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WASHINGTON — The House Financial Services Committee has opened a bipartisan examination of allegations that the London interbank offered rate was manipulated.
July 16 -
U.S. officials were told in April 2008 that banks were possibly underreporting their London interbank offered rate submissions, according to documents released on Friday by the Federal Reserve Bank of New York.
July 13 -
WASHINGTON — Twelve Democratic senators have called for a U.S. investigation into any role banks and regulators may have played in the scandal over the London Interbank Offered Rate.
July 12
WASHINGTON — Ben Bernanke had the back of the Federal Reserve Bank of New York on Tuesday.
Testifying before the Senate Banking Committee about the Libor scandal, the Federal Reserve Board chief said the New York Fed took the appropriate steps to inform the relevant authorities when it suspected traders of manipulating the important benchmark rate.
"The Federal Reserve Bank of New York, after receiving information from its market inquiries responded very quickly," Bernanke said. "It set up an internal working group to address the issue. Importantly, it informed all the relevant authorities in both the U.K. and the United States."
The New York Fed — which is responsible for gathering market intelligence for the entire Fed System — offered a list of possible fixes to structural problems with the London interbank offered rate, but British authorities adopted only a small part of them, Bernanke said.
Actions by the New York Fed, which was overseen by then-President Tim Geithner, set off a chain of events that led to a "rapid follow-up" by the responsible agencies, Bernanke said. Geithner has been the Treasury secretary since January 2009.
The Commodity Futures Trading Commission began inquiries as early as April 2008 and sent requests for information to U.S. banks in the fall of that same year. The Securities and Exchange Commission and the Justice Department began probes in 2009 and 2010, respectively, Bernanke said.
The Libor-related scandal at Barclays overshadowed monetary policy at the hearing Tuesday, where the chairman delivered his semiannual report to Congress.
Bernanke endorsed the need for reforms. "I would like to see additional reforms to the LIBOR process, assuming that LIBOR will continue to be a benchmark for financial contracts," Bernanke said.
Recent reports about traders' actions were "very troubling" and undermine the public's confidence in financial markets, Bernanke said. "It's a major problem for our financial system … and we need to address it," said Bernanke.
A Barclays trader told a junior Fed employee in a phone call on April 11, 2008, that he thought Barclays was underreporting its rate to avoid looking weak during the period of the financial crisis, Bernanke said. Transcripts of the phone calls, released Friday at the behest of lawmakers, made no reference to the manipulation of rates for profits by derivatives traders as had been alleged recently, he said.
Complicating matters even further, he said, was the fact that there were fewer of most types of transactions during the height of the crisis other than overnight ones. Banks were being asked to report what they would pay if they were borrowing at a certain term, and it may have been the case that transactions were not taking place at the term.
Still, he said, recent events made clear that the "Libor system is structurally flawed."
Bernanke briefly discussed several alternatives that are currently being looked into, like repo rates or the overnight index swap rate or other types of interest rates, which have the advantage that they are market rates as opposed to simply reported rates as is the case with Libor.
It is still unclear whether U.S. banks were guilty of the same manipulation, Bernanke said. The ongoing investigation by U.S. regulators is "robust,"he said.
Two U.S. banks have already disclosed in filings with the SEC that they are providing information to the agencies investigating the matter.
Democrats and Republicans complained that it was unacceptable that no action was taken when the problem first surfaced in 2008.
"It's underway four years later," Sen. David Vitter, R-La., said. "Neither the New York Fed nor other regulators did a sufficient investigation [in 2008] so that we could know one way or the other … that the U.S. banks didn't do the same thing. Am I missing something?"
Others echoed similar concerns.
"Did it not occur to somebody to bring the financial institutions together and say, 'Hey, you probably ought to consider a different way of establishing your floating rate re-sets because there's this integrity problem'?" Sen. Patrick Toomey, R-Pa., asked.
The Fed lacked the authority to do so, Bernanke said — a defense that lawmakers were not willing to accept.
"You have enormous influence over the institutions engaging in this," Rep. Toomey said.
Other lawmakers, such as Sen. Bob Menendez, D-N.J., pressed Bernanke on what regulators would do to restore confidence.
"It has to be an international effort," said Bernanke, offering two strategies to fix Libor.
One would be to increase the transparency, reduce the ability of individual banks or traders to affect the overall Libor and increase monitoring of the reporting system. The second strategy would be to switch over from a reported rate to one of the observable market rates as the index.
Still, an overhaul will be hard, he said, because Libor is "deeply ingrained in many contracts."
