Friday, November 16, 2012

Senators Put Hold on Office of Financial Research Director over Treasury’s Failure to Respond to LIBOR Concerns

Senators Charles Grassley (R-Iowa) and Mark Kirk (R-IL) have put a hold on the nomination of Richard Berner to be the head of  the new Dodd-Frank created Office of Financial Research due to Treasury’s failure to respond to issues surrounding LIBOR. The OFR is designed to assist the Financial Stability Oversight Council by conducting studies and accumulating financial data.

Specifically, the Senators are concerned that Treasury failed to respond to their October 2 letter to Sescribed as a rigged interest rate that affects interest rates on mortgages, student loans, credit cards and other loans. In the letter to the Secretary, the Senators asked Mr. Geithner to answer a series of questions including whether the Treasury Department has calculated the increased debt burden that  U.S. borrowers, including state, municipal, and local governments, will face as a result of the LIBOR scandal.

The Senators also ask if U.S. officials considered the litigation risks to U.S. borrowers in deciding to bring the LIBOR scandal only to the attention of British central banks rather than U.S. lenders and borrowers and whether the Treasury Department’s continued reliance on LIBOR is affecting borrower access to Small Business Administration loans. The Secretary’s response to the questions was requested by October 16.

The London interbank offered rate, or LIBOR, is the average interest rate that banks use to borrow from each other.  Set in London, the rate is one of the main rates that determine the cost of interest for trillions of dollars of loans on a variety of everyday consumer loans such as mortgages and more complicated financial instruments such as derivatives.

Senators Grassley and Kirk emphasized that, in the wake of the LIBOR scandal, it is essential to undertake steps to consider the creation of a US-based interest rate index. If U.S. investors and borrowers have suffered financial harm from dependence on an index set in London, they have the right to expect the country’s leaders to support better alternatives. Complacency in the wake of losses and lawsuits will diminish both investor and borrower confidence regarding debt securities issued in U.S. financial markets, said the Senators.

Taxpayers need to know that the Treasury Department is making sure that the interest rates they pay on everything from home loans to retirement investments are not rigged, said Senator Grassley. Treasury must take swift action to inform consumers, homeowners, students and other borrowers about potential impacts of faulty interest rates, added Senator Kirk, a member of the Senate Banking Committee. The financial system depends on this crucial information, he posited, and Treasury should consider alternative solutions to boost confidence in the marketplace.”

In the letter, the Senators noted that, in recent testimony before Congress, Secretary Geithner said that when, as president of the Federal Reserve Bank of New York, he became aware of concerns that the LIBOR rate was being rigged, he deferred to the British central bankers to fix the problem.  Despite those concerns, continued the Senators, Mr. Geithner appears not to have taken action to diminish use of this flawed index in U.S. financial markets; to the contrary, Treasury’s use of LIBOR has increased.

Recently, a Task Force headed by Martin Wheatley, UK Financial Services Authority Managing Director, recommended three specific regulatory reforms to restore credibility to LIBOR. First, regulation of LIBOR by the FSA. Second, the key persons in the LIBOR process should be approved by the FSA. Third, amending the Financial Services and Markets Act to allow the FSA to prosecute the manipulation of LIBOR.

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