By Denny Gulino

WASHINGTON (MNI) – Treasury Secretary Tim Geithner Wednesday found
himself still mired in questions about what he did about LIBOR in 2008,
as members of the House Financial Services Committee virtually ignored
the announced topic of their hearing, recommendations for long-term
reform of the financial system.

Geithner, appearing before the committee as chairman of the
Financial Stability Oversight Council of regulators, instead was again
and again taken back to his days as president of the New York Federal
Reserve Bank.

The partisan sparring went on for almost three hours, one more
reprise of the back and forth in the wake of the June 27 announcement of
nearly a half billion dollars in penalties extracted from the UK’s
second-largest bank, Barclays, almost half by the CFTC.

Typical of Republican questioning was that of Rep. Jeb Hensarling,
the Texas Republican who chairs the House Republican Conference. He
focused on the fact the New York Fed kept using LIBOR for its own
purposes even after Geithner had alerted market regulators to the
already widely reported possibility of major flaws in the rate
benchmark.

Although Geithner acknowledged “We were worried” about LIBOR,
Hensarling said that, “It appears that the early response was to keep
using it, which means it appears you treated it almost as a curiosity or
something akin to jaywalking as opposed to highway robbery.”

Geithner responded, “We were concerned about this and we did the
important and very consequential thing of bringing it to the attention
of the full complement of regulatory authorities.”

Was the N.Y. Fed obligated to keep using LIBOR, Hensarling asked.
“Of course not,” Geithner answered. “but we had to make a basic choice
among alternatives at that time and I think that was the right choice
back then.”

Hensarling continued, “A manipulated number versus a
non-manipulated number?”

Said Geithner, “I wouldn’t say it that way. I would say this was a
rate structured in a way that was vulnerable to misreporting. We were
very concerned about it. What we decided to do was to try to initiate a
reform of the process with the British but to make sure the relevant
authorities made use of it.”

Wednesday’s questions did not include any references to the
disclosure less than an hour before the hearing began. At a breakfast
appearance before reporters, CFTC Chairman Gary Gensler pointed out his
agency began its probe of Barclays at least a month before Geithner
briefed regulators on LIBOR in 2008. The trigger was not the N.Y. Fed,
Gensler said, but a newspaper article on the subject.

Federal Reserve Chairman Ben Bernanke last week told Congress that
no one at the Fed was aware at the time of one of the subsequent two
allegations by the CFTC, that traders has conspired in several banks to
manipulate rates. What had been known, according to both Geithner and
Bernanke, was that there was a potential for misreporting.

The first allegation, the one that has cost the jobs of Barclays’
top three executives, was that bank staff were instructed to lower their
rate submissions to make the bank appear less vulnerable to market
markups than was actually the case.

Gensler also pointed out that Barclays, in its settlement with the
CFTC, agreed to start using actual transactions, not bank estimates, as
the basis for its LIBOR submissions, a reform still at the early stages
of consideration among European regulators.

At another point in Wednesday’s hearing, Geithner said no one yet
knows if the U.S. government was victimized on net by artificially low
LIBOR rates and said that analysis is still under way. Lower LIBOR rates
would benefit borrowers but disadvantage lenders and to some extent, the
Fed and Treasury filled both roles to varying degrees.

“We do not know if we were disadvantaged by this process,” Geithner
said. “We don’t know what the net effect was on those prices” and “it
will take some time for them to figure that out.”

Geithner was cautious in answering exactly when he was informed
that N.Y. Fed telephone contacts with traders had, in one case, turned
up outright admissions of LIBOR manipulation, saying the N.Y. Fed is
currently combing the files. He said repeatedly “I believe” he did not
know of such telephone contacts, documented in transcripts released by
the N.Y. Fed, until mid 2008.

In one of the few departures from the LIBOR theme, Geithner said
the United States has been continually advising European authorities on
how to solve its problems and has been supporting some IMF involvement.
But, he repeated, the actual solution and its financing is up to the
Europeans.

“The market every day is making a new assessment about whether
Europe’s leaders are doing enough to hold it together,” he said.

Asked by a Republican congressman why his constituents in New
Mexico should believe the Treasury Secretary about the economy, as
Geithner prepares to leave the Treasury Department after Election Day,
Geithner responded, “I’m in public office. I have the privilege in that
context of makings lots of decisions. Those decisions are going to be
controversial decisions.”

Geithner continued, “I’ve taken a lot of criticism for judgments
I’ve had to make from both sides, but all I can do, and what’s my
responsibility, is to do what’s in the public interest and help the
president deal with the problems facing the country.”

** MNI Washington Bureau: 202-371-2121 **

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