Outstanding update and summary from the Huffington Post. Commentary is below.
Let's say you're one of the most important banking regulators in America, and you get word that some of the world's biggest banks are manipulating an interest rate that affects borrowing costs throughout the economy. Do you: a) leap into action and not rest until the problem is solved, or b) write a strongly worded memo and then hope for the best?
According to reports in The New York Times and the Wall Street Journal, then-New York Fed President Timothy Geithner chose b), writing a six-point memo to the Bank of England on how to fix the process of setting Libor, the hopelessly manipulated interest rate. And then he turned his attention to other things, such as being Treasury Secretary, for the next four years.
The result of this choice -- one that was apparently made by every other regulator on both sides of the pond, to be fair -- has been a banking scandal of epic proportions. It will involve Geithner and his then-boss, Fed Chairman Ben Bernanke, testifying before a Senate subcommittee later this month. It could well cost the 16 banks involved $22 billion, according to a new estimate by analysts at Morgan Stanley (which is not involved in this particular scandal). And the manipulation of Libor may have already cost consumers, businesses, cities, states and school districts untold millions and/or billions of dollars, which an army of plaintiffs' lawyers are gearing up to extract from the banks. Maybe Geithner did not choose too wisely?
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DB here. For an alternate point of view on LIBOR read this from Bruce Krasting. Bruce is correct regarding the liability gold rush as the manipulation has tended to keep consumer rates lower than they otherwise would have been, but I beg to differ on the issue of 'nooses', as he writes below. Given rampant unpunished fraud, and unless and until the system someday arrives at a point where the prison-industrial complex just can't keep up with the demand because we're putting so many of the septic squid behind bars, then there is no such thing as a bad reason to prosecute Wall Street. Period.
People have been sandbagging Libor quotes since Libor was originated. I don’t believe that there is a money pro on either the buy or sell side over the past thirty years who didn’t understand that the Libor Fixing was “fixed”. If they claim to be “shocked” today, they are either lying or stupid. The same goes for every central banker and treasury official that knows the way to the bathroom. As far as any consumers who took out a Libor based loan are concerned; they have no claim at all. If Libor hadn’t been “fixed” all these years they would have paid substantially more on those loans. Libor has always been jimmied down, not up. The world has been looking for an excuse to hang some bankers (and a few regulators). Liborgate looks like it could be the opportunity for the bloodletting. I’m convinced that this is the wrong issue to bring out the nooses.