While president of the Federal Reserve Bank of New York, Timothy F. Geithner pressed British regulators to reform the way a critical global benchmark called the London interbank offered rate, or Libor, is calculated, according to a June 1, 2008, e-mail obtained by The Washington Post.
Writing to the head of the Bank of England, among others, Geithner made six recommendations, which included eliminating incentives that could encourage banks to manipulate the rate and establishing a “credible reporting procedure.”
“We would welcome a chance to discuss these and would be grateful if you would give us some sense of what changes are possible,” Geithner wrote.
It’s unclear what other steps Geithner took and whether his efforts stopped any wrongdoing by banks. Last month, London-based Barclays, one of Europe’s largest banks, admitted that it schemed to manipulate Libor during the financial crisis — and its chief executive has asserted that regulators knew about its activities but didn’t do much to stop them. The scandal has led to the resignation of Barclays’s senior executives.
With the Libor scandal threatening to migrate from London to Washington, pressure is growing on regulators and Geithner, who is now the Treasury secretary, to explain what they knew and when.
On Thursday, several key Democratic senators called on the Justice Department to hold accountable bankers and regulators who failed to “stop wrongdoing that they knew, or should have known, about.”
In an effort to address some of these questions, the New York Fed, which Geithner led from 2003 until he joined the Obama administration, is set to release a trove of documents Friday morning detailing its response to concerns raised as early as 2007 about Libor, which helps set the standard for $10 trillion worth of corporate bonds, credit cards, mortgages and other loans around the world.
Andrea Priest, a spokesperson for the New York Fed, said the documents to be released Friday “will show that the New York Fed took prompt action four years ago to highlight problems with Libor and press for reform.”
The New York Fed played a marginal role in driving the inquiry, according to a source familiar with the U.S. and British investigation. During years of investigation briefings on Libor, the New York Fed’s name rarely, if ever, came up, said the source, who spoke on the condition of anonymity because the investigation is ongoing.
In the byzantine world of banking regulation, the New York Fed is perhaps the most powerful player. Yet during the time that allegations about Libor were reported to the Fed, it was also in the middle of handling a metastasizing crisis in the financial sector.
The investment bank Bear Stearns collapsed just weeks before Geithner had a meeting on April 28, 2008, titled “Fixing LIBOR,” according to his schedule. Events continued to go downhill that summer and fall.
Officials at the Commodity Futures Trading Commission first began looking into the Libor issue after the Wall Street Journal and the Financial Times ran stories in early 2008 raising questions about market manipulation. The CFTC approached the Justice Department. The Financial Services Authority in Britain joined in later that year.
A former regulator, Sheila C. Bair, who was head of the Federal Deposit Insurance Corp. during the financial crisis, said the New York Fed — as well as other regulators, such as the Office of the Comptroller of the Currency — has a privileged view into the inner workings of the banks.
“They both have scores of examiners in these banks, so it’d be easier for them to conduct this kind of investigation than the CFTC,” Bair said.
Nevertheless, the joint investigation among the Justice Department, the CFTC and British regulators found that throughout the financial crisis, Barclays routinely reported artificially low borrowing rates. The falsified data masked the level of trouble that Barclays was in during that time and may have helped keep Libor rates low. That, in turn, may have allowed Barclays to borrow money more cheaply.
The investigation is now focusing on another bank, but this part of the probe may not be completed until the fall, according to the source familiar with the matter. Nearly 20 of the world’s largest banks — including Citigroup, Bank of America and JPMorgan Chase — help set Libor rates.
Geithner as well as other banking regulators have been criticized in the past for siding too closely with the banks under their watch.
Geithner is also scheduled to testify before the Senate Banking Committee and the House Financial Services Committee in two weeks during regularly scheduled hearings. Lawmakers who requested the documents now being released by the Fed are likely to pepper him with more questions as they try to piece together the timeline during that chaotic period in 2008.