Geithner Proposed Libor Changes in ’08

Timothy F. Geithner in 2008 sent the Bank of England recommendations for improving calculations of the London interbank offered rate, now at the center of a scandal over allegations the benchmark was manipulated.

Geithner, the U.S. Treasury secretary who was president of the Federal Reserve Bank of New York at the time, sent Bank of England Governor Mervyn King six recommendations. One was to “establish and publish best practices for calculating and reporting rates, including procedures designed to prevent accidental or deliberate misreporting,” according to a memo obtained by Bloomberg News.

Members of Congress are seeking information from U.S. regulators about the scandal that prompted Barclays Plc Chief Executive Officer Robert Diamond to quit last week after the U.K.'s second-biggest lender was fined a record 290 million pounds ($448 million) for attempting to rig interest rates. At least a dozen banks are being investigated for manipulating Libor, the global benchmark for $360 trillion of securities.

King forwarded Geithner's recommendations to the then-markets director at the Bank of England, Paul Tucker, who shared them with Angela Knight, according to a statement today by the U.K. central bank. She was then the chief executive officer of the British Bankers Association, the lobby group which coordinates Libor.

Geithner sent the recommendations in June 2008 after King discussed Libor issues with other central bankers at Basel. The BBA began a review of Libor the same month.

“The bank was aware of the forthcoming BBA consultation and, despite not having any regulatory responsibilities in this area, was concerned that it be as comprehensive as possible,” the Bank of England said in a statement. “Both the bank 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.”

The New York Fed today is set to release documents in response to a request from Representative Randy Neugebauer, a Texas Republican who serves on the House Financial Services Committee. Neugebauer sent a letter this week to New York Fed President William C. Dudley asking for transcripts of communications between the regulator and Barclays relating to setting Libor rates from August 2007 to November 2009.

Market Monitoring

“In the context of our market monitoring following the onset of the financial crisis in late 2007, involving thousands of calls and e-mails with market participants over a period of many months, we received occasional anecdotal reports from Barclays of problems with Libor,” New York Fed spokeswoman Andrea Priest said this week in a statement.

Priest said that in early 2008, after the failure of Bear Stearns Cos. in the financial crisis, the district bank “made further inquiry of Barclays as to how Libor submissions were being conducted” and it later “shared our analysis and suggestions for reform of Libor with the relevant authorities in the U.K.”

The Senate Banking Committee plans to question Geithner and Fed Chairman Ben S. Bernanke on the scandal at regularly scheduled hearings this month. Committee Chairman Tim Johnson, a South Dakota Democrat, said July 10 he is “concerned by the growing allegations of potential widespread manipulation of Libor and similar interbank rates.”

Twelve Democratic senators, including Jack Reed of Rhode Island and Carl Levin of Michigan, yesterday sent a letter to Geithner and Attorney General Eric Holder asking for an examination of “allegations that U.S. and foreign bank regulators may have been aware of this wrongdoing for years.”

“This scandal calls into further question the integrity of many Wall Street banks and whether our prosecutors and regulators are up to the task of regulating them,” the letter said.

Among Geithner's recommendations to King was to add a second Libor fixing for the U.S. market and to broaden the number of banks taking part in the U.S. fixing beyond JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. That would “produce a fixing that is more representative of the London interbank market and less susceptible to the specific funding issues of institutions” that do not have a broad dollar funding base.

Libor is calculated from a daily survey carried out for the BBA in London, in which the world's biggest lenders are asked the rate they're charged to borrow over a variety of short-term maturities in currencies including dollars, euros and yen. Banks are accused of low-balling submissions for the benchmark during the financial crisis.

Bloomberg News

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