Treasury Secretary Tim Geithner testified on Capitol Hill Wednesday and was challenged by lawmakers about his knowledge of the LIBOR-rigging scandal that has embroiled more than a dozen banks here and abroad.
LIBOR stands for the London interbank offered rate and it affects trillions of dollars worth of financial contracts, including mortgages, student loans and credit card rates. LIBOR is published daily and is the average interest rate 16 big banks pay on short-term loans.
LIBOR is the latest scandal to breach investors' trust in the global financial system. British bank Barclays admitted in July that its traders manipulated the benchmark interest rate. The LIBOR scandal forced the resignation of Barclays CEO Robert Diamond and the London-based bank agreed to pay $453 million in fines to settle charges.
The LIBOR scandal shocked global markets this summer but red flags about the rate-rigging were raised as early as 2007 when a whistleblower at Barclays alerted regulators that the bank was lying about its interest rate.
Geithner, who was then-president of the New York Federal Reserve, reportedly offered the Bank of England recommendations on how to revamp LIBOR including how to "establish and publish best practices for calculating and reporting rates, including procedures designed to prevent accidental or deliberate misreporting," according to Bloomberg.
The NY Fed "took the initiative to bring those concerns to the attention of the broader U.S. regulatory community," Geithner told Congress on Wednesday. "I believe we did the necessary and appropriate thing very early in the process."
While Geithner pushed for broader reforms of LIBOR, he did not notify regulators at the Department of Justice, the Commodity Futures Trading Commission and Securities and Exchange Commission to the wrongdoing.
Neil Barofsky, the former inspector general in charge of oversight at TARP and author of the new book "Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street," says Geithner's comments on LIBOR aren't credible and argues that his inaction was an implicit approval of what banks were doing.
The message to the banks was "if we commit fraud, we break the rules, don't worry, we're too big — they'll never bring the appropriate steps against us," Barofsky says in an interview with The Daily Ticker. "And that is why we've had scandal after scandal after scandal."
This was a "global conspiracy to fix one of the most important interest rates in the world," Barofsky continues. "[Geithner] heard this information and looked the other way. Geithner and other regulators should be held accountable, they should be fired across the board. If they knew about an ongoing fraud, and they didn't do anything about it, they don't deserve to have their jobs. I hope we see people in handcuffs."
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