Interest rate scandal attracts Hill scrutiny

Lawmakers in the House and Senate are taking an interest in the brewing bank scandal in Britain and are seeking more information about allegations that a key interest rate was widely rigged.

On Tuesday, Senate Banking Committee Chairman Tim Johnson (D-S.D.) announced his panel plans to explore the allegations in the Libor scandal, and said he expects answers on the matter from Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke.

The head of investigations for the House Financial Services Committee, meanwhile, is pressing the Federal Reserve Bank of New York for communications it had with the bank at the center of the scandal while the rate-fixing was ongoing.

Johnson said questions over whether banks artificially pushed to lower an interbank lending rate, the London Interbank Offered Rate or Libor, merited exploration. The rate is used as a benchmark for a slew of loans worldwide, including mortgages and student loans.

{mosads}“I am concerned by the growing allegations of potential widespread manipulation of LIBOR and similar interbank rates by some financial firms. At my direction, the Committee staff has begun to schedule bipartisan briefings with relevant parties to learn more about these allegations and related enforcement actions,” he said in a statement. “It is important that we understand how any manipulation may impact American consumers and the U.S. financial system.”

Johnson announced that Bernanke will testify before his panel on Tuesday and will field questions about the possible market manipulation. Geithner will make an appearance later this month at a separate hearing. 

In June, U.S. and U.K. regulators announced a massive settlement with Barclay’s, Britain’s largest bank, over allegations it conspired to manipulate the interest rate to maximize profits and deflect scrutiny during the financial crisis. 

The Libor is set by the reports of 18 global banks and is based on how much it costs them to borrow from each other. Regulators charge that Barclays for years submitted artificially lower figures, in part because higher lending costs during the financial crisis could have been interpreted as a sign of instability.

The settlement, totaling roughly half a billion dollars, also led to probing hearings by British lawmakers, as well as the resignation of several top bank officials, including Barclays Chief Executive Robert Diamond. However, Diamond has also indicated that the bank was pressed to report lower rates by other institutions.

In a letter sent to N.Y. Fed President William Dudley, Rep. Randy Neugebauer (R-Texas) asked for any communications the bank had with Barclays from August 2007 to November 2009 regarding the setting of Libor. 

The letter, sent Monday, cites Diamond’s recent testimony before a British panel, in which he says his bank “repeatedly raised” concerns about the Libor with U.S. regulators, including a dozen conversations with the regional Fed bank. Geithner was head of the N.Y. Fed from 2003 until he left to head President Obama’s economic team, and Neugebauer is chairman of the investigations subcommittee of House Financial Services.

Sen. Richard Shelby (R-Ala.), the top Republican on the Banking Committee, is working with Johnson on the issue, and specifically is looking into Geithner’s role in it.

“I am specifically interested in learning what role then-FRBNY President Timothy Geithner played in these events,” he said in a statement.

Sen. Richard Shelby (R-Ala.), the top Republican on the Banking Committee, is working with Johnson on the interest rate issue, and said he is looking into Geithner’s role in it.

“I am specifically interested in learning what role then-FRBNY President Timothy Geithner played in these events,” he said in a statement.

The N.Y. Fed said in a statement that it received “occasional anecdotal reports” from Barclays about Libor problems, but they were among “thousands of calls and e-mails with market participants” in the aftermath of the financial crisis. It added that it further inquired on the matter in the spring of 2008, and shared its analysis with U.K. regulators.

This post was last updated at 4:19 p.m.