The Treasury Department's bailout watchdog wants to stop using the flawed Libor rate in setting the terms of bank bailouts.
Too bad she wasn't around four years ago when the bailouts began.
“We can’t continue to use for TARP a measure in which there’s no confidence or assurance that it’s reliable, which could potentially be subject to manipulation,” Christy Romero, special inspector general for the Troubled Asset Relief Program, told Bloomberg.
Libor, or the London Interbank Offered Rate, is an interest rate that affects borrowing costs throughout the economy, from floating-rate mortgages to more than $350 trilion in derivatives contracts. As the benchmark for global lending, Libor might have seemed a natural choice for setting the terms of the government's bailouts of banks and American International Group during the crisis. Borrowers all over the world routinely use Libor. The government used it as the base interest rate -- or in the case of AIG, ultimately, the only interest rate at which bailed-out banks and AIG had to pay back their loans.
Treasury Secretary Tim Geithner, who helped set the terms of those bailouts, has said the Treasury Department and Federal Reserve had no choice but to use Libor in the myriad lending programs that propped up the financial sector.
Romero directly contradicted that assertion in her interview with Bloomberg, saying that replacing Libor is "easy to do because there are alternative interest rates in the contracts" for the TARP programs still in operation. There were also plenty of other rates available that the government could have used, including the federal funds rate set by the Federal Reserve (also manipulated, but legally).
Bloomberg published its Sept. 21 interview with Romero on Tuesday, the same day the British Bankers Association announced its desire to disown Libor, after having overseen the rate, poorly, since its inception. A day earlier, Gary Gensler, head of the Commodity Futures Trading Commission, told European Parliament that Libor needed to be taken out to a field and put down.
The problem with using Libor for bailouts during the crisis was that it was completely fake -- even more fake than usual -- and Geithner knew it, or should have at least.
Libor is set every day by a group of 16 banks, which all report the rates they have to pay to borrow from each other. During the crisis, they weren't lending to each other, so that created a bit of a problem right there. And banks certainly didn't want to confess what they really thought they'd have to pay to borrow in the market: Doing so would have crippled investor confidence in them. And so they all reported lower borrowing costs than they should have, making Libor a fraud.
Even before the crisis, Libor was at constant risk of manipulation by traders trying to push it around to help out their derivatives trades. Barclays Capital was the first to confess to such shenanigans, and it seems Royal Bank of Scotland is not far behind, according to a separate Bloomberg report on Monday.
Despite having knowledge of Libor's flaws by the time of the crisis, Geithner allowed Libor to be used in loans to banks under the Term Asset-Backed Securities Loan Facility, or TALF, and to American International Group, rubber-stamping Libor's legitimacy and potentially costing taxpayers millions, if not billions, of dollars.
AIG, for example, managed to get its initially painful bailout terms renegotiated in March 2009, when Geithner was Treasury Secretary, to a loan whose only interest rate was Libor. How much money did that save AIG and cost the taxpayer? Of course, the taxpayer also owned a lot of AIG stock, so you could argue the taxpayer won out in the deal one way or the other.
In any event, now that most of the harm has been done, Romero wants to finally shake Libor out of what's left of the government's bailout programs, including TALF and the Treasury's Public-Private Investment Program.
She has asked that Fed and Treasury to make it happen, and they have said they'll get right back to her on it.
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The UK bank has been at the centre of a very public storm since U.S. and British authorities fined it more than $450 million last month for its part in manipulating Libor. The ensuing backlash cost chief executive Bob Diamond and chairman Marcus Agius their jobs. The pair have appeared before a parliamentary committee to testify about what went on at the bank, in a scandal which has drawn in British central bankers and government ministers.
BANK OF AMERICA
Bank of America is among the banks being investigated, a person familiar with the matter told Reuters last year. The bank did not comment in its 2011 annual report. It is one of 11 banks accused of conspiring to manipulate Libor in two lawsuits filed by discount brokerage and money manager Charles Schwab.
The Swiss Competition Commission said in February that Bank of Tokyo-Mitsubishi UFJ was among those it was investigating on suspicion of conspiring to manipulate rates. The Japanese bank did not comment on any probes in its 2011 annual report. This month, the group suspended two London-based traders as a result of a probe into manipulating interbank lending rates, but the bank said that was not to do with their conduct at BTMU. They had previously worked at Dutch lender Rabobank.
Citigroup said its subsidiaries had received requests for information and documents as part of investigations in various jurisdictions. The U.S. bank said it was cooperating. The bank is also subject to a number of private lawsuits filed in the U.S. against banks that served on the Libor panel. In December, Japan's financial regulator said it would penalise the Japan securities units of Citigroup and UBS after finding that an individual who worked at UBS and then moved to Citi had, along with his boss at Citi, attempted to influence the Tokyo interbank offered rate (Tibor).
Credit Suisse is one of 12 banks being investigated by the Swiss Competition Commission about alleged collusive behaviour among traders to influence the bid ask spread for derivatives tied to Libor and Tibor as well as the rates themselves. Credit Suisse said it was cooperating fully.
The German bank said it was cooperating with investigations in the United States and Europe in connection with setting rates between 2005 and 2011. It has had civil actions filed against it in the United States related to the setting of Libor. Germany's market regulator has launched a probe into the bank over suspected manipulation of interbank lending rates, sources have said. Results are expected in mid-July. German magazine Der Spiegel reported, citing no sources, that two Deutsche Bank employees have been suspended after external auditors examined whether staff were involved in manipulating rates.
Lloyds said it was cooperating with investigations. It has also been named in private lawsuits in the U.S. related to the setting of Libor. It said it 2011 annual report that it could not predict the ultimate outcome of investigations or lawsuits. In May, the bank said two derivatives traders had been suspended following an investigation into possible interest rate manipulation.
HSBC has said it received demands from regulators for information in connection with Libor investigations and it was cooperating. It has also been named in lawsuits related to Libor in the United States. HSBC said in its 2011 annual report that it could not predict the outcome of the investigations and lawsuits.
The bank, now a subsidiary of Lloyds, said it was cooperating with investigations. It has also been named in private U.S. lawsuits related to the setting of Libor. HBOS said it in its 2011 annual report it was not possible to predict the scope, outcome or impact of the investigations and lawsuits.
JPMorgan said it was cooperating with regulators and government bodies investigating the setting of Libor, Euribor and Tibor rates, mainly in 2007 and 2008. It has also been named as a defendant in private U.S. lawsuits over Libor.
Rabobank said it was cooperating with investigations into possible manipulation of Libor rates. It has also been named as a defendant in a number of civil lawsuits in the United States. Rabobank said it was confident the claims would be held unfounded and was conducting its defence as such.
Canada's largest bank did not make any comment in its 2011 annual report on its involvement in regulatory probes into possible manipulation of interbank lending rates.
Royal Bank of Scotland said it was cooperating with investigators, who had requested information. RBS said members of its group had been named as defendants in a number of lawsuits in the United States. The bank said it had substantial defences to these claims. Following a newspaper report last month that it faced a 150 million pound fine, RBS said there could not be any certainty as to the timing or amount of any fine or settlement.
The Swiss bank said it had been granted leniency or immunity from potential violations by some authorities, including the U.S. Justice Department and Swiss Competition Commission, in return for its cooperation in the Libor manipulation probe. It did not specify what information it was providing. In December, Japan's financial regulator said it would penalise the Japan securities units of Citigroup and UBS after finding that an individual who worked at UBS and then moved to Citi had attempted to influence Tibor. It has also been the subject of U.S. lawsuits.
The German bank was among those being investigated, a person familiar with the matter told Reuters in March last year. The bank made no mention of the probes in its 2011 annual report. In July last year it was dropped, at its request, from the panel of banks contributing to daily fixings of Libor for U.S. dollars.
The Japanese bank did not mention the investigations into possible Libor manipulation in its 2011 annual report. In April last year it was one of 12 banks sued by Vienna-based asset manager FTC Capital, accused of conspiring to manipulate Libor.