April 23, 2024

DealBook: Congress Presses New York Fed for More Details on Rate-Rigging Scandal

Representative Randy Neugebauer, the chairman of the House Financial Services Subcommittee, wrote a letter  to the New York Fed on Monday.Jay Mallin/Bloomberg NewsRepresentative Randy Neugebauer, the chairman of the House Financial Services Subcommittee, wrote a letter  to the New York Fed on Monday.

Congress widened its inquiry into the interest-rate manipulation scandal, pressing the Federal Reserve Bank of New York to further disclose its knowledge of the multiyear scheme.

On Monday, the oversight panel of the House Financial Services Committee sent a letter to the New York Fed seeking volumes of records about the London interbank offer rate, or Libor, a measure of how much banks charge each other for loans. Lawmakers are demanding that the New York Fed detail its communications with employees from all 16 banks that help set the interest rate, which affects the trillions of dollars in mortgages and other loans.

The letter follows an Congressional request that the New York Fed turn over transcripts from phone calls its officials had with just one bank: Barclays.

In June, the British bank became the first to settle accusations that it tried to manipulate Libor for its own benefit. Authorities around the globe are investigating more than 10 other big banks for their role in rigging the interest rate.

The initial transcripts released this month showed that the New York Fed learned about wrongdoing at Barclays in 2008. That revelation called into question whether the New York Fed pursued the matter fully.

Libor Explained

“We know that we’re not posting um, an honest” rate, a Barclays employee told a New York Fed official in April 2008, according to transcripts. At the time, because high borrowing costs were a sign of poor health, banks were submitting artificially low rates to project a better image of their finances.

The transcript, among other documents, only fed the firestorm over what regulators might have known about the rate-rigging scandal. The New York Fed and other authorities are under scrutiny for failing to thwart the illegal activities that, at Barclays, continued to 2009.

“There are still many outstanding questions that merit further investigation,” Representative Randy Neugebauer, the chairman of the House Financial Services Subcommittee on Oversight and Investigations, wrote in the letter on Monday.

The latest request is likely to produce reams of memos and e-mails. The subcommittee is demanding “all communications and documents” between the New York Fed and the 16 banks over a five-year span, from 2007 to 2012. The New York Fed, which has until Sept. 1 to provide the documents, must also turn over its internal documents and any correspondence with authorities in the United States and abroad.

The New York Fed has defended its actions, saying it briefed regulators about the broad problems with Libor.

But lawmakers have questioned why the New York Fed, despite its awareness of misconduct at Barclays, did not refer the illegal acts to regulators or the Justice Department. Instead, the New York Fed circulated in June 2008 a plan to fix Libor, producing a six-point plan to revamp the rate-setting process.

“As you know, the role of government is to ensure that our markets are run with the highest standards of honesty, integrity and transparency,” Mr. Neugebauer wrote. “Therefore, any admission of market manipulation — regardless of the degree — should be swiftly and vigorously investigated.”

Article source: http://dealbook.nytimes.com/2012/07/23/congress-presses-new-york-fed-for-more-details-on-rate-rigging-scandal/?partner=rss&emc=rss

In Congress, Bills to Speed Unwinding of 2 Giants

The proposals would dismantle Fannie and Freddie in a most ironic manner. The mortgage giants thrived for decades by behaving like private companies at public expense. The cumulative effect of the eight bills would make the companies behave like federal agencies while stripping away the advantages.

Fannie and Freddie would be required to pay their employees according to federal wage scales. The companies would be subjected to regular oversight by an inspector general and required to ask Treasury before borrowing money.

But at the same time, the companies, which provide financing to lenders, would be required to charge the same prices as private investors. They would be prevented from serving their basic purpose as a source of cheap money for mortgage loans.

“This will allow more private-market participation in the housing finance market, which is critical for the long-term health of the housing market and the overall economy,” said Representative Randy Neugebauer, a Texas Republican who is one of the eight party leaders who are each sponsoring one piece of the legislative package.

The proposal to shut down Fannie and Freddie answers a promise made by many House Republicans during the midterm elections. And by proposing eight separate bills, Republicans have preserved considerable flexibility to negotiate with the White House, increasing the chances that some elements will succeed.

There already is agreement that the companies should be closed, gradually allowing private investors the opportunity to finance mortgage loans.

The main difference is a question of timing. The Republican plan would require Fannie and Freddie to stop subsidizing mortgage loans through low-cost financing over the next two years, and to sell most of their enormous mortgage holdings over the next five years.

The administration envisions a process that may take a decade and it has shown no eagerness to begin while housing remains in the doldrums.

“We look forward to working with Congress to wind down the G.S.E.’s at a pace that does not damage the fragile housing market or threaten the ongoing economic recovery,” a Treasury spokesman, Steven Adamske, said, using the abbreviation for a government-sponsored enterprise.

The consequences of this disagreement were on display Tuesday as the administration introduced new rules intended to discourage reckless lending.

The rules require banks to retain some risk of loss when they sell loans to investors, except for loans made on the most conservative terms, including a down payment of at least 20 percent. But the rules also stipulate that loans sold to Fannie and Freddie are not subject to the requirement so long as the companies remain wards of the state.

Almost all the financing for new mortgage loans continues to flow through the federal government, and the administration is concerned that any new roadblocks would exacerbate the woes of the housing market. Moreover, the government can prevent Fannie and Freddie from using the exception to acquire high-risk loans.

House Republicans, however, say that investors will not return until the government leaves. One bill proposed Tuesday would make lenders retain risk even when they sell off loans to Fannie and Freddie.

Representative Scott Garrett, the New Jersey Republican who is chairman of the subcommittee that oversees Fannie and Freddie, said it was time to start the process.

“We have to make certain that government policies do not continue to crowd out the private sector,” Mr. Garrett said.

Article source: http://feeds.nytimes.com/click.phdo?i=c58b43eaec53fb7f7f29ec2a1a19f730