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Geithner doubts Libor manipulation cost taxpayers bailout money

Treasury Secretary Timothy F. Geithner, testifying before a Senate panel, defends his handling of concerns in 2008 that large banks were manipulating Libor.

July 27, 2012|By Jim Puzzanghera, Los Angeles Times
  • Treasury Secretary Timothy F. Geithner speaks during a hearing of the Senate Banking Committee. Interest rates for trillions of dollars in commercial and consumer loans, including mortgages, worldwide are based on Libor.
Treasury Secretary Timothy F. Geithner speaks during a hearing of the Senate… (Brendan Smialowski, AFP/Getty…)

WASHINGTON — Treasury Secretary Timothy F. Geithner told lawmakers that he doesn't think the manipulation of the scandal-plagued Libor standard by large banks cost taxpayers money when the benchmark interest rate was used to set some bailout terms.

Still, he said, Treasury officials are investigating how the London Interbank Offered Rate affected bailout costs.

For the second straight day of congressional hearings Thursday, Geithner defended his handling of concerns raised in 2008 that large banks were manipulating Libor. Interest rates for trillions of dollars in commercial and consumer loans, including mortgages, worldwide are based on Libor.

British investment bank Barclays last month agreed to pay $450 million to settle allegations by U.S. and British regulators that it manipulated the rate. Investigators are looking at whether other large banks also manipulated Libor to boost profits or make the banks appear more financially sound than they were.

Sen. David Vitter (R-La.) criticized Geithner and other U.S. officials for using the rate in connection with some bailouts in 2008 when they knew it was vulnerable to misreporting.

"That was the best alternative available at the time, and you can't say now with confidence that that choice in any way disadvantaged the American taxpayer," Geithner said. "I think it's quite unlikely, but we're going to take a careful look at that."

Geithner said investigations have shown that banks manipulated the rate up and down, so it's unclear what effect the practice had on money the Federal Reserve lent in the $182-billion bailout of American International Group Inc. and for a $1-trillion emergency lending program called the Term-Asset Backed Securities Loan Facility.

"We don't know at this point what impact that behavior had [in moving] the rate up or down for investors or borrowers," he told the Senate Banking Committee. "It's possible that people who borrowed money were advantaged by this. It's possible that people lent money were disadvantaged, but we don't really know to the extent that happened."

Geithner has taken heat from Republicans for his actions as president of the Federal Reserve Bank of New York in 2008 when it learned that the rate was vulnerable to manipulating. He had received evidence that Barclays was under-reporting its borrowing costs to bring down Libor — a way to show the bank was healthier as the financial crisis was starting to wreak havoc worldwide.

Geithner said he notified top U.S. officials, including the heads of the Treasury Department, Securities and Exchange Commission and the Commodity Futures Trading Commission, which launched the investigation that led to the Barclays settlement.

Geithner also sent recommendations for fixing Libor to the Bank of England and the British Bankers Assn., the private group in London that oversees the rate.

Three large U.S. banks — Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. — are among the international financial institutions that set the rate in 2008.

Vitter pressed Geithner about whether U.S. officials knew if any of those U.S. banks also helped manipulate it.

"We don't know that," Geithner said, though he directed Vitter to U.S. investigators for more details. The Treasury Department is not involved in the investigations, which are being conducted by the Justice Department and the CFTC, along with British regulators.

"So we're now over four years later and we haven't answered that question," Vitter said. "Doesn't that unequivocally suggest somebody dropped the ball?"

Geithner said that such investigations are complex and take time to complete.

Sen. Patrick J. Toomey (R-Pa.) criticized Geithner for not warning state and local governments of the concerns about Libor, which they used to set rates on municipal bonds they issued.

"My concern is that knowing this rate did not have integrity, you nevertheless stood by while thousands of transactions were executed," Toomey said.

Geithner noted that concerns that Libor might be manipulated were widely reported in the media starting in early 2008.

Democrats defended Geithner, saying he raised concerns with top officials in the U.S. and Britain when he learned of the potential problems.

"You and the New York Fed were proactive," said Sen. Charles E. Schumer (D-N.Y.). "I think the idea we did nothing for four years is obviously false, and I think some are taking unfair shots at you."

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