Watchdog: Scrap Libor for bailout programs

The two programs in question are the Public-Private Investment Program (PPIP), under which the Treasury helps support the mortgage-backed securities market, and the Term Asset-Backed Securities Loan Facility (TALF), in which the Fed supports asset-backed securities including those backed by student loans, auto loans and credit card loans. The latter program does not employ taxpayer dollars, but the Fed does turn over any excess funds it has each year to the Treasury.

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.