By Mike Wereschagin, The Pittsburgh Tribune-Review
July 26--U.S. Sen. Pat Toomey told Treasury Secretary Timothy Geithner he put "hundreds" of Pennsylvania municipalities at risk by not warning them of suspicions that banks might be manipulating a key interest rate.
Geithner, speaking Thursday morning at a Senate Banking Committee hearing, defended his response in 2008 when, as president of the Federal Reserve Bank of New York, he reported to financial regulators that bankers might be rigging the London Inter-Bank Offered Rate, or LIBOR.
Banks around the world use LIBOR for trillions of dollars worth of transactions, from interbank loans to bond deals to home mortgages.
Geithner said his report sparked a four-year investigation that resulted in London banking giant Barclays agreeing to pay a $450 million settlement to U.S. and British regulators.
"You were aware of this in early 2008, and for the last four years you never used the bully pulpit that you had to ... warn the American people," Toomey, R-Lehigh County, a former investment banker, said.
Geithner said the investigation did more good than sounding a public alarm would have.
"There are some problems that you can address by talking about them. Generally, I'm of the view that it's better to act on these things and that's what we tried to do," Geithner said.
Regulators say bankers artificially held down the interest rate in an effort to make their banks appear more financially sound during the recession and 2008 financial crisis. A higher rate would have signaled that banks didn't trust each other to pay back loans, much like a credit card company might raise a customer's interest rates if he misses a payment.
It's unclear whether or how much the rate-rigging cost investors. The lower rates might have driven down the return that bondholders received from their investments, and could have cheated municipalities out of some of the return on their credit swap investments.
"You knew that those LIBOR payments might not be the correct payments -- in fact, might be less than what they ought to be getting," Toomey said. "Those municipalities did not know that, and they should have."
Geithner said concerns about LIBOR "were in the public domain," citing 2008 reporting by the Wall Street Journal.
"The vulnerability that we were worried about was there for people to see," Geithner said.
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