Opinion

Bethany McLean

Was Geithner ‘forceful’ on Libor?

By Bethany McLean
July 27, 2012

“Exceptional.” “Very forceful.” “Early.” Those are the words used by Treasury Secretary Tim Geithner recently to describe what he did in the spring of 2008 to address problems with the key interest rate known as Libor. During Geithner’s congressional testimony this week, New York Senator Charles Schumer called Geithner “proactive.” Not to be outdone, White House Press Secretary Jay Carney chimed in after Geithner’s testimony, calling what Geithner did “aggressive.” The key piece of what he did, of course, was to send a memo dated June 1, 2008 to Bank of England Governor Mervyn King suggesting changes to improve the credibility of Libor.

Plenty of commentators, and especially Republicans, have given Geithner a hard time about his lack of other action. That’s not entirely fair because Geithner didn’t completely ignore the Libor problem; in addition to his memo, he also brought it up to the President’s Working Group on Financial Markets and to the Treasury. But at the same time, the lavish praise is hard to understand. How can it have been exceptional, forceful, early or aggressive for Geithner to have sent a memo across the Atlantic, when the press and the financial research community had already written not just about the problem with Libor but also about its potentially far-reaching consequences?

Consider that six weeks before Geithner’s memo, the Wall Street Journal’s Carrick Mollenkamp wrote an April 16, 2008 story entitled “Bankers Cast Doubt on Key Rate Amid Crisis.” The piece noted that Libor – which is supposed to be the average interest rate at which banks make short-term loans to each other and which serves as a basis for trillions of dollars in other loans – had become such a fixture in credit markets that many people trusted it implicitly. Mollenkamp quoted a mortgage banker who said he depended on Libor to tell him how much he owed his bank. Concerns about Libor’s reliability are “actually kind of frightening if you really sit and think about it,” the banker told Mollenkamp. On May 29, the Journal followed up with another, even more detailed analysis, which crunched the numbers to show just how much the banks might be understating Libor.

Even before the initial Journal piece appeared, on April 10, 2008, a research analyst at Citigroup named Scott Peng wrote a report headlined, “Special Topic: Is LIBOR broken?” Peng concluded that Libor could understate actual interbank lending costs by 20 to 30 basis points. Ironically enough, he based his evidence in part on the fact that the Fed itself was providing short-term loans to banks at a higher rate than Libor.   Not incidentally, Peng (whom Mollenkamp cited in his story) wrote the following: “LIBOR touches everyone from the largest international conglomerate to the smallest borrower in Peoria … the functionality and relevance of LIBOR is of primary importance to the global financial system … if LIBOR, now the most popular floating-rate index in the world, loses credibility because it no longer represents true interbank lending costs, the long-term psychological and economic impacts this could have on the financial market are incalculable.”

And even before that, in March 2008, in another report Mollenkamp cited, two economists at the Bank for International Settlements wrote their own report raising questions about Libor. They said that banks might have an incentive to provide false rates to profit from derivatives transactions, and that although the practice of throwing out the lowest and highest groups of quotes was likely to curb manipulation, Libor rates could still “be manipulated if contributor banks collude or if a sufficient number change their behavior.”

In other words, at the time Geithner wrote his “early” memo, it was already known that there was likely a big problem with Libor, that the problem could affect a wide range of borrowers and that the damage from any manipulation could be, as Peng put it, “incalculable.” If you were inclined to be nice, you might call Geithner’s actions “timely.” But that’s about it.

In fairness, Geithner’s lack of follow-through was hardly unique: The Journal noted in its pieces that the British Bankers Association was aware of the problem, and other regulators and law enforcement people could have read the paper and taken action, too. But as followers of the Libor scandal now know, the New York Fed did have access to what seems to be some unique information. On April 11, 2008, just before the Journal story ran, Barclays basically confessed, telling the Fed: “We know that we’re not posting, um, an honest rate.” That wasn’t in Geithner’s “aggressive” memo; Geithner said in congressional testimony that he wasn’t aware of that specific conversation. Say what you will about JPMorgan CEO Jamie Dimon, but when he found out that he should have known something he says he didn’t know, he didn’t call himself  “exceptional.” He said: “We screwed up.”

You could argue that four years later, we’re seeing the results of investigations Geithner helped set in motion.  Maybe. You could also argue, and some have, that the failure to do anything earlier is no big deal, and that a memo is all that was called for, if even that. After all, it’s uncertain what the financial impact of any Libor manipulation was. And the very fact that so many people suspected there was a problem means that those involved, from the perpetrators to the regulators, must be innocent. How can you commit a financial crime in plain sight?

The problem with that line of argument is that many financial crimes are committed in plain sight. The casual acceptance of widely known wrongdoing is almost the definition of modern financial malfeasance. Think about the dotcom era research scandal, in which investment bank “analysts” wrote puffy research pieces so that unsuspecting investors would put their savings into inflated stocks. Lots of people were in on the game. Did that make it right? Or think about the housing bubble. An awful lot of people understood that dubious loans were being packaged up and sold as triple-A securities. That was just the way things were done, and so almost no one questioned it. Again, does that make it right? And while it may turn out that the economic impact of any manipulation of Libor was small, that doesn’t change the fact that people cheated. The cost of that, in terms of lost trust, is indeed incalculable.

If you think more broadly about human history, some of the worst abuses have often occurred in the relative open. What is “exceptional” and “aggressive” is to be able to see that what’s happening is wrong, and to do something concrete to stop it. As human history also shows, that’s unfortunately a lot to ask of someone. But let’s save the extravagant praise for when it’s truly been earned.

PHOTO: U.S. Treasury Secretary Timothy Geithner delivers his testimony regarding the annual report of the Financial Stability Oversight Council before the House Financial Services Committee on Capitol Hill in Washington, July 25, 2012. REUTERS/Jonathan Ernst

Comments
12 comments so far | RSS Comments RSS

Given that LIBOR is a somewhat esoteric commodity, it is not hard to understand how the abuses continued in plain sight for so long. Ms. McLean is spot on with her depiction of Geithner’s testimony. More constructive criticism of government and industry is something we need desperately from journalism. The sensational stuff makes great, emotional copy, and sells advertising, but otherwise is of dubious worth.

In a similar vein, it would be nice if there was more journalistic focus on the ethical wasteland that is the US Congress. There are only two types of individuals in that body. Those who commit felonies on a regular basis and those who know about it and assist in the coverup. The latter group is a combination of those actively involved in deception and those who contribute through their silence. Specifically, the felonies most often involve the theft of our tax dollars for political purposes. It amounts to billions every year. A recent conviction of a member of Congress for money laundering was not an aberation. This sort of thing goes on every day. It is literally standard operating procedure. If we can’t trust politicians to keep their hands off our hard earned tax dollars, for what precisely can we trust them?

Posted by gordo53 | Report as abusive
 

It is simply insane to know that the Banks have been stealing more than $250 every month from me by deliberately fixing the interest rate charged on the equity line I took out years ago. And that the Fed knew about this or could have discover it if they wanted is simply absurd. That the government does not represent me is not news, but that the government conspires to steal my money–sucks my sweat and blood, troubles the soul. Tim Geithner is the worst possible Treasury Secretary that we could have at this crucial period that the economy and the financial sector needs serious adjustment to the reality of the time. I hope no one should conduct any further poll why Americans are jaded about politics–it’s simply the cynicism of the system.

Posted by 0okm9ijn | Report as abusive
 
 

Of the hundreds of articles written about the financial shenanigans of our elite Wall Street, Congressional and lobbyist masters, this is by far the best.

Bethany – kudos! You deserve a Pulitzer.

Posted by ptiffany | Report as abusive
 

Geithner was aware of Criminal Fraud and failed to notify the Justice Department. That is a CRIME. If this is NOT a case for RICO, not sure what would suffice. The saving of the Western Financial system was and is based on transferring the savings of middle class to the banks balance sheet. Just about every indicator was manipulated to save our Western Ideals of ‘free markets’! Look at a 6 month of LIBOR today and tell me it is NOT manipulated, albeit by the ECB and the LTRO function.
The FED, ECB, BOJ have neutered EVERY INDICATOR of ‘Market Stress’ over the past 3 months(VIX, 10yr Treasury, Gold,Yen/Dollar,Euro/Dollar)…..this will END VERY BADLY!!!

When HISTORY is written…and it will…2008-2014 will go down as the GREATEST LIE AND FRAUD ever told in mankind. If you believe Geithner and LIBOR are isolated cases….you have NOT been observing the correct stress indicators….one hint….the ECB is already buying Spanish and Italian Debt outside ANY announced program (ESFS, ESM)!
Thanks Bethany…always enjoy your writing…seem to ask the questions with an answer that NOBODY wants to provide or hear!!

Posted by StanKerouac | Report as abusive
 

Why hasn’t he been arrested? There are fifty state attorney generals that are not doing there job right now too!

Posted by tmc | Report as abusive
 

Hmmm, I guess, to answer my own question, it would have thrown the world into turmoil far worse than living with a lie for a while. They are, now that it’s “safe”, slowly bringing it to light without causing pandemonium. I just hope that quiet but forceful change comes next.

Posted by tmc | Report as abusive
 

What you omitted was the glaring insider dealing to cover up the fixing of the books by Lehman.
Geithner outrageously painted his corroboration in unethical, illegal coverup of Lehman’s dishonest disclosure with investors,
by distorting Paulson’s coercing Barclays to buy Lehman
as if it’s an effort to “save” the world.

In their efforts to distort their key role in causing the 2008 financial crisis, they tried to use the coverup attempt as the justification to be lenient on the Libor rate fixing by Barclays.

THEY SHOULD INSTANTLY BERATING THE ILLEGAL NATURE OF LEHMAN’S FIXING OF THE BOOK AS WELL AS THE LIBOR FIXING.

INSTEAD, THEY STILL TALK AS IF THEIR COLLABORATIVE EFFORT TO HIDE LEHMAN’S INSOLVENCY TO INVESTORS WORLDWIDE. DURING THE LAST MONTHS OF COVER UP, LEHMAN DUMPED VAST AMOUNT OF WORTHLESS TRIPLE A BONDS INTO THE ASIAN MARKET.

GEITHNER ALSO EGREGIOUSLY ADMITTED THAT HE DID NOT SEE ANYTHING WRONG WITH THIS DUMPING OF WORTHLESS ASSETS TO INVESTORS NOT WITHIN THEIR INSIDER CIRCLE. ON CHARLIE ROSE, GEITHNER, “AT THAT TIME, EVERYBODY WAS TRYING TO DUCK( AT THE EXPENSE OF UNKNOWING BUYERS OF THEIR WORTHLESS TOXIC ASSETS)” AND ACTED AS IF HIS FRIENDS, THE CROOKS’ DUCKING IS SUFFICIENT REASON FOR HIM NOT TO DO ANYTHING MORE.

THAT SHOWS THE ULTRA BLINDNESS TO FUNDAMENTAL ETHICAL STANDARD THAT A FED BANK CHAIRMAN AND A TREASURY SECRETARY SHOULD HAVE.

GEITHNER, PAULSON WOULD BE IN JAIL. THEIR WEALTH SHOULD BE TAKEN TO COMPENSATE THE HUNDREDS OF MILLIONS OF WORLDWIDE INVESTORS WHOM THEY HELP THE CROOKS TO SWINDLE.

MANY ARE WITHOUT THEIR LIFELONG SAVINGS, WITHOUT THEIR HOUSE, THEIR JOBS. AND GEITHNER DARED TO LIE TO OBAMA AND STEP UP THE SCAPEGOATING OF ASIAN COUNTRIES, WHICH ARE THEIR BIGGEST PREY IN THEIR PREDATORY COVERUP.

GEITHNER SHAMED AMERICA. WE SHOULD IMPEACH PAULSON, GEITHNER.

WE SHOULD CHANGE THE LAW SO THAT THESE GUYS SHOULD NOT HAVE “ADMINISTRATIVE IMMUNITY” WITHIN OUR EXECUTIVE BRANCH OF THE GOVERNMENT. THAT’S THE ONLY WAY AMERICA CAN REGAIN OUR CREDIBILITY.
TRUTH BE TOLD: CHINA SHOULD HAVE BEEN BANGING ON THE TABLE IN 2008 ABOUT ALL THE BONDS DUMPING IN HONG KONG AND SHANGHAI BY LEHMAN WITH THE DIRECT HELP OF PAULSON, GEITHNER AND BERNANKE.

THEY SHAMED ALL AMERICANS. THEY WILL GO DOWN IN HISTORY AS WITHOUT MORALS, HYPOCRITICAL, SHAMELESS SCAPEGOATERS.

HIS CURRENT TACTIC OF PRETENDING TO BE A “SAVIOR”, BY SAYING THAT HE SHOULD HAVE BAILED OUT EVERYONE, IS ANOTHER SCAM THAT AMERICANS WILL NO LONGER FALL FOR.

HE IS THE ONE OF VERY FEW THAT CAUSED THE FINANCIAL CRISIS. AND HE TRIED TO LIE AND CHEAT AMERICANS BY ACTING AS IF HE SHOULD HAVE SAVED MORE!!!
WOLF IN SHEEP SKIN– THAT’S GEITHNER AND PAULSON!

Posted by Janeallen | Report as abusive
 

Was Geithner ‘forceful’ on Libor?

This is a STUPID question.

He’s the BITCH of the establishment criminal bankers.

NO. Of course he wasn’t, he’s their lap dog.

Posted by Lord_Foxdrake | Report as abusive
 

Excellent article, Ms McLean!

Posted by w.burton | Report as abusive
 

Let’s remember that poor little timmy did write a strongly worded memo. In the obama administration that is considered hard, ‘forceful’ labor. We have to face the fact that the entire system is corrupt. There is not one single innocent individual to be found in the banking/finance world. Every single one of the parasites needs to be held to account…it’s time to balance the books.

Posted by stambo2001 | Report as abusive
 

Thank you.

Posted by matthewslyman | Report as abusive
 

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