Geithner Defends Response To LIBOR Scandal

Treasury Secretary Timothy Geithner was on Capitol Hill Wednesday to talk about the implementation of Dodd Frank. But the questions focused on why the New York Fed, under Geithner, didn't act more aggressively when it first learned about possible manipulation of a key interest rate.

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And I'm Robert Siegel. Today, on Capitol Hill, lawmakers, mostly Republicans, went after Treasury Secretary Timothy Geithner. He appeared before a House committee to deliver the annual report of a group known as the Financial Stability Oversight Council. But as NPR's John Ydstie reports, the session was dominated by one word, Libor.

JOHN YDSTIE, BYLINE: Geithner was supposed to be testifying before the committee on treats to U.S. financial stability. But he spent most of his time explaining his response in 2008 to the rigging of the Libor, an interest rate used around the world, but set in London. The scandal blossomed after U.S. and British regulators announced last month that the big British bank Barclays admitted to trying to manipulate the rate and agreed to pay a $450 million fine. Several other big banks are under investigation.

Scott Garrett, a Republican congressman from New Jersey, was angry that even though Geithner knew the rate might be rigged as early as the spring of 2008 when he was president of the New York Federal Reserve, he hadn't alerted Congress at any time during the past four years.

REPRESENTATIVE SCOTT GARRETT: You're the secretary of Treasury of the United States of America. You had the authority for four years to come to us, lay out the problem and lay out the solutions. And for four years, you didn't do anything about it.

SECRETARY TIMOTHY GEITHNER: Congressman, in my judgment, the regulators did the necessary, appropriate thing in this context, and they started that process very early.

GARRETT: You told the Congress about this?

GEITHNER: No. Well...

GARRETT: OK.

GEITHNER: ...let me explain what we did.

YDSTIE: Geithner told Garrett what he said in several other forums, that after hearing rumors of rate manipulation in the markets and in press reports beginning in late 2007, the New York Fed looked into the issue and found the concerns credible. He said then in the spring of 2008, he alerted U.S. financial regulators at the White House working group and British regulators responsible for enforcement.

GEITHNER: We took the initiative to brief the broader regulatory community, so they had the information even though it was in the press. And we pushed the British to resolve it. We did that very early. We did it very, very quickly.

YDSTIE: However, the head of the Bank of England, Mervyn King, has suggested Geithner did not tell him that the Libor was actually being manipulated. Texas Republican Congressman Jeb Hensarling wanted to know why the Fed had later decided to use Libor to set the terms of its takeover of AIG even after the Fed came to believe the Libor was rigged.

REPRESENTATIVE JEB HENSARLING: There are other interest rate indexes out there. How can a number that you know has been manipulated - how can that possibly be the best choice?

GEITHNER: Well, again, we were concerned about this.

HENSARLING: But you weren't obligated to use it. The New York Fed was not obligated to use Libor, yes or no?

GEITHNER: No. Of course not. But...

HENSARLING: OK.

GEITHNER: ...we had to make a basic choice among alternatives at that time, and I think that was the right choice back then.

YDSTIE: It wasn't lost on the top Democrat on the Committee, Barney Frank of Massachusetts, that most of the accusations of a lax response were coming from the Republicans on the panel.

REPRESENTATIVE BARNEY FRANK: We do want to remind people this all happened under the administration of President Bush, and the president's working group to which you reported was the President Bush's working group.

YDSTIE: The British Bankers Association has made modest changes in its administration of the Libor, which is set by surveying the borrowing costs of 18 major banks, including three U.S. banks. U.S. officials say the changes don't go far enough. The Federal Reserve is now examining alternatives to using Libor as a benchmark. John Ydstie, NPR News, Washington.

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