The latest development in the Libor-manipulation scandal is that the banks weren’t really fixing the price of the key interest rate in total secret — US regulators were aware of the sleazy activities at the time, and seemed to have done nothing.
Which should surprise no one.
I can’t tell you how much federal officials knew about the activities of Barclay’s, JPMorgan, Citigroup and the other big banks at the center of the maelstrom. In coming weeks, both Federal Reserve chief Ben Bernanke and Treasury Secretary Tim Geithner will inevitably discuss the mess when they appear before Congress.
Bernanke testifies before the Senate Banking Committee next week, but the more important hearing by far will come a week later — when the House Financial Services Committee questions Geithner, who headed the New York Fed when the sleaze was going down.
If the right questions get asked, the American people will get a firsthand account not just about how much our government knew about the Libor mess, but also of the cozy, corrosive relationship between the nation’s big banks and the bureaucrats who are supposed to regulate them.
Long before President Obama tapped him for Treasury, Geithner was one of those bureaucrats. He worked at the Clinton Treasury, the IMF and then as president of the New York Federal Reserve Bank for five years — where he played a key role in the bailouts and the rest of the government’s response to the financial crisis.
The New York Fed has two main functions: It handles the transactions whereby the overall Federal Reserve controls the nation’s money supply, and it’s supposed to be the chief regulator of the big banks in its region.
When Obama named him for Treasury, the banking industry hailed Geithner as a godsend. Shares shot up on his announcement, and CEOs called it a wise choice for a key job at a time of crisis.
But the dirty little secret on Wall Street is that the New York Fed is a horrible regulator: It sees its chief job as keeping the banking system intact. Since it needs its member banks to buy US government debt and to control the money supply, the last thing it wants to do is shed light on the banks’ shady practices.
Which is why the Wall Street power brokers loved Geithner so much: On his New York Fed watch, he basically let them get away with the financial equivalent of murder, letting them take on the astronomical amounts of risk that ultimately blew up the system in 2008.
And then, when they needed a bailout, he was there with a plan that made sure their banks and jobs were safe.
That’s why I’m saying Geithner is such an important witness as the Libor investigation expands to include the possibility that banking-industry cops like himself looked the other way.
The London Interbank Offered Rate, keep in mind, is one of the world’s most important financial benchmarks. Both Wall Street financiers and average consumers are charged interest based on Libor, which is set by a banking trade group that calculates an average of the big banks’ borrowing rates.
So the last thing you want is for the rate to be manipulated in any way. Yet that’s what the banks are accused of doing, as their borrowing rates started rising in the runup to the crisis.
The incentive for banks like Barclays to rig Libor by reporting falsely low borrowing costs is obvious: They could make money and disguise the extent of their distress.
We know that Barclays — so far the only firm charged in the matter — met with officials at the New York Fed to discuss the Libor mess back in 2007 and 2008, when it complained that banks might be manipulating the benchmark.
And we know that now-deposed Barclays CEO Bob Diamond met with Geithner during this time. Maybe they were only talking about the broader market upheaval; maybe they discussed the Libor rate-fixing, too.
Geithner has declined repeated requests for comment. The New York Fed stated that it “received occasional anecdotal reports from Barclays of problems with Libor . . . and we subsequently shared analysis and suggestions for reform” with regulators in the UK, where Libor is set.
Translation: We chose to do nothing.
But Congress has a duty to find out why — and what Tim Geithner knew about the banks’ dirty dealings.
Charles Gasparino is a Fox Business Network senior correspondent.