Friday, July 13, 2012

In Letter to FSOC Members, Leading Senators Urge Investigation of LIBOR Manipulation

Senators Jack Reed (D-RI), Chair of the Securities Subcommittee and Carl Levin (D-MI), Chair of the Oversight Subcommittee, have asked the members of the Financial Stability Oversight Council (FSOC), including the SEC and CFTC Chairs, to restore confidence in the financial markets in the wake of the LIBOR manipulation  by conducting prompt and thorough investigations and taking appropriate actions against any wrongdoers, and fixing this process so that breaches of confidence like this do not happen again. The Senators urged the FSOC members to direct their staffs to assess the current LIBOR process, to detail areas where abuse has or could occur, and outline proposals that will restore the market’s confidence. The letter, which was also sent to the US Attorney General, was also signed by Senators Dianne Feinstein (D-CA), Tom Harkin (D-IA), Patrick Leahy (D-VT), Robert Menendez (D-NJ), Sherrod Brown (D-OH), Jeff Merkley (D-OR), Sheldon Whitehouse (D-RI), Frank Lautenberg (D-NJ), Daniel Akaka (D-HI), and Jeanne Shaheen (D-NH).

The London Inter-Bank Offered Rate (LIBOR) is a measure of the cost of borrowing between banks and a crucial benchmark for various interest rates worldwide. It is used to set interest rates for credit cards, student loans, and mortgages in the United States.  It has been termed the world's most important benchmark for interest rates, underpinning approximately $800 trillion in loans, derivatives, and other financial instruments. It is also used by regulators and the markets to help evaluate the financial strength of banks

The Senators are concerned that global financial institutions, including several based in the United States, may be involved in an effort to purposely misstate LIBOR. At its most basic level, noted the Senators, manipulating LIBOR by submitting inaccurate numbers might help these financial institutions improve the value of their own LIBOR-linked trading positions and improve market participants’ and regulators’ perceptions of their soundness and lower their borrowing cost.

In settlements with the CFTC and DOJ, said the Senators, one bank admitted and accepted responsibility for its misconduct in manipulating LIBOR. But, they emphasized that much more needs to be done. In that spirit, the Senators urged the SEC, CFTC and other financial regulators to direct their staffs to thoroughly investigate the banks and the process involved in setting LIBOR for any wrongdoing.  Banks and their employees found to have broken the law should face appropriate criminal prosecution and civil action. 

The Senators are similarly troubled by allegations that U.S. and foreign bank regulators may have been aware of this wrongdoing for years.  Just like the banks and executives they oversee, reasoned the Senators, regulators who were involved should be held to account for any failures to stop wrongdoing that they knew, or should have known about.