U.S. Treasury Secretary Timothy Geithner said on Thursday that the Federal Reserve Bank of New York did not encourage banks to misrepresent their borrowing costs when setting the key benchmark interest rate Libor when he was the head of the regional Fed bank in 2008.
Geithner, Fed Chairman Ben Bernanke and U.K. banking authorities have come under fire for not doing enough to fix problems with Libor, a rate which is used for $550 trillion of interest rate derivatives contracts and influences rates on a wide array of consumer products such as mortgages and credit cards.
In his second day of testimony to Congress, Geithner reiterated that when he was New York Fed president he told U.S. regulators about the rate manipulation and made recommendations to fix Libor to authorities in Britain where the interest rate is set.
When asked by a Senate Banking Committee lawmaker if the New York Fed turned a blind eye to banks' misrepresentations or if he was aware of any other regulator condoning bankers' behavior, Geithner said "absolutely not."
More than a dozen global banks are under investigation over whether they manipulated the Libor rate in an attempt to make profits or hide weaknesses. Some critics have suggested British regulators not only knew banks were under reporting their borrowing costs but may have encouraged the practice to protect the financial system during the 2007-09 credit crisis.
So far, Barclays is the only bank that has been fined by U.S. and U.K. authorities for manipulating the rate.
The Bank of England's deputy governor, Paul Tucker, was ensnared in the scandal when Barclays released notes suggesting Tucker may have condoned the rigging. Tucker has denied the allegations.
At the hearing, Geithner said he did not know whether the three U.S. banks that help set Libor - Citigroup, Bank of America and JPMorgan Chase - manipulated the rate. Some 16 major banks contribute to setting the key interbank lending rate, which is overseen by a private banking group the British Bankers' Association.
The Financial Stability Oversight Council, which includes every major U.S. financial regulator, is examining other survey-based measures of financial prices and interest rates for manipulation, Geithner said.
The Treasury Secretary added that the powerful financial supervisor, which he chairs, will also need to take a careful look at other parts of the financial system where the market relies on a private entity composed of private firms that has some quasi-regulatory role.
"Have to be careful to make sure that the system is not relying on associations of private firms that leave us vulnerable to the kinds of things we have seen," Geithner said.
At the congressional hearing, Senate Banking Committee members were gentler than their counterparts in the House of Representatives, where some Republicans accused Geithner of dropping the ball.
Republican Senators, however, wanted to know why Geithner did not use his influence as New York Fed chief and then as Treasury Secretary to sound a louder alarm bell on Libor.
"You were aware of this in early 2008 and for the last four years you never used the bully pulpit to warn the American people," said Republican Senator Pat Toomey.
Geithner said he did what he felt was the most effective way to get to the heart of the problem. "There are some problems that you can address by talking about them, but I am of the view that it is better to act on these things and that is what we tried to do," he said.
Congress has been zeroing in on what Geithner knew and when and whether he acted appropriately. Geithner has said he believed he first heard about the rigging in 2008 and then acted quickly after that point. Documents released by the New York Fed showed that Barclays told Fed analysts about possible problems with the low Libor rates as early as August 2007.
(Reporting By Rachelle Younglai; Editing by Padraic Cassidy and Andrew Hay)
By Rachelle Younglai