Treasury Secretary Timothy Geithner at Capitol Hill in Washington. In June 2008, Geithner sent a memo to Bank of England Governor Mervyn King on Libor rate rigging. Image Credit: AP

New York/Washington: The Federal Reserve Bank of New York is drawing more scrutiny from lawmakers critical of its record as a bank supervisor after releasing documents showing it was aware Barclays Plc underreported London interbank offered rates (Libor) in 2008.

The New York Fed knew “some banks” were potentially understating submissions for Libor as early as 2007, according to a statement posted on its website yesterday. A Barclays employee told a New York Fed staff member in April 2008 that the UK’s second largest lender was underreporting its rate to avoid a “stigma”, the Fed bank said.

In June 2008, then-New York Fed President Timothy F. Geithner sent a memo to Bank of England Governor Mervyn King, recommending changes to the way rates are calculated on Libor, the global benchmark for $360 trillion (Dh1,322 trillion) of securities. Barclays was fined a record £290 million (Dh1.659 billion) last month and chief executive officer Robert Diamond resigned. At least a dozen banks are being investigated.

Representative Brad Miller, a North Carolina Democrat who sits on the House Financial Services Committee that oversees the Fed, said the documents suggest the US and UK regulators didn’t act forcefully enough after learning of the interest-rate rigging.

“They said ‘You shouldn’t be doing that,’ but it doesn’t appear that they acted in a decisive way to put an end to it, and certainly not to hold accountable to sanction the people who had manipulated Libor,” Miller said in an interview yesterday. “I’d like to know, if they had this knowledge, what did they do with the knowledge.”

“As is clear from the work culminating in the report to King of the Bank of England, the New York Fed helped to identify problems related to Libor and press the relevant authorities in the UK to reform this London-based rate,” the New York Fed said in the statement yesterday. Andrea Priest, a spokeswoman for the New York Fed, declined to comment further.

Memo sent to King

Geithner, who is now Treasury secretary, sent the memo to King after the two discussed Libor at a meeting of central bankers in Basel, Switzerland, the previous month. Among his six suggestions was one to “establish and publish best practices for calculating and reporting rates, including procedures designed to prevent accidental or deliberate misreporting.”

The proposals were passed along to the British Bankers’ Association (BBA) by King and Paul Tucker, at the time markets director of the UK central bank, according to correspondence released by the Bank of England.

“It is good that the New York Fed suggested reforms to Libor, and they deserve due credit,” Sheila Bair, former chairman of the Federal Deposit Insurance Corp, said. “But the fact remains, they will need to explain why they did not look more thoroughly into concerns about misconduct by Libor submitters, misconduct which was routine.”

Geithner and Fed Chairman Ben S. Bernanke will be questioned about Libor at regularly scheduled Congressional hearings this month. Geithner was succeeded by William C. Dudley at the New York Fed in January 2009.

“They are going to have a very difficult audience” on Capitol Hill, Karen Shaw Petrou, a managing partner at Federal Financial Analytics, a Washington research firm, said. “It’s going to be ‘What did you know, when did you know it, and why didn’t you do anything about it?’”

How Libor is calculated

Libor is calculated from a daily survey carried out for the BBA, in which the world’s biggest lenders are asked the rate they’re charged to borrow over a variety of short-term maturities in currencies including dollars, euros and yen. Banks are accused of low-balling submissions for the benchmark during the financial crisis.

“This rate is a British rate,” Jaret Seiberg, a senior policy analyst with Guggenheim Securities LLC in Washington, said. “There are limits to what the US could force the British bankers to do, but more importantly the structural problems of the Libor rules were coming down at the very time the US was teetering into a major financial debacle, so I think it’s understandable if issues raised in ’07 didn’t get followed up in ’08.”

The New York Fed released the documents in response to a request from Representative Randy Neugebauer, a Texas Republican who serves on the House Financial Services Committee, for transcripts of communications with Barclays relating to setting Libor from August 2007 to November 2009.

“We’ll continue looking into this matter to determine who was involved in this practice and whether it could have been prevented by regulators,” Neugebauer said in an emailed statement yesterday.

Concern among lawmakers that the Fed is too close to Wall Street was rekindled in May after JPMorgan Chase & Co. announced a trading loss on May 10 that chief executive officer Jamie Dimon said yesterday may swell to $7.5 billion. Dimon also serves as a director of the New York Fed. Three senators, including Vermont Independent Bernie Sanders, introduced legislation in May that would remove bankers from the boards of regional Fed banks.

Confidence ebbs

Americans’ confidence in US banks fell to a record low of 21 per cent in June, with the percentage saying they have “a great deal” or “quite a lot” of faith in the financial institutions about half that in June 2007, according to a Gallup poll conducted June 7-10.

The Fed isn’t the only regulator that suspected Libor might be rigged. The US Office of the Comptroller of the Currency said yesterday it became aware of potential problems with the Libor rate-setting process in 2007 and “reached out to British authorities at the time”, according to an agency spokesman.

“We met with the British Bankers Association and the FSA, which already had work under way on the integrity of the Libor rate-setting process,” Bob Garsson, a spokesman for the OCC, said in a telephone interview yesterday, referring to the UK Financial Services Authority.