brief the Treasury Committee on his report, in what appeared likely to be a rather routine session. Unfortunately, his testimony proved to be unhelpful, and indeed positively obstructive in certain respects. Far from addressing areas of concern, it had the effect of raising several serious new questions about the validity of his report. Worst of all, it was given in a dismissive and aggressive tone, particularly in response to my questions. Both in tone and content I fear it will prove to be an embarrassment to the Bank.
I am writing to ask you to take a personal interest in this matter, which has potentially important implications. I enclose a copy of the transcript of Lord Grabiner's testimony, but would specifically encourage you to view his exchanges with me yourself online via http://www.parliamentlive.tv/Main/Player.aspx?meetingId=17023, beginning at 15.17. The transcript alone does not convey the character of Lord Grabiner's testimony--a point, ironically, which I made to him in relation to key telephone conversations quoted in his report.
In his testimony, Lord Grabiner acknowledged that he had not listened to those key conversations himself, and did not appear to believe that he should have done (in response to Q70-2, Q106). Moreover, he repeatedly showed himself unwilling to answer clear, direct and polite questions (Q35); indeed at one point he denied that there was any point in my asking him questions at all about his conclusions, even on the basis of uncontested facts (Q102). On several occasions I asked him what he had concluded about the behaviour of Mr Mallett, the Chief Dealer. Instead of answering with his own conclusions, even when specifically prompted (Q89-90), he said merely "I accepted his evidence" or similar (Q84-6, Q88-9, Q96, Q100). This came across as an attempt to evade personal responsibility for views which he had in effect taken on this issue. Yet Lord Grabiner was happy to give his own conclusions in relation to other aspects of his report (Q17, Q68-9).
For much of his testimony to me, and in part with other members of the Committee, Lord Grabiner adopted a highly aggressive tone. I suggested a possible alternative interpretation of a key conversation (Paragraph 56 of the report), between a trader and the Bank's Chief Trader, Mr Mallett, which if correct would suggest that the report was certainly incomplete and arguably defective. Instead of discussing this suggestion in a reasonable way, however, Lord Grabiner described my alternative interpretation as "wrongful" and "spin" (Q86), which was "deeply offensive and probably illegal" (Q87). He referred sarcastically to my "judicial mind", apparently knowing that I am not a lawyer (Q100-101). At one point he thumped the table (Q99; not recorded in the transcript). Overall, if I may say so, he came across more like a hostile witness in a court proceeding than an expert witness seeking to brief the Committee.
But if anything the content of Lord Grabiner's testimony was still more problematic. Paragraph 56 of his report contains the text of a telephone conversation between Mr Mallett and an unnamed trader. The trader sought to speak to Mr Mallett, in order to raise an issue of what he describes as "market manipulation". Lord Grabiner's interpretation is that this conversation was "garbled" (Q83); that the trader "backed off" his claim of market manipulation (Q79); that there is an important distinction to be drawn between what he described as "legal market manipulation" and "illegal market manipulation" (Q80-82); and that this may have been "legal market manipulation" (Q81).
We can leave to the experts the questions whether there is a relevant distinction to be drawn here between "legal" and "illegal" market manipulation, whether Lord Grabiner's characterisation of "legal manipulation" is right, and whether the term "manipulation" is generally (or indeed ever) used in the foreign exchange markets to refer to "legal manipulation". Even ignoring these issues, it is very hard to see how Lord Grabiner's interpretation can be correct.
First of all, the relevant part of the conversation is hardly garbled: the trader is unequivocal that there is market manipulation, and when he says "no, no, no definitely not" he is not backing off from that unequivocal claim, but unwilling to identify one person rather than another. Lord Grabiner states that the denial relates to the issue of market manipulation, but this looks like a misreading, since it comes in response to a further question (Q79). And if the conversation was garbled, one might expect Mr Mallett to say at some point "I don't understand..." or words to that effect. But he does not. Indeed, he specifically asks the trader to report back to him. So the conversation was not, in this crucial respect at least, garbled. But if this is true then it also appears to undermine Mr Mallett's later direct testimony to Lord Grabiner that the conversation was garbled, of which Lord Grabiner said, repeatedly, "I accepted his evidence" (Q83-4).
Secondly, this can hardly be "legal market manipulation", as Lord Grabiner suggests. If it was legal, why would the trader initiate the conversation at all? It stretches credulity to suggest that the trader is deliberately taking time away from trading to call his head dealer and report an instance of legal market behaviour. And why would Mr Mallett ask the trader to get back to him on it, if this was "legal market manipulation"?
Thirdly, there is an internal conflict within Lord Grabiner's testimony. On his view, the conversation was garbled, and there may have been "legal" but not "illegal" market manipulation (Q81). But earlier he said of the trader's words, "he starts... with a view to criticising or expressing suspicion of the behaviour of two brokers unnamed." But if that is true, it supports the interpretation that what they are discussing is "illegal" market manipulation. And again, to that extent at least, the conversation was not garbled at all.
It looks, therefore, as if Lord Grabiner may have made a mistake of interpretation in his report. And it is noteworthy that when my colleague Alok Sharma MP later asked him about my questions on Paragraph 56, he said "Mr Mallett formed the view that he formed and I believed him, because if you do not give him the benefit of that doubt, the alternative is that this was a very serious dereliction of duty" (my italics). This appears on its face to be reasoning backwards. Whether Mr Mallett's behaviour would or would not be a "very serious dereliction of duty" cannot properly be a factor in the correct interpretation of that behaviour. The job of an independent inquiry is to determine the facts, and make the judgements based on those facts, from which the question whether there has been a very serious dereliction can then be inferred.
But on one point at least, I think Lord Grabiner is right. If his interpretation is mistaken, then Mr Mallett would indeed be guilty of a "very serious dereliction of duty". For the reasons stated, I think his interpretation is mistaken. I am therefore now asking you and your colleagues to investigate carefully yourselves--if necessary, taking further advice, or inviting Lord Grabiner himself to reconsider the matter --whether or not the argument I am making is correct. If it is, then I am asking for the report to be amended, and any criticism to flow as appropriate from that.
Overall, it is not clear from the tone and content of his testimony that Lord Grabiner fully understood the function of the Treasury Committee. To be specific, he appears to have forgotten that he was speaking to us not in a personal capacity, but as the agent of the Bank of England; that he is ultimately being paid at the taxpayer's expense, at considerable cost; and that I and my colleagues on the Committee are under a duty to examine evidence placed before us, and to ask questions of expert witnesses such as him, on the public's behalf. You yourself are the principal here, Governor, and so ultimately responsible in this matter; and I would suggest that, as your agent, Lord Grabiner owes you an apology for his behaviour.
I would be grateful for a prompt reply. I am copying the Chairman of the Treasury Committee on this letter, and I may place it and your reply in the public domain.
Member of Parliament
Hereford and South Herefordshire