NY Fed, Geithner, aware of rate-fixing problem in 2008

By Peter Schroeder - 07/13/12 12:40 PM ET

The Federal Reserve Bank of New York revealed to congressional investigators Friday that it was aware of potential manipulation of a key interest rate back as early as 2007.

A slew of documents released by the bank indicate that its officials knew of potential rate-fixing at the height of the financial crisis. Among those aware of the problem was Treasury Secretary Timothy Geithner, who was then its president.

Scrutiny over the London Interbank Offered Rate (Libor) climbed to new highs in recent weeks, after British bank Barclay's reached a settlement totaling half a billion dollars with regulators over long-running charges it sought to manipulate the rate to boost the firm's reputation. Several top executives, including former chief executive Robert Diamond, resigned following the scandal.

The interest rate, determined by collecting reports of interbank lending rates from some of the world's largest banks, has also attracted U.S. interest because it serves as a key benchmark for a slew of financial products, including mortgages, credit cards, and student loans. Lawmakers also want to learn more about what Geithner knew of the rate-fixing years ago.

According to a transcript provided by the New York Fed, an unidentified Barclays employee told a Fed official in April 2008 that the bank was effectively being forced to report a false lower borrowing rate because other banks were doing so as worries about the financial system grew. The employee said Barclays originally was reporting authentic borrowing numbers, but ended up looking weaker than other banks that were low-balling their figures.

"I'm going to be really frank and honest with you," the employee said. "We went through a period where ... we were putting in where we really thought we would be able to borrow ... and it was ... above where everyone else was publishing rates.

"Next thing we knew, there was, um, an article in the Financial Times, charting our Libor contributions and comparing it with other banks and inferring that this meant that we had a problem raising cash ... our share price went down," the employee added. "We know that we're not posting, um, an honest Libor."

The New York Fed said that the analyst on that call immediately notified top officials, and Geithner raised the issue with federal regulators at a May 1 meeting.

The bank also released an email Geithner sent that same day to the Bank of England that made a number of recommendations for how to improve the integrity of Libor.

"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.

The New York Fed handed over the documents following a request by Rep. Randy Neugebauer (R-Texas), who heads the House Financial Services Oversight subcommittee. Neugebauer said Friday he would decide how to proceed with the investigation after the staff has had a chance to review the documents.

“As much as $800 trillion in financial products are pegged to Libor, so any manipulation of this rate is of serious concern," he said. "We’ll continue looking into this matter to determine who was involved in this practice and whether it could have been prevented by regulators.”

Both Neugebauer's panel and the Senate Banking Committee are exploring the matter, and both Geithner and Fed Chairman Ben Bernanke are expected to face questions on the topic during congressional testimony later this month.