Treasury Secretary Timothy F. Geithner has said that he sounded the alarm four years ago to regulators about problems with the benchmark interest rate known as Libor.
But Geithner, who was then head of the Federal Reserve Bank of New York, did not communicate in key meetings with top regulators that British bank Barclays had admitted to Fed staffers that it was rigging Libor, according to people familiar with the matter.
Instead, regulators at the Commodity Futures Trading Commission and the Justice Department worked largely without the Fed’s help to build a case against Barclays. That work has culminated in a massive scandal rocking the banking industry on both sides of the Atlantic.
As Geithner prepares to testify Wednesday morning on Capitol Hill, he returns to a familiar position as a lightning rod for critics on the left and the right who find fault in his work as a banking regulator before he joined the White House and as a bailout architect under President Obama.
He will face a key question from House and Senate members this week: Did he and others at the New York Fed, the country’s most powerful banking regulator, act urgently enough to stop fraud at Barclays and potentially other banks?
Geithner has said the New York Fed did everything in its power.
“We moved quite quickly to try to get the British to address it and make sure that we brought it to the attention of the full complement of U.S. regulatory agencies so that they could take a careful look at it, which they did,” Geithner said Monday night on Charlie Rose’s interview show. “And to their credit, they’ve done a pretty strong enforcement action right now, but there’s more work to do on this.”
Focus on Libor
Documents released by the New York Fed show that the agency chose to focus on structural problems with Libor rather than help to bring corrupt actions at Barclays and other banks to light.
“At no stage did he [Geithner] or anyone else at the New York Fed raise any concerns with the Bank that they had seen any wrongdoing,” Bank of England governor Mervyn King said in testimony before a British parliamentary committee last week.
Geithner was aware there were problems with how Libor was calculated because it relied on self-reporting by the world’s biggest banks. But it’s unclear from the documents whether he knew about numerous phone calls in which Barclays employees admitted to New York Fed staff members that the bank was manipulating Libor.
In a phone call from April 2008, a Barclays employee made such an admission to New York Fed staff member Fabiola Ravazzolo: “So, we know that we’re not posting um, an honest Libor.” Then in October again, in three separate phone calls, Barclays executives told Fed employees that Libor was “unrealistic” and “absolute rubbish.”
Throughout the spring and summer of 2008, in the midst of increasing turmoil in the financial world, the Fed studied what was wrong with Libor.
Two weeks after the April phone call, Geithner held a meeting called “Fixing LIBOR” with senior New York Fed staff members. A few weeks later, in a meeting with U.S. Treasury officials, New York Fed staffers, including Ravazzolo, presented slides saying there are “questions regarding Libor’s accuracy and relevance.”
Then, on June 1, Geithner e-mailed recommendations to King, the British central banker, on how to improve the process for setting the rate.
The New York Fed also says that it raised the Libor issue in a meeting around this time with the President’s Working Group on Financial Markets, which consisted of top officials from Treasury, the Federal Reserve, the Securities and Exchange Commission, and the CFTC.
But two people with knowledge of the matter said senior officials and investigators never heard an appeal from the New York Fed to investigate possible wrongdoing over Libor. The people spoke on the condition of anonymity in order to speak more freely about the ongoing investigation.
Geithner, through a spokesman, referred questions to the New York Fed, which declined to comment. The New York Fed, in response to requests from lawmakers, is set to release more documents.
The Fed seemed unsure in the summer of 2008 whether it could prove that Libor was rigged. In a presentation June 5 given to staff members to other regulatory agencies, New York Fed employees said: “These claims are difficult to evaluate.”
Still, the Fed proceeded to use Libor as a benchmark to determine how much insurance giant American International Group would pay back the government during its bailout. The measure also was used in the fall of 2008 to set the interest rate for the emergency lending program called the Term Asset-Backed Securities Loan Facility, or TALF.