Senators push Bernanke: Was Fed asleep in the LIBOR rate scandal?
Fed Chairman Ben Bernanke was questioned by senators Tuesday about the central bank's role in the LIBOR rate-setting scandal. He said the Fed had pushed for reform of the rate setting process in 2008 when it became concerned about manipulation of the influential benchmark.
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The Fed, including its regional branch in New York, is tasked with regulating banks for their "safety and soundness," Bernanke explained, but not with pursuing the kind of infractions at issue in the interest rate case. He said the Federal Reserve Bank of New York passed information along to authorities including the Justice Department and Commodity Futures Trading Commission.Skip to next paragraph
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Bernanke stressed that the New York Fed offered recommendations to British officials on how to improve the LIBOR process.
He outlined two paths forward: Taking steps to ensure greater credibility within the existing LIBOR system, or replacing it with another benchmark based on observed transactions in the marketplace.
The Fed Chairman told lawmakers that consumers such as mortgage borrowers may have benefited from LIBOR manipulation in 2008, because the misreporting took interest rates in a downward direction. But he said manipulating the rate is "unacceptable behavior."
In Barclays' case, some of the alleged manipulation dates as far back as 2005 and 2006, prior to the financial crisis. In one 2006 email, a Barclays trader told a Barclays LIBOR submitter, "Would really appreciate any help," after explaining that "we have an unbelievably large set on Monday.... We need a really low 3m [three-month] fix, it could potentially cost a fortune."
The LIBOR scandal has become the latest blow to public trust in the financial industry, which has taken numerous other hits since 2008.
The credibility of regulators is also at stake.
On Tuesday, Bernanke's counterpart in Britain also made a public appearance talking about LIBOR. Bank of England chief Mervyn King dismissed accusations of negligence on LIBOR. He said he only found out about the malpractice two weeks ago.
Testifying before members of Parliament, Mr. King was questioned about a 2008 email sent by Timothy Geithner, then president of the New York Fed, with recommendations to enhance LIBOR's credibility. King said the Fed did not raise any evidence of wrongdoing.
In emails released by the Bank of England, Geithner's proposals, dated May 27, 2008, included a section on how to eliminate the incentive to misreport banks' lending rates.
The Wall Street Journal, in an editorial Tuesday, argued along a similar line. Quoting a June 2008 communication from Mr. Geithner to King, the paper said the memo's tempered language belied current "Fed spin" that US regulators were pressing hard for LIBOR reform.
Last week, 12 Democratic Senators sent a letter to Attorney General Eric Holder, Mr. Geithner (now Treasury secretary), and members of the US Financial Stability Oversight Council, appealing for both reform and pursuit of wrongdoers.
"We urge you to help restore some of that confidence [in the financial system] by conducting prompt and thorough investigations, evaluating the facts, taking appropriate actions against any wrongdoers, and fixing this process so that breaches of confidence like this do not happen again," the letter said.
Material from wire services was used in this story.
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