Friday, July 20, 2012

Left Side of the Aisle #66 - Part 1

Tim Geithner and LIBOR

The LIBOR scandal, which so far has been largely confined to the UK, could jump across the pond and right into the lap of Treasury Secretary Tim Geithner.

As I explained last week LIBOR is in effect the interest rate at which the biggest banks can get short-term loans from each other. It's importance is that many other interest rates are pegged to it. It directly affects some $10 trillion in economic activity and indirectly affects as much as $800 trillion, right down to things like home mortgages and student loans. And there is clear evidence that those banks have been manipulating the rate to their own advantage. One - Barclays - has already reached a settlement of over $500 million and several other major banks both here and abroad are being investigated in several countries.

Between 2003 and when he joined the Obama administration in 2009, Tim Geithner was director of the New York Federal Reserve Bank, usually just called the New York Fed. It is regarded as the most powerful of the regional banks that make up the Federal Reserve system. There have been increasing questions about what the Fed knew or didn't know, did or didn't do, in relation to LIBOR during the time Geithner was in charge of the New York Fed.

Under pressure, the New York Fed released a bunch of documents related to those questions. They show that more than four years ago, in December 2007, a time - again - when Geithner was in charge there, Barclays bank told the New York Fed that, in general, LIBOR submissions appeared unrealistically low. A few months later, in April 2008, a New York Fed analyst asked a Barclays employee in detail about the extent of problems with LIBOR. “We just fit in with the rest of the crowd if you like,” the bank’s staffer said. “We know that we’re not posting an honest LIBOR. And yet we are doing it, because if we didn’t do it, It draws unwanted attention on ourselves."

The response of the New York Fed representative to this confession of lying and assertion of lying on the part of all the others? Sympathy and understanding:

"You have to accept it," the representative of the New York Fed says. "I understand. Despite it’s against what you would like to do. I understand completely."

It's hey, y'know, ya gotta do what ya gotta do for your own short-term interests and the rest of world will just have to suck it up and deal with it.

According to the Fed's documents, in the first part of 2008 a summary of this admission circulated through the US government, including the Federal Reserve and the Treasury Department. As a result, on June 1 of that year, Geithner sent a memo to the governor of the Bank of England, one Mervyn King, suggesting six reforms of LIBOR. King responded that Geithner’s recommendations “seem sensible” and passed them on to the British Bankers’ Association, which actually gathers the data on which LIBOR is based and does the daily calculation.

But here's the thing: While the Fed claims it continued to follow developments in LIBOR after that time, it offers little documentation of that interest, beyond a handful of phone calls. There is no evidence that Geithner's recommendations were acted on - in fact, they never were - or that the Fed pushed for their adoption. Which is why, in late October 2008, months after Geithner's memo to King, a Barclays employee could tell a New York Fed representative that LIBOR rates were still "absolute rubbish."

And here's the big thing: Mervyn King, addressing Parliament on July 17, said he had not been sent any of the evidence of misreporting that the Fed had gathered. “The New York Fed did not raise any evidence of wrongdoing with regards to LIBOR,” he said. Which could be discounted as self-serving - he is, after all, a banker - except for the fact that there is no evidence either in Geithner's memo or anywhere else that the Fed or anyone else in the US government told British regulators that they had evidence of deliberate manipulation of LIBOR. They wrote up their little memo - and then they dropped it.

And what is their defense? Federal Reserve Chairman Ben Bernanke told the senate Banking Committee on Tuesday that the central bank did all it was required to do. To put that more clearly, in the face of a confession that a major international interest rate benchmark was being manipulated, they did the minimum required by law - more precisely, they did as little as possible.

So what's going to come of all this? I think here, in the US, almost nothing. Maybe some fines, maybe a resignation or two, but no real change. Here's why: The O gang is not going to go after this because to do so would mean going after their own guy, Geithner, And while you think the GOPpers would pounce on this, what with Geithner being Obama's Treasury Secretary and all, but I expect they won't - because you have to remember that Geithner's wrongdoing was in ignoring the wrongdoing of others. So to really go after Geithner, they would have to go after the banks. And that I just don't see them doing.


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