US Treasury Secretary Timothy Geithner pressed the Bank of England in June 2008 to make changes in the way that LIBOR, a key interest rate benchmark, was set, according to documents obtained by media outlets.
Geithner, who was the head of the New York Federal Reserve Bank at the time, sent a private e-mail to Bank of England Governor Mervyn King recommending six ways to enhance the credibility of the London interbank offered rate.
More than a dozen banks are under investigation by authorities in Europe, Japan and the US over suspected rigging of the global borrowing cost benchmark, which is used in contracts worth trillions of US dollars globally.
The June 1, 2008, e-mail, first reported by the Washington Post, included a two-page memo dated May 27 of that year that suggested establishing best practices for calculating LIBOR, “including procedures designed to prevent accidental or deliberate misreporting.”
It recommended that the British Bankers’ Association require auditors for banks reporting their borrowing costs for the calculation of LIBOR to attest to the accuracy of their rates.
London-based Barclays is the only bank so far to admit any wrongdoing in giving false information in setting LIBOR, in order to influence the pricing of derivatives and also to rebut speculation about the weakness of its balance sheet.
Barclays agreed to pay fines of US$453 million in a settlement with US and British officials. LIBOR is used for US$550 trillion of interest rate derivatives contracts, and influences rates from mortgages to student loans to credit cards.
The scandal so far has been mostly confined to London, with public outcry that regulation in the UK was lax. However, concern has grown about the impact on consumers and the involvement of US regulators.
A group of Democratic senators on Thursday pushed for the US Justice Department and financial regulators to step up investigations into whether global banks manipulated the interest rate benchmark. US state attorneys general are also jumping into the widening scandal, a move that could open a new front against the top global banks. The New York Fed was due to release documents yesterday that it has said will show it took “prompt action” four years ago to highlight problems with LIBOR.
In his e-mail, Geithner suggested one way to “eliminate [the] incentive to misreport” would be to randomly select a subset of 16 reporting banks and calculate an average after discarding the highest and lowest values, without identifying which banks may have had unusually high or low borrowing costs.
During the 2007 to 2009 financial crisis, the borrowing costs of many banks soared as counterparties worried about their health. Some banks may not have wanted their high borrowing costs to become public out of fear it may have fueled concern about their viability.