* Geithner knew Libor issues in 2008
* U.S. agencies already investigating banks and Libor
By Sarah N. Lynch and Alexandra Alper
WASHINGTON, Oct 2 Two Senate Republicans on
Tuesday slammed Treasury Secretary Timothy Geithner for failing
to wean U.S. firms off a key British benchmark interest rate
that he knew was being rigged, resulting, the lawmakers said, in
costly litigation that hurts American taxpayers.
In a sharply worded letter to Geithner, Republicans Chuck
Grassley and Mark Kirk blamed a "deluge" of lawsuits over the
manipulation of the London Interbank Offered Rate (Libor) on
Geithner's failure to inform the public, even though he knew of
manipulation as president of the New York Federal Reserve in
Geithner did raise alarms with authorities in Britain, where
the rate is set, but did not inform the public when he was
leading the New York Fed or as Treasury Secretary.
Grassley said Geithner's decision not to take action to end
the dominance of Libor, or at least inform the American public,
has contributed to emerging litigation that threatens to clog
U.S. courts with multi-billion dollar class action lawsuits and
losses on interest rate swaps by local, municipal, and state
governments which may also lead to more lawsuits.
This, the senator said, will result in higher taxes or fewer
local services for Americans, and put American investors at
A Treasury spokesperson said on Tuesday that officials will
"support reforms to strengthen the integrity and governance of
Grassley's letter comes as the Justice Department, Commodity
Futures Trading Commission and the United Kingdom's Financial
Services Authority continue to probe whether banks colluded to
manipulate the London interbank offered rate, which underpins
trillion of dollars in contracts and loans -- from U.S.
mortgages to Japanese interest-rate swaps.
New York and Connecticut state attorneys general announced
in July they were also probing possible manipulation.
Currently, Libor is based on banks' assessments of what they
expect to be charged rather than measuring actual lending rates.
Barclays Plc was the first bank to settle charges
that it manipulated Libor when it agreed in June to pay a $453
million fine. Other banks, including UK-based Royal Bank of
Scotland Group Plc and Switzerland's UBS AG,
are also being eyed by regulators as the investigation
Geithner's handling of Libor has come under fire by other
Republican lawmakers. Earlier this year, the New York Fed
released documents requested by the House Financial Services
Committee, which showed that as early as August 2007, Barclays
told Fed staffers about possible problems with Libor. Geithner,
who said he learned of the rigging in 2008, alerted authorities
to potential Libor-setting problems.
That committee is continuing to look into the Fed's response
to that information.
The New York Fed declined immediate comment.
AN AMERICAN BENCHMARK
Grassley and Kirk, echoing regulators, called for the
creation of an American benchmark to replace Libor.
"If U.S. investors and borrowers have suffered financial
harm from our dependence on an index set in London, they have
the right to expect the country's leaders to support better
alternatives," they wrote.
CFTC Chairman Gary Gensler has been calling for a revised
benchmark that would be based on observable transactions, to
limit the opportunity for manipulation.
"The critical thing is that it be based on observable
transactions, sufficient so that we don't have misconduct in the
setting of these rates," he told Reuters in an interview on
This contrasts with the emphasis in a report last week by
Martin Wheatley, a top UK regulator, that emphasized how Libor
should be repaired rather than replaced, as this could not be
done easily in the near term.
Wheatley, managing director of the Financial Services
Authority, mapped out in his report how to improve governance of
Libor, taking it out of the hands of the British Bankers
Association lobbying group, a step Gensler welcomed.
Wheatley and Gensler will now head an International
Organization of Securities Commissions' task force to look for
alternatives. It is due to report by next March.