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Senate Committee Looking Into Banks Role In Libor Scandal

Subrina Hudson |
July 10, 2012 | 3:32 p.m. PDT

Executive Producer

Former President of Barclays Robert Diamond resigned over allegations of manipulating interest rates. (World Economic Forum/Flickr)
Former President of Barclays Robert Diamond resigned over allegations of manipulating interest rates. (World Economic Forum/Flickr)
The tentacles of the Libor scandal is making its way into the U.S. as Federal Reserve Chairman Ben Bernanke and U.S. Treasury Secretary Timothy Geithner are expected to face questioning from the Senate Banking Committee.

Tim Johnson, committee chairman, said in a statement to Bloomberg that he will question Geithner and Bernanke at regularly scheduled hearings this month. He did not mention any plans to hold a separate hearing on Libor.

“I am concerned by the growing allegations of widespread manipulation of Libor and similar interbank rates by some financial firms,” said Johnson. “At my direction the committee staff has begun to schedule bipartisan briefings with relevant parties to learn more about these allegations and related enforcement actions.”

Johnson is not alone in seeking to find out the details of the Libor scandal, which led to the resignation of Barclays Plc Chief Executive Officer Robert Diamond last week after it was fined $450 million for attempting to manipulate interest rates to deflect concerns about its health and boost profits.

On Monday, Representative Randy Neugebauer, a Texas Republican who serves on the House Financial Services committee, sent a letter to William Dudley, president of the Federal Reserve Bank of New York, requesting transcripts of any “communications with Barclays regarding the setting of interbank offered rates from August 2007 to November 2008.” According to Reuters, the deadline for Dudley to submit the transcripts is July 13.

Neugebaur said there have been reports indicating that while Barclays “raised concerns multiple times” over how Libor was set with American and British authorities they were never told to stop the practice.

According to The New York Times:

The Barclays settlement is the first actions stemming from a broad investigation into how banks set key benchmarks, including the London interbank offered rate, or Libor. The pricing of $350 trillion of financial products, including credit cards, mortgages and student loans, is pegged to Libor and other such rates.

Authorities around the world are now considering actions against more than 10 big banks, including UBS, JPMorgan and Citigroup. The banks also face a raft of civil litigation from municipalities, investors and other financial firms that claim they lost money from misreporting of rates. These lawsuits could end up costing the banking industry tens of billions of dollars, according to analysts.

Looking into the role of the Federal Reserve Bank of New York, raises questions about whether authorities took enough action to address any concerns they had over the way Libor rates were set. Reuters reports that the district bank may have known about the flawed setting of global benchmark interest rates as early as August 2007.

“In the context of our market monitoring following the onset of the financial crisis in late 2007, involving thousands of calls and emails with market participants over a period of many months, we received occasional anecdotal reports from Barclays of problems with Libor," said New York spokeswoman Andrea Priest to Bloomberg.

Following the rescue of Bear Stearns Cos. in March 2008, “we made further inquiry of Barclays as to how Libor submissions were being conducted. We subsequently shared our analysis and suggestions for reform of Libor with the relevant authorities in the U.K.”

Andrew Verstein, an associate research scholar at Yale University, who has written about Libor, told Reuters that the New York Fed had clearly reviewed the situation and had enough resources to investigate any claims.

Many of the requests for improper Libor submissions came from New York traders, according to Reuters.

As one of the world's most powerful regulators, the New York Fed has the power to "jawbone" banks to force them to make tough decisions, said Oliver Ireland, former associate general counsel at the Federal Reserve in Washington and now a lawyer at Washington law firm Morrison & Foerster.

Still, he said by the autumn of 2008, the New York Fed's focus was locked on the impact of the meltdown of Lehman Brothers and AIG as it sought to prevent a global economic disaster.

Barclays said in documents released last Tuesday that it first contacted Fed officials to discuss Libor on August 28, 2007, at a time when credit problems arising from the U.S. housing bust were beginning to mount. It communicated with the Fed twice that day.

Between then and October 2008, it communicated another 10 times with the U.S. central bank about Libor submissions, including Libor-related problems during the financial crisis, according to the documents.

Barclays' U.S. operations would have come under the Fed’s range of authority, especially after the company acquired the investment banking and trading operations of the bankrupt Lehman Brothers in September 2008.

The Libor scandal has raised questions over the role of bank regulators and shown that no single regulator had the responsibility of making sure rates submitted by banks were honest.

Stanford University Finance Professor Darrell Duffie told Reuters that the regulators were “on the case reasonably quickly” when concerns were raised in 2008 but it took the U.S. and UK a long time to act on the misbehavior.

 

For more of Neon Tommy's coverage on the Libor scandal, click here.

Reach Executive Producer Subrina Hudson here and follow her on Twitter here.



 

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