|
 |
 |
|
Watchdog: Scrap Libor for bailout programs
The government's official bailout watchdog is calling on the Treasury Department and Federal Reserve to abandon a widely used benchmark interest rate as the basis for a pair of bailout programs, citing widespread concern over its accuracy.
In a new report released Thursday, the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) said the government is risking taxpayer funds by continuing to use the London interbank offered rate (Libor) as part of bailout programs. Rather, it called on the agencies to use their "considerable leverage" to rework contracts under the program to replace the rate.
Libor, used widely across financial markets, has come under harsh scrutiny in recent months, after the British bank Barclays paid nearly half a billion dollars to settle charges with regulators that it conspired to rig the rate, which serves as a benchmark for a wide range of consumer lending. A number of top executives resigned from the bank in the wake of the scandal, and questions about the rate have been raised at a range of congressional hearings since then. Regulators in the U.S. and Britain have called for the rate to be overhauled or abandoned as a benchmark, saying the controversy undermines confidence in financial markets.
In its quarterly report, SIGTARP contended that the rate has become compromised and should no longer be used as a benchmark for bailout programs.
"The time for Treasury and the Federal Reserve to act is now, rather than wait for global Libor reform," the report stated.
There is $5.685 billion in outstanding PPIP debt tied to Libor, and that program could last until 2017. There is $598.6 million outstanding in TALF loans, which could remain until 2015.
The Fed declined to rework its remaining TALF contracts to remove Libor, telling SIGTARP that only half of the loans under the program were based on Libor, and 98 percent of those loans had been repaid. The Treasury also declined to make the recommended changes, saying it would need evidence that Libor currently is inaccurate, adding that it would be difficult to implement such changes at this point.
In a response letter, Tim Massad, the Treasury's assistant secretary for financial stability, said the Treasury supported a comprehensive review of Libor, but did not agree it was the time to make a change. He contended the Treasury did not have sufficient evidence to ditch Libor for PPIP, pointing out that the regulatory actions taken against Barclays were for conduct before the financial crisis and TARP came into being.
He also pointed out that institutions implementing PPIP have spent years developing a strategy that takes Libor into consideration. Ditching it at this point could do more harm than good to taxpayers, he said.
"Abruptly altering the benchmark index at this time could have significant adverse consequences," he warned.
SIGTARP was unconvinced by these arguments, contending that there are sufficient questions about the rate for the regulators to abandon it, and that they should lead the push to remove the rate.
"For Treasury and the Federal Reserve to cling to the status quo of keeping in TARP a rate that is broken, unreliable and subject to manipulation is contrary to TARP’s historical goal of using unprecedented solutions to promote confidence in the financial system," the report stated.
SIGTARP also used the report to press for regulators to identify the insurance company American International Group (AIG) as "systemically significant," which would subject it to heightened oversight and regulation. Such a designation is a new power granted by the Dodd-Frank financial reform law, and AIG disclosed earlier this month that the government was taking steps to identify it as such. SIGTARP also called on the Treasury to take into account the financial stability of banks when it decides to auction off its holdings in those institutions.
This post updated at 6:55 a.m.
Most Viewed RSS Feed »
