Bernanke, Geithner response to Libor scandal rings hollow

WASHINGTON: Ben Bernanke heads the most powerful central bank in the
world. Yet the Federal Reserve chairman says he was largely powerless
to stop what some are calling the biggest financial fraud in history:
the systematic manipulation of a key global interest rate.
It's
a line of argument that has fallen flat with some lawmakers and
investors, who want to know why Bernanke and other key U.S. regulators
did not do more to end a potentially criminal rigging of interest rates
affecting trillions of dollars in financial contracts.
Bernanke
said last week he had been largely unable to directly address problems
with Libor, or the London interbank offered rate, which he said he
learned of in 2008.
"We are and need to continue advocating for
reforms to the Libor process. It is constructed by a private
organization in the UK, and so our direct ability to influence that is
limited," Bernanke said in congressional testimony.
Timothy Geithner,
who oversaw Wall Street as president of the New York Fed for five years
before he became Treasury Secretary in 2009, has delivered much the
same message.
He told lawmakers this week that he informed regulators "early on" about the problems and made recommendations to the Bank of England on how to reform the system.
"Seriously? They did all that they could do? I mean, come on," said Alan De Rose, managing director of government and trading finance at Oppenheimer in New York.
"Answers
like those, they strain credibility," said De Rose, formerly a trader
at a U.S. primary dealer, the selected large banks that do business
directly with the Fed.
Legislators are similarly skeptical, at a
time when the Fed is already taking heat in Congress for its regulatory
failings that contributed to the financial crisis.
Republican
Congressman Scott Garrett took aim at Geithner at a hearing of the
House of Representatives' Financial Services Committee on Wednesday.
"You
have been before this committee countless numbers of times since 2008
and if this is the crime of the century, as so many people are
reporting today, never once did you ever once come and mention it as
being a problem, never once did you come here and say this is what
you're going to do about it," he said.
The revelations about
Libor have further dented public confidence in the financial industry,
which has been battered by a string of crises that led to unpopular
taxpayer bailouts in many advanced economies. It is also another blow
to the standing of regulators who have been widely accused of being
asleep at the switch in the run-up to the financial crisis of 2008-2009.
Geithner
told lawmakers this week he contacted the appropriate regulatory
authorities, including the Bank of England, quickly after being
informed that there were suspicions about the veracity of rates being
reported by banks.
"We, at least I, first learned about those
concerns in the early parts of spring of 2008 and we acted very quickly
at that stage," Geithner said. "We took a very careful look at these
concerns, we thought those concerns were justified."
The Federal Reserve Board, the New York Fed and the Treasury all declined to comment for this article.
Policymakers had a lot on their plate in 2008 as the global financial system was at risk of melting down.
JAY-WALKING OR HIGHWAY ROBBERY?
As
well as wondering why U.S. regulators failed to follow up with the
British authorities after no immediate corrective steps were taken,
lawmakers noted the Fed itself continued to use Libor as a benchmark in
its emergency lending programs, including the controversial bailout of
failed insurer AIG.
"It appears that the early response was to
keep using it, which means it appears that you treated it as almost a
curiosity or something akin to jay-walking instead of highway robbery,"
Republican Congressman Jeb Hensarling told Geithner this week.
Robert
Shapiro, a former undersecretary of the U.S. Commerce Department who
now runs Sonecon, an advisory firm in Washington, says the scandal is
vast and will continue to grow.
"Barclays is not some lone, bad apple. This could well turn into the largest consumer fraud ever seen," Shapiro said.
Barclays
last month admitted to giving false information as part of setting the
interest rate in a record $453 million settlement with U.S. and UK
authorities.
Dozens of big banks, including JPMorgan Chase & Co, are under investigation. An internal probe at Deutsche Bank
found two former traders may have been involved in colluding to
manipulate global benchmark interest rates but suggested top managers
were unaware of the fraud.
Things could get more embarrassing
for U.S. regulators. The House Financial Services Committee has asked
the New York Fed for all communications going back to August 2007 with
the banks that helped set Libor.
The first trove of documents
from the New York Fed showed Barclays had flagged concerns as early as
2007 and Geithner sent the email to Bank of England governor Mervyn King in June 2008 with the Libor recommendations.
Still,
analysts do not see immediate repercussions for Bernanke and Geithner
other than the risk of an additional loss of public confidence.
Dean
Baker, co-director of the Center for Economic and Policy Research, a
liberal think tank in Washington, says the comments from Bernanke
stretch credulity, particularly after the Fed fought hard to keep
regulatory power over banks in post-financial crisis reforms.
"He
is insulting his audience to say there was nothing they could do,"
Baker said. "That is complete nonsense. If he had called up King and
said that he has to fix the Libor, and if he doesn't this all goes
public, then King would have no choice."
"I think this is a case
of the central bankers being a good old boys club and that would be
considered rude behavior. Rather than break the rules of the club,
Bernanke allowed this fraud to continue, violating his responsibilities
as Fed chair."
The apparently mild nature of Geithner's warnings
about Libor to the Bank of England allowed King to claim he was never
informed of accusations of fraud at all, critics say.
Simon Johnson, a former chief economist at the International Monetary Fund, lambasted the Fed.
"The
Federal Reserve is responsible for the 'safety and soundness' of the
financial system in the United States," said Johnson, now a professor
at the MIT Sloan School of Management.
"Does allowing suspicions
of fraud to continue unchecked at the heart of this system help to
sustain the credibility and legitimacy of markets? Surely not." -
Reuters