March 25, 2023

DealBook: Facing House, Geithner Is Grilled on Rate-Rigging

Timothy F. Geithner, the Treasury secretary, answering questions from lawmakers on Wednesday.Brendan Smialowski/Agence France-Presse — Getty ImagesTimothy F. Geithner, the Treasury secretary, answered questions from lawmakers on Wednesday.

Timothy F. Geithner was grilled on Wednesday about the growing interest rate rigging scandal, as lawmakers questioned why he failed to thwart the illegal activity during the financial crisis.

As head of the Federal Reserve Bank of New York in 2008, Mr. Geithner learned that big banks were trying to manipulate a benchmark interest rate. Rather than curbing the bad behavior at specific firms, Mr. Geithner pushed broad reforms to the rate, known as the London interbank offered rate, or Libor.

“It appears you treated it as a curiosity, or something akin to jaywalking, as opposed to highway robbery,” Jeb Hensarling, Republican of Texas, said at a House hearing on Wednesday.

Related Links

Even as Republicans slammed Mr. Geithner on Wednesday, many Democrats came to his defense. Mr. Geithner, now the Treasury secretary, challenged the Republican critique as well. In testimony before the House Financial Services Committee, Mr. Geithner said he was “very concerned” that the rate-setting process lacked integrity and he promptly notified other regulators about his worries.

Last month, Barclays struck a $450 million settlement with American and British authorities over accusations that it undermined Libor. The case against the British bank was the first action to stem from a global investigation into more than 10 other banks.

Libor Explained

“We took the initiative to bring those concerns to the broader regulatory community,” Mr. Geithner said, referring to the Commodity Futures Trading Commission and Securities and Exchange Commission. “I believe we did the necessary and appropriate thing very early in the process,” he said.

But Mr. Geithner on Wednesday also acknowledged that he did not alert federal prosecutors to the wrongdoing.

The revelation prompted lawmakers to question whether his response was sufficient, given the scope of wrongdoing and the importance of Libor to the broader financial system. Libor, a measure of how much banks charge to lend to one another, is a benchmark for trillions of dollars in mortgages and other loans.

In April 2008, the New York Fed learned from Barclays that it was artificially depressing its Libor reports to deflect concerns about its health. “We know that we’re not posting um, an honest” rate, a Barclays employee told a New York Fed official in April 2008.

Mr. Geithner said he was not aware at the time of “that specific conversation.”

But that same day, New York Fed officials wrote in a weekly internal memo that the problem was widespread. “Our contacts at Libor contributing banks have indicated a tendency to underreport actual borrowing costs,” New York Fed officials wrote, “to limit the potential for speculation about the institutions’ liquidity problems.” At the time, high borrowing costs were a sign of poor health.

Even after discovering that banks were manipulating Libor, the New York Fed pursued a somewhat passive approach.

When Mr. Geithner briefed other American regulators on Libor in May 2008, he did not disclose the specific wrongdoing at Barclays. Republicans pressed him on Wednesday to explain why he didn’t notify the Justice Department about the illegal behavior.

He explained that the Justice Department did not belong to the working group of regulators that were focused on Libor.

Mr. Geithner, who outlined the state of Wall Street regulation on Wednesday, heralded his past efforts to reform Libor. He noted that the New York Fed repeatedly pushed a British trade group that oversees Libor to overhaul the rate-setting process.

In a June 2008 e-mail to the Bank of England, the country’s central bank, Mr. Geithner recommended that British officials “strengthen governance and establish a credible reporting procedure” and “eliminate incentive to misreport” Libor.

The New York Fed then advocated fixes more forcefully than its British counterparts, records show. The trade group later adopted only some of Mr. Geithner’s recommendations.

“We gave them very specific detailed changes,” Mr. Geithner said, adding that “if more of those would have been adopted sooner, you would have limited the risk.”

But Representative Randy Neugebauer, Republican of Texas, questioned why the New York Fed focused on policy solutions rather than the bright-line legal violations.

“If they were having structural problems, then I think your e-mail was appropriate,” said Mr. Neugebauer, who is leading a Congressional investigation into how the New York Fed handled the Libor scandal. “But what was being disclosed here was fraud.”

Ultimately, Mr. Geithner said, responsibility rests with the British regulators. “We felt, and I still believe this, it was really going to be on them to fix this. This is a rate set in London.”

Democrats echoed his argument. “I for one am not part of the ‘blame America first’ crowd,” said Representative Brad Sherman, Democrat of California.

In deferring to overseas authorities, Mr. Geithner drew further ire from Republicans. “It wasn’t just a British problem,” Mr. Neugebauer said, noting that the rate affects the cost of borrowing around the world.

Despite the scrutiny, Mr. Geithner escaped relatively unscathed. While Republicans rebuked his approach to the Libor problems, few new revelations emerged from the more than two-hour hearing. And the pressure eased at times when Democratic lawmakers praised Mr. Geithner for championing reforms to Libor.

“There’s been an effort to blame you for all of this,” said Barney Frank, the ranking Democrat on the committee. But “you reported this” to other regulators.

Mr. Frank, a Massachusetts Democrat, cast the blame not on regulators but the banks that ran afoul of the law. The banks, he said, “grievously misbehaved.”

Article source:

Amid Skepticism, Debt Panel Is Pressed for a Deal

On the heels of a nasty showdown that led the nation to near default, a joint Congressional committee is preparing to try to devise a deficit-reduction plan that both parties can live with — a goal that has eluded Congressional leaders, a cadre of senators and the president of the United States.

The difficulty that this new committee will have scaling the steep walls of ideology and partisan mistrust is lost on few, including its own members.

“I approach this task like all tasks in Washington, with high hopes and tempered expectations, ” said Representative Jeb Hensarling, a Texas Republican and co-chairman of the Joint Select Committee on Deficit Reduction, whose six Senate members and six House members are divided evenly by party. “This committee has very serious work to do, but it should not be confused with Captain America or any other superhero.”

The impediments to the committee’s work lie as much in the way its success markers are defined as in the inherent partisan rancor — and substantial financial conflicts — among its members.

Under the legislation written to raise the debt ceiling this month, if the committee fails to come up with a plan by Nov. 23 to cut the federal deficit by $1.2 trillion over 10 years, or if its proposals are not approved by Congress roughly a month later, the government will automatically cut spending across a vast area of its operations, including the Pentagon.

But the cuts would not be made until January 2013, nearly a year after the trigger is hit, leaving members of Congress to devise ways to avoid the fallout, even as they wrestle during the middle of a presidential campaign with a main component of the deficit debate: the Bush tax cuts that are set to expire at the end of 2012.

“The trigger can get pulled,” said Josh Barro, a senior fellow and federal fiscal expert at the Manhattan Institute, a conservative research organization. “But then there is a substantial amount of time to unpull the trigger. When you look at the committee picks, it is really hard-core partisan people who are not likely to compromise, and some would prefer the trigger rather than the fight over the campaign season to come up with a plan.”

Privately, Republicans and Democrats are pondering which party would be more hurt by across-the-board cuts.

The committee members say there has been a political shift since the Obama administration and Congress failed to come up with a more sweeping plan to deal with the nation’s debt, lending more urgency to their work. After the debt ceiling was lifted, Standard Poor’s downgraded the nation’s credit, the stock market took a wild dip and polls demonstrated that voters have lost patience with Washington infighting.

“There is just a lot more pressure now to accomplish something,” said Senator Patrick J. Toomey of Pennsylvania, a Republican on the committee. “The dynamics are just different this time around.”

Having the debt ceiling issue resolved also helps. “I think that since the economic nuclear bomb has been taken off the table,” said Representative Chris Van Hollen of Maryland, a Democratic committee member, “people can focus on this in a little fresh way.”

But many impediments remain. None of the Republicans on the committee have indicated that there is much wiggle room on the revenue side of the ledger, beyond a willingness to end tax subsidies for some industries, like ethanol. For their part, the Democrats chosen for the panel are largely protective of the entitlement programs that represent the biggest part of the federal budget.

“I don’t think this committee is going to achieve a full fix to our problems, because Democrats have never wanted to put their health care bill on the table,” Representative Paul D. Ryan, a Wisconsin Republican who leads the House Budget Committee and studiously avoided assignment to the new panel, said in a recent interview on “Fox News Sunday.”

The central area of agreement between the two parties — a need for major changes to the tax code — is unlikely in the short time before the committee’s deadline.

Further, it is clear that there is some residual unpleasantness after the bitter debt ceiling fight. “Some of the members I know, some I don’t, but I think I will keep my opinions of them to myself,” Mr. Hensarling said.

Separate from the internal dynamics of the committee, each of the dozen members has favorite causes or industry allies, which could influence their opinions on cutting spending or raising revenue.

For instance, Senator Patty Murray of Washington, a Democratic member, has long promoted the interests of Boeing, one of the largest military contractors, taking in more than $172,000 in donations from the company or its executives during her career. Mrs. Murray once ran a television advertisement boasting about how she helped Boeing win a $40 billion Air Force contract for its aerial-refueling tankers.

Mr. Hensarling, a member of the House Financial Services Committee, has pulled in hundreds of thousands of dollars from banks and Wall Street firms, including $57,800 in the last election cycle from Goldman Sachs.

Further, special interest groups are waiting in the wings. “The sense around here is a lobbying bonanza,” said Jonathan Collegio, a spokesman for American Crossroads, the influential Republican advocacy group formed by Karl Rove.

Watching with particular interest are groups that defend entitlement programs. “We’ve had all these different gangs all looking basically at these same issues,” David Certner, the legislative policy director for AARP, which is pushing to protect Medicare, Social Security and other programs affecting older Americans. “We’re just going to keep doing the things we’ve been doing — the same lobbying, the same strategy, the same message.”

All six Republicans on the committee have signed the pledge not to raise taxes dictated by Grover Norquist, a leading conservative who heads Americans for Tax Reform. Now, Mr. Norquist said, he will focus on keeping the Democrats in line. “The Republicans are serious budget reformers; the lady from Washington,” Mr. Norquist said of Mrs. Murray, “doesn’t do budgets.”

It is these kinds of statements that worry proponents of a deficit overhaul. “If these guys can’t get it done,” said Alan Simpson, the co-chairman of President Obama’s National Commission on Fiscal Responsibility and Reform, “and are in thrall to the AARP and Grover Norquist, we ain’t got a prayer.”

Eric Lipton and Eric Lichtblau contributed reporting.

Article source: