In the wake of revelations that U.K.-based Barclays had been making false submissions to set a key global rate, everyone’s been wondering: Where were the regulators? On Friday, one of those regulators--the New York Federal Reserve--made the case that it wasn’t asleep at the switch by releasing 17 documents intended to show that it had quickly identified problems with the London interbank offered rate, or Libor, and that it had pushed for reform.
Allegations that banks manipulated Libor--a rate that serves as a base for hundreds of trillions of dollars in loans worldwide--have once again called the global financial industry and its regulators into question and renewing cries for the break-up of big banks.
The documents released by the Fed portray Treasury Secretary Timothy Geithner--then head of the powerful New York Fed--as both aware of the issue and involved with his peers in Britain, raising concerns. They do not, however, show what Geithner did beyond recommending regulatory changes or whether he pressed British authorities any further.
Both Geithner and Federal Reserve Board Chairman Ben Bernanke face Congress in the coming weeks and will be asked what U.S. regulators knew, when, and how they acted in response.
The documents’ release was a response to a request from Rep. Randy Neugebauer, R-Texas, who chairs the House Financial Services Committee’s subcommittee on oversight and investigations. Neugebauer asked for transcripts of all communications related to Libor between August 2007 and November 2009. The Fed released additional materials to bolster its case.
A Fed statement walked through the timeline of events leading up to then-New York Fed president Timothy Geithner’s June 1, 2008, e-mail to Bank of England governor Mervyn King outlining ways to enhance Libor’s credibility. According to the Fed, its market monitoring team picked up on possible problems with Libor reporting as early as the fall of 2007.
In 2008, a Barclays employee told a Fed analyst that the bank was underreporting its rate to avoid the stigma associated with being a Libor outlier. The same employee said he believed other banks were also under-reporting their own Libor submissions. The Fed analyst notified senior management of the Barclays employee’s account.
A briefing mentioning reports that Libor submitters were underreporting borrowing rates was circulated to senior officials at the New York Fed and other Fed banks as well as the Treasury Department. Nearly two months later, Geithner sent the letter to King.
“We spoke briefly in Basel about the BBAs [British Bankers Association] Libor regime, and you said you would welcome some suggestions. I have attached a list of recommendations prepared by my staff. We would welcome a chance to discuss these and would be grateful if you would give us some sense of what changes are possible,” he wrote.
One of the questions lawmakers are likely to raise is whether Geithner followed up after sending the e-mail. The New York Fed said it continued to monitor potential problems with Libor, but did not go into greater detail.
The Bank of England passed Geithner’s e-mail along to the British Bankers Association on June 3, according to a separate BoE release on Friday. “Both the Bank [of England] and the Federal Reserve were assured by the BBA that it would take on board the recommendations, either through actions or through questions on which it would consult,” BoE said in the release. BBA began reviewing the Libor process in June 2008.