Nobody in their right mind would want to become part of the Libor rate-rigging scandal. But that's what's happening to Treasury Secretary Timothy Geithner.
In June 2008, Geithner, then the president of the Federal Reserve Bank of New York, sent a memo to British banking authorities in which he expressed concern over "the integrity and transparency" of the key interest rate, according to documents published by The New York Times and reported elsewhere. The Bank of England confirmed that Geithner offered the British central bank advice on Libor in 2008.
As it turns out, there was plenty of reason to be concerned. Barclays, one of the banks involved in setting the rate -- known as the London interbank offered rate, or Libor -- has admitted to cooking its numbers in order to manipulate the benchmark. At least a dozen other banks are now under investigation for allegedly doing the same thing.
Since Libor is used to calculate the interest rates for trillions of dollars' worth of financial instruments -- everything from student loans to mortgages to credit cards -- its "integrity and transparency" is a matter of no small significance.
That's why lawmakers are interested in findng out what Geithner knew about the possibility of behind-the-scenes manipulation of Libor, and why banking regulators didn't take more decisive action to address the problem sooner.
On Friday, the Federal Reserve Bank of New York released documents showing that on April 11, 2008 -- two months before Geithner sent his memo -- a Barclays employee told an analyst from the New York Fed's Markets Group that Barclays was indeed using false information to set the interest rate.
"We know that we're not posting, um, an honest LIBOR," the Barclays employee told the New York Fed's Fabiola Ravazzolo, according to a transcript of the phone conversation.
The Barclays employee explained to Ravazzolo that Barclays was misrepresenting itself in order to avoid looking weaker than other banks. That same day, according to the New York Fed, the Barclays employee's message was relayed to other members of the Markets Group, and a report raising concerns about the accuracy of Libor was circulated to authorities at the New York Fed, the Federal Reserve Board of Governors, and the U.S. Treasury.
Geithner will appear before the Senate Banking Committee and the House Financial Services Committee later this month, where he's expected to answer questions about what he and other regulators knew about Libor in 2007 and 2008.