Tim Geithner had evidence of a financial crime of epic proportion — so he wrote a memo.
That’s about the only way you can sum up the then-New York Fed boss’ actions several years ago, when he was confronted with fairly compelling evidence that banks under his direct supervision were manipulating Libor — a key benchmark of global finance.
The Libor scandal has become pretty big news, with Barclays ousting its CEO and agreeing to pay a large fine even as it cooperates with civil and criminal law-enforcement authorities now investigating other big banks.
But it doesn’t end there: There’s also evidence that top regulators, including Geithner, now Treasury secretary, knew about and largely ignored the mess.
On Friday, the New York Fed released documents that supposedly exonerate Geithner. Selective leaks to friendly news outlets ensured kind first-day coverage, with one headline reading “Geithner tried to curb bank’s rate rigging in 2008.”
But that’s a bizarrely generous read of Geithner’s action (or inaction) on learning that Barclays actually admitted to one of his investigators that it had submitted false data for the computation of Libor, and that other banks were doing the same.
As I wrote last week, the New York Fed has long enjoyed a cozy relationship with the banks under its regulatory umbrella — ignoring even the stuff that brought down the financial system in 2008.
A close associate of former Clinton Treasury Secretary and top Citigroup exec Robert Rubin, Geithner has spent most of his professional life as a federal financial bureaucrat — a member of a community that keeps close ties with the heads of the major banks. Yet even by that standard, his behavior in the Libor scandal is incredible.
Libor, the London Interbank Offered Rate, is set by a UK banking trade group, which uses the big banks’ borrowing costs to compute a single benchmark rate that’s widely used on complex financial products as well as consumer loans.
In other words, rigging Libor is a pretty big deal. Yet Geithner treated it like a parking violation.
In 2007 and 2008, as the banking crisis began to heat up and big investors started demanding higher interest rates when lending to the banks, evidence began to build that banks were submitting falsely low borrowing costs to mask their financial distress.
Barclays was one such bank. Indeed, the New York Fed learned as early as December 2007 that Barclays may have been manipulating Libor — but Geithner’s crew waited until April 2008 to make its initial inquiry, documents show.
That’s when a New York Fed official contacted a trading executive at Barclays — who admitted the dirty deed with very little pressure: “We know that we’re not posting, um, an honest Libor.”
The trader’s rationale: If the bank posted its real borrowing costs, then spiking in the runup to the banking crisis, “It draws, um, unwanted attention on ourselves.”
The trader indicated that other banks were submitting fake info, too. The New York Fed regulator conducting the interview didn’t seem particularly outraged, answering with a simple “OK.”
Maybe the Fed official didn’t want to show her cards, but you’d think that a competent regulator hearing a concession like would get the wheels of justice moving pretty quickly. But not at Tim Geithner’s New York Fed.
Geithner was brought in right after the call — and his response was more of the same. He sent a single e-mail to his counterpart at the Bank of England recommending a handful of ways to address Libor rigging, including how UK regulators “should eliminate incentive to misreport.”
So here you have it: In Geithner’s world, rate-rigging fraud is “misreporting.”
His UK counterpart, Bank of England Governor Mervyn King, didn’t do much better. He e-mailed Geithner that he’d ask the trade group “to include in their consultation document the ideas contained in your note.”
Other than a few followup calls from his staff to traders, that’s about the end of Geithner’s real interest in the matter — until it came to light that the practices were much worse and more pervasive than even the Barclays trader had suggested, and that other big banks directly under the New York Fed’s jurisdiction were manipulating one of the world’s most important financial barometers.
Or, as Geithner put it, “misreporting.”
Charles Gasparino is a Fox Business Network senior correspondent.