WASHINGTON – The Federal Reserve Bank of New York released documents Friday that show it learned five years ago of big banks understating their borrowing costs to manipulate a key interest rate.
The documents also show Treasury Secretary Timothy Geithner, who was then president of the New York Fed, urged the Bank of England to make the rate-setting process more transparent.
A congressional panel requested the documents and is investigating manipulation of the London interbank offered rate (LIBOR) rate, which affects interest people pay on loans.
The process for setting LIBOR has come under scrutiny since Britain's Barclays bank admitted two weeks ago that it had submitted false information to keep the rate low. In settlements with U.S. and British regulators, the bank agreed to pay a $453 million fine.
Regulators are also looking to see if other major banks, including Citigroup Inc. and JPMorgan Chase & Co., committed similar violations.
The LIBOR rate is little-known outside the financial industry. But it provides the architecture for trillions of dollars in contracts around the world, including mortgages.
A British banking trade group sets the rate every morning after international banks submit estimates of what it costs them to borrow money.
The documents show correspondence from Barclays bank to the New York Fed in 2007 indicated some major banks may have been trying to rig the rate.
Then in April 2008, an employee of Britain's Barclays told the New York Fed the bank had underreported its borrowing costs to keep the key interest rate low.
The employee explained that Barclays was understating its borrowing costs because other big banks were doing the same.
"So, we know that we're not posting um, an honest LIBOR," the Barclays employee says, according to the transcript of the April 2008 telephone call. "And yet we are doing it because um, if we didn't do it ... it draws, um, unwanted attention on ourselves."
On June 1, 2008, Geithner sent an email to Mervyn King, the head of the Bank of England, urging the British central bank to change the way the LIBOR is calculated.
Internal New York Fed reports also show regulators were concerned about the accuracy of the LIBOR rate. And in a June 5, 2008 report to a group of U.S. federal regulators, analysts at the New York Fed cited possible misreporting of the rate.
While Geithner expressed concerns to the British central bank, it wasn't until last month that U.S. and British regulators won a settlement with Barclays and imposed fines.
It isn't clear why Geithner didn't make his concerns public after he sent the email in 2008.
Treasury spokeswoman Natalie Wyeth declined to comment on the subject Friday.
The New York Fed released the documents at the request of Rep. Randy Neugebauer, R-Texas, who heads the House Financial Services investigative panel.
"As much as $800 trillion in financial products are pegged to LIBOR, so any manipulation of this rate is of serious concern," Neugebauer said in a statement Friday. "We'll continue looking into this matter to determine who was involved in this practice and whether it could have been prevented by regulators."
Sen. Tim Johnson, chairman of the Senate Banking Committee, said Geithner and Federal Reserve Chairman Ben Bernanke should be prepared to answer questions on the subject when they appear before his committee later this month.
The chairman of Barclays, Bob Diamond, resigned last week and had to forfeit up to $31 million in bonuses and incentives.