The flames of the Libor scandal have been creeping up under the feet of Treasury Secretary Timothy Geithner. Evidence showed that the New York Fed found out about the rate-rigging from Barclays and other banks in 2007, when Geithner was still the bank President. This appeared to display regulatory impotence in the face of massive fraud. Geithner had to respond. And he did with a classic version of CYA.
Timothy Geithner in 2008 sent a private memo to Bank of England Governor Mervyn King calling for six changes that he said would improve the credibility and integrity of the London interbank offered rate, a key interest rate that is now at the center of a international banking scandal, according to documents reviewed by the Wall Street Journal.
At the time the memo was sent, Mr. Geithner was president of the Federal Reserve Bank of New York and the financial industry was about to enter one of the darkest periods of the financial crisis. Mr. Geithner is now U.S. Treasury secretary. As Mr. Geithner sent the memo to London, U.S. regulators also began conferring about concerns related to possible distortions of Libor and what the impact might be, people familiar with the matter said.
Geithner passed the documents around to anyone who wanted them last night. If there can be something less than the bare minimum, a two-page document to the Bank of England – not the banks implicated in the rate-rigging over which the NY Fed has control, but some other regulator – would be it. He didn’t speak out publicly, he didn’t use his regulatory power over the banks he had authority and in defense of the stateside financial products calculated using the Libor benchmark rate, he just wrote a memo.
The memo says that the Bank of England should “eliminate the incentive to misreport” Libor on the part of the banks. So there’s no doubt in the minds of the regulators that there was misreporting going on.
Geithner suggested that the British Banker’s Association, which sets the Libor, increase the number of banks submitting their interest rates, and randomly select a subset of the interest rate numbers it received from banks, so that no bank would know if the number they submitted would make it into the calculation. This isn’t a bad idea, but here’s the thing; nobody carried it out. Geithner knew of wrongdoing and sent his memo, and didn’t get anything in the way of follow-up. And how did he respond to THAT? With nothing.
The memo is expected to be released today along with a series of other documents showing the NY Fed’s involvement with the scandal. This could include transcripts of conversations between NY Fed officials and Barclays.
Senate Democrats charged ahead on the scandal yesterday, asking the Justice Department for a full civil and criminal investigation into banks that fixed the Libor. Of course, Barclays cooperated with DoJ and paid the $450 million fine that put the scandal into the spotlight, and there are credible reports that the investigation is ongoing. But in particular, the Senate Dems, led by Carl Levin and Jack Reed, wanted DoJ to investigate “allegations that U.S. and foreign bank regulators may have been aware of this wrongdoing for years.”
That’s where Geithner’s 2-page memo comes in.