Geithner set to defend actions on Libor, Wall Street reform before Congress

Treasury Secretary Timothy Geithner will be mounting a defense of the financial reform law and his own stint running the Federal Reserve Bank of New York as ongoing scandals cast renewed clouds over Wall Street.

The president’s top economic advisor is set to testify this week before banking panels in the House and Senate, just days after the Wall Street overhaul turns two years old, and in the midst of a rate-rigging scandal that could reach far across the financial sector.

Geithner’s upcoming testimony has been in the works for weeks, and was intended to address a broad range of issues tied to the financial reform law.

{mosads}But a burgeoning banking scandal over the London Interbank Offered Rate (Libor) now will compete for the spotlight. Before becoming Treasury Secretary, Geithner was president of the Federal Reserve Bank of New York when it first learned potential rigging of the benchmark interest rate was occurring.

Rep. Randy Neugebauer (R-Texas), who heads the House panel’s subcommittee on investigations, told The Hill earlier this month that he is confident Geithner will be faced with questions about the scandal during his appearance.

Geithner may have gotten a sneak preview from Federal Reserve Chairman Ben Bernanke’s testimony before the same two committees this past week.

Like Geithner, Bernanke was invited to give his regular testimony on the state of the nation’s monetary policy. And while plenty of lawmakers did press him on the Fed’s plans for the economy, many also took the opportunity to dig into the Libor scandal.

The first question Bernanke faced from the Senate panel was about the scandal, as Chairman Tim Johnson (D-S.D.) asked him for details on how the Fed handled the discovery of rate-rigging. Bernanke maintained that the Fed referred the matter to the appropriate regulators as soon as it learned of the problem.

The Libor is set based on rates reported by a handful of large banks borrowing from each other. During the financial crisis, the British bank Barclays admitted to the New York Fed that it was reporting artificially lower borrowing rates in order to protect its reputation as worry gripped the financial system. Barclays has since paid nearly half a billion dollars in penalties over the rate-rigging, and an investigation into what other banks may have been engaged in the practice is underway.

The New York Fed released documents earlier this month that revealed it first heard of the false reporting in April 2008, and also revealed an email Geithner sent to the Bank of England detailing ways to improve the integrity of the Libor, which is used to help set the rates on a slew of consumer products like mortgages and credit cards.

However, it was clear from Bernanke’s testimony that some lawmakers were not satisfied with a mere referral or recommendations.

Sen. Pat Toomey (R-Pa.) aggressively pressed Bernanke on why the Fed failed to do more to address the issue years ago, when it first emerged.

“Why have we allowed it go on the old way when we knew it was flawed for the last four years, with trillions of dollars of transactions?” he asked. “You have enormous influence over institutions engaging in this.”

A spokesman for Toomey said Friday the senator plans to be “very active” in grilling Geithner at Thursday’s hearing.

For his part, Geithner has defended his and the Fed’s response to the scandal, saying they did “the right and necessary thing” in an appropriate timeframe.

“We were forceful from the beginning, and you’ve seen now a very forceful enforcement response,” he said in a CNBC interview Wednesday.

When pressed on why it has taken years for those initial concerns to turn into public enforcement action, Geithner painted it as a responsible approach.

“These cases, as you know, take some time. And you could ask yourself: Why couldn’t the enforcement response be quicker?” he said. “But there’s strength in that too, because they want to do this stuff carefully.”

Libor is likely to be just one area Geithner will have to field questions from lawmakers. He is likely to be peppered with a slew of questions tied to the work of the Financial Stability Oversight Council (FSOC), ranging from helping to implement the contentious “Volcker Rule,” to its work identifying what firms qualify as “systemically significant” and merit heightened regulation.

But even then, the ongoing Libor scandal, coupled with the multibillion dollar trading losses suffered at JPMorgan, will play a role in the debate on Wall Street reform.

“We expect that trading losses at JP Morgan and the LIBOR investigations will give ammo to those who argue that the largest banks are too big to be managed effectively or regulated and need to shrink or be broken up,” wrote Brian Gardner, senior vice president of Washington research at Keefe Bruyette & Woods in a note to clients Friday.