HFSC Discusses LIBOR Manipulation , FSOC and the European Debt Crisis with Treasury Secretary Timothy Geithner
AT TODAY’S HOUSE FINANCIAL SERVICES COMMITTEE HEARING, members discussed the LIBOR manipulation scandal and the structure of financial services regulation with Treasury Secretary Timothy Geithner.
In his opening statement, Geithner discussed the strengths and weaknesses of the financial system, progress regulatory bodies have made in implementing reform, and the Financial Stability Oversight Council’s (FSOC) recommendations to further improve stability. He cited statistics demonstrating financial institutions’ improved capital positions, the falling costs of credit, and reduced leverage ratios. While acknowledging that U.S. financial institutions have reduced their exposure to “tenuous” European economies, he said a severe recession abroad would still have a major impact on the U.S. economy. He explained that the economic slowdown the U.S. is currently experiencing could be additionally exacerbated by the approaching fiscal cliff, and argued that these potential threats “underscore the need for continued progress in repairing the remaining damage from the financial crisis and enacting reforms to make the system stronger for the long run.”
Geithner also noted several key improvements various regulatory bodies have made to the financial system, including stronger capital and liquidity requirements, enhanced supervision and prudential standards, the establishment of an orderly liquidation authority, increased derivatives oversight, and better consumer and investor protections. To further improve financial stability, Geithner recommended strategies to address vulnerabilities in wholesale short-term funding markets, like money market funds and the tri-party repo market. He also suggested governing the holding and protection of customer funds deposited for trading on foreign futures markets and clarifying standards for mortgage underwriting.
Question and Answer
The question and answer session largely focused on the LIBOR manipulation scandal, specifically focusing on when Geithner was aware of LIBOR manipulation and his actions to address the issue. It was also clear from some of the questions that Members do not fully understand the LIBOR manipulation scandal, including how the LIBOR rate is set and if U.S. regulators have the authority to bring enforcement actions against the banks responsible for manipulating the rate.
Geithner said he first became aware of possible LIBOR manipulation in the spring of 2008 and shortly thereafter, briefed President Obama’s Working Group on Financial Markets on the subject – the working group consisted of representatives from the Commodity Futures Trading Commission (CFTC), the Securities and Exchange Commission (SEC), and the Federal Reserve Board among others. He also said that he shared his concerns about the LIBOR rate with the then Governor of the Bank of England, and sent him a “very detailed memorandum recommending a series of changes.”
When asked what actions the President’s working group took in response to Geithner’s concerns, Geithner said the CFTC initiated a confidential, “very far reaching” investigation that has culminated in the enforcement action earlier this month. He added that after sending the LIBOR memo to the Bank of England, the New York Fed followed up three times with the British Bankers Association. He said the Association took some steps to address the issue, but “obviously we don’t think they went far enough.”
Rep. Maxine Waters (D-Calif.) asked Geithner to expand on regulatory agencies’ reactions to the LIBOR manipulation scandal and the impact it will have on financial markets going forward. Geithner described Treasury recommendations to the British rulemaking authorities, which include specific points to make it “untenable” for LIBOR to be manipulated. He said FSOC and other relevant agencies are working to address any remaining implications for the financial system by investigating similar rates overseen by private firms and examining alternatives to Libor. Assuring the Committee that FSOC intends to cooperate fully with Congress, he stressed that enforcement agencies be given enough resources to work effectively.
Rep. Stephen Lynch (D-Mass.) asked Geithner to detail specific recommendations to enhance the credibility of LIBOR. Geithner said it is important to strengthen governance and reporting procedures, add a second U.S. dollar fixing for the LIBOR market, specify the size of transactions, and eliminate incentives to misreport.
Chairman Spencer Bachus (R-Ala.) asked Geithner if the Treasury’s use of LIBOR to set the AIG and TARP bailouts will have an adverse effect on taxpayers. Geithner said Treasury was “just like every other investor in the world” when those bailouts were being contemplated and needed to choose the “best rate available at the time,” which he said was the LIBOR rate. He said Treasury and other regulatory agencies are currently examining the extent of the manipulation and will be able to determine the impact on taxpayers when that examination is completed.
Rep. Ron Paul (R-Texas) asked if Geithner would support a change in policy where the Fed would be given the authority to buy Treasury debt directly instead of using bond brokers. Geithner said he is a strong defender of two principles: “First is making sure the Fed has full authority to set monetary policy, independent of politics, and, second, to make sure that there’s nothing in the relationship between the Fed and the Treasury that would raise concerns that the Federal Reserve is directly financing the fiscal deficits of the United States.” Geithner said Paul’s proposal could run afoul of the second principle, but would need to review it more closely.
Rep. Walter Jones (R-N.C.) asked Geithner if it is time to have a debate about reinstating the Glass-Steagall Act. Geithner said Congress considered reinstating Glass-Steagall when considering the Dodd-Frank Act, and will consider reinstating it in the future, but noted that the reforms instituted by the Dodd-Frank Act are “very tough,” touting its capital requirements, limits on the size of banking institutions and restrictions on government rescues.
Rep. Judy Biggert (R-Ill.) focused her questions on AIG, specifically asking which regulatory agency was responsible for overseeing its activities before the crisis and who is responsible for regulating it today. She referenced the recent TARP Special Inspector General Report on AIG oversight, which stated that for the last two years AIG has operated without the oversight of a consolidated banking regulator.
Geithner said “no competent authority was responsible and accountable for AIG.” He said the Office of Thrift Supervision (OTS) did have some oversight authority over AIG, but it did not have the proper authority to oversee all of the entity’s operations. Geithner noted that FSOC is in the process of designating which non-banks are systemically important financial institutions (SIFIs) and ensuring their compliance with heightened capital standards. He added that according to current estimates, taxpayers will earn a positive return on AIG’s bailout funds.
Rep. Gary Miller (R-Calif.) asked Geithner to update the Committee on the Office of Financial Research’s (OFR) study analyzing the asset management industry, specifically asking if the OFR is accepting input from the industry and when the study will be completed. Geithner said OFR is making a lot of progress on the study, but he is unsure when OFR will complete it. He said the OFR is using publically available information about the systemic risk and structure of the asset management industry, implying that OFR is not asking for direct input from asset management firms.
Miller also asked what the FSOC is doing to ensure that global SIFI oversight is coordinated and not preempted by existing foreign regulations. Geithner said U.S. and foreign regulators have negotiated a set of uniform rules that apply to all SIFIs, and noted that the Fed is working with other central banks to make sure that those rules are enforced consistently.
Rep. Brad Sherman (D-Calif.) asked about the potential effects of eliminating the home mortgage and property tax deductions. Geithner said that housing prices would fall, weakening the health of Fannie and Freddie and increasing foreclosure rate. Noting that there is a “very long way to go” in repairing the housing market, he encouraged Congress to consider legislation to refinance underwater homeowners.
Rep. Carolyn Maloney (D-N.Y.) asked Geithner to comment on the effects of the debt ceiling crisis last summer. Geithner said the threat of default is “very damaging” and caused economic growth to slow last summer. Noting a “precipitous drop” in consumer and business confidence during last year’s debt crisis, he said it would be detrimental to the economy if such a crisis occurred again.
Rep. Scott Garrett (R-N.J.) expressed his distaste for the idea of a non-bank SIFI and announced that he will be drafting legislation to prevent regulators from using this designation, arguing that it will lead to consolidation in the asset management and insurance industries, and provide the designees a “financial advantage.” Geithner disagreed with Garrett’s characterization of the non-bank SIFI designation, saying that he does not believe the designation will confer a financial advantage because the designation requires an entity to hold greater capital against its risk.
Rep. Gregory Meeks (D-N.Y) asked for Geithner’s opinion on recent proposals that use eminent domain to purchase underwater mortgages at a fair market value and reissue them to homeowners. Geithner said he was carefully reviewing the proposal, but noted that it raises complicated legal issues. He made a point to stress the “broad range of other tools available…within existing authority” to provide principal reduction to underwater homeowners.
Rep. Patrick McHenry (R-N.C.) asked if the European Debt Crisis will get worse before it gets better. Geithner said the answer is entirely dependent on the choices European countries make going forward. He said the Eurozone is implementing tough reforms to make their member state economies’ more efficient and competitive, but acknowledged that they must focus more attention on instituting better fiscal discipline and better management of their financial systems. In the short term, Giethner said Europe must do more to promote confidence in their markets and banking system.
Following up, McHenry asked Geithner to detail the Administration’s plan to address the Debt Crisis. Geithner said the U.S. has been encouraging European leaders to move more aggressively to contain the damage from the crisis. He said the Fed and Treasury have also been working to mitigate the effects of the crisis on the U.S. economy, referencing the recent swap line agreements with the European Union. However, Geithner said the ultimate solutions to the problems that Europe is facing “will have to come from the Europeans.”
Rep. Luis Gutierrez (D-Ill.) asked Geithner to expand on the annual report and discuss measures the FSOC has taken to protect the economy. Emphasizing the difficulties and complexities of writing financial regulation, Geithner highlighted banks’ higher capital levels, increased derivatives oversight, reduced potential for systemic failure, and improved disclosure standards for credit cards and mortgages.
Rep. Nydia Velazquez (D-N.Y.) asked Geithner how to restore confidence in the economy. Geithner said that new rules need to be enforced by strong authoritative bodies and bad actors must be held accountable for their actions.
For testimony and a webcast of the hearing, please click here.
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AT TODAY’S HOUSE FINANCIAL SERVICES COMMITTEE HEARING, members discussed the LIBOR manipulation scandal and the structure of financial services regulation with Treasury Secretary Timothy Geithner.
In his opening statement, Geithner discussed the strengths and weaknesses of the financial system, progress regulatory bodies have made in implementing reform, and the Financial Stability Oversight Council’s (FSOC) recommendations to further improve stability. He cited statistics demonstrating financial institutions’ improved capital positions, the falling costs of credit, and reduced leverage ratios. While acknowledging that U.S. financial institutions have reduced their exposure to “tenuous” European economies, he said a severe recession abroad would still have a major impact on the U.S. economy. He explained that the economic slowdown the U.S. is currently experiencing could be additionally exacerbated by the approaching fiscal cliff, and argued that these potential threats “underscore the need for continued progress in repairing the remaining damage from the financial crisis and enacting reforms to make the system stronger for the long run.”
Geithner also noted several key improvements various regulatory bodies have made to the financial system, including stronger capital and liquidity requirements, enhanced supervision and prudential standards, the establishment of an orderly liquidation authority, increased derivatives oversight, and better consumer and investor protections. To further improve financial stability, Geithner recommended strategies to address vulnerabilities in wholesale short-term funding markets, like money market funds and the tri-party repo market. He also suggested governing the holding and protection of customer funds deposited for trading on foreign futures markets and clarifying standards for mortgage underwriting.
Question and Answer
The question and answer session largely focused on the LIBOR manipulation scandal, specifically focusing on when Geithner was aware of LIBOR manipulation and his actions to address the issue. It was also clear from some of the questions that Members do not fully understand the LIBOR manipulation scandal, including how the LIBOR rate is set and if U.S. regulators have the authority to bring enforcement actions against the banks responsible for manipulating the rate.
Geithner said he first became aware of possible LIBOR manipulation in the spring of 2008 and shortly thereafter, briefed President Obama’s Working Group on Financial Markets on the subject – the working group consisted of representatives from the Commodity Futures Trading Commission (CFTC), the Securities and Exchange Commission (SEC), and the Federal Reserve Board among others. He also said that he shared his concerns about the LIBOR rate with the then Governor of the Bank of England, and sent him a “very detailed memorandum recommending a series of changes.”
When asked what actions the President’s working group took in response to Geithner’s concerns, Geithner said the CFTC initiated a confidential, “very far reaching” investigation that has culminated in the enforcement action earlier this month. He added that after sending the LIBOR memo to the Bank of England, the New York Fed followed up three times with the British Bankers Association. He said the Association took some steps to address the issue, but “obviously we don’t think they went far enough.”
Rep. Maxine Waters (D-Calif.) asked Geithner to expand on regulatory agencies’ reactions to the LIBOR manipulation scandal and the impact it will have on financial markets going forward. Geithner described Treasury recommendations to the British rulemaking authorities, which include specific points to make it “untenable” for LIBOR to be manipulated. He said FSOC and other relevant agencies are working to address any remaining implications for the financial system by investigating similar rates overseen by private firms and examining alternatives to Libor. Assuring the Committee that FSOC intends to cooperate fully with Congress, he stressed that enforcement agencies be given enough resources to work effectively.
Rep. Stephen Lynch (D-Mass.) asked Geithner to detail specific recommendations to enhance the credibility of LIBOR. Geithner said it is important to strengthen governance and reporting procedures, add a second U.S. dollar fixing for the LIBOR market, specify the size of transactions, and eliminate incentives to misreport.
Chairman Spencer Bachus (R-Ala.) asked Geithner if the Treasury’s use of LIBOR to set the AIG and TARP bailouts will have an adverse effect on taxpayers. Geithner said Treasury was “just like every other investor in the world” when those bailouts were being contemplated and needed to choose the “best rate available at the time,” which he said was the LIBOR rate. He said Treasury and other regulatory agencies are currently examining the extent of the manipulation and will be able to determine the impact on taxpayers when that examination is completed.
Rep. Ron Paul (R-Texas) asked if Geithner would support a change in policy where the Fed would be given the authority to buy Treasury debt directly instead of using bond brokers. Geithner said he is a strong defender of two principles: “First is making sure the Fed has full authority to set monetary policy, independent of politics, and, second, to make sure that there’s nothing in the relationship between the Fed and the Treasury that would raise concerns that the Federal Reserve is directly financing the fiscal deficits of the United States.” Geithner said Paul’s proposal could run afoul of the second principle, but would need to review it more closely.
Rep. Walter Jones (R-N.C.) asked Geithner if it is time to have a debate about reinstating the Glass-Steagall Act. Geithner said Congress considered reinstating Glass-Steagall when considering the Dodd-Frank Act, and will consider reinstating it in the future, but noted that the reforms instituted by the Dodd-Frank Act are “very tough,” touting its capital requirements, limits on the size of banking institutions and restrictions on government rescues.
Rep. Judy Biggert (R-Ill.) focused her questions on AIG, specifically asking which regulatory agency was responsible for overseeing its activities before the crisis and who is responsible for regulating it today. She referenced the recent TARP Special Inspector General Report on AIG oversight, which stated that for the last two years AIG has operated without the oversight of a consolidated banking regulator.
Geithner said “no competent authority was responsible and accountable for AIG.” He said the Office of Thrift Supervision (OTS) did have some oversight authority over AIG, but it did not have the proper authority to oversee all of the entity’s operations. Geithner noted that FSOC is in the process of designating which non-banks are systemically important financial institutions (SIFIs) and ensuring their compliance with heightened capital standards. He added that according to current estimates, taxpayers will earn a positive return on AIG’s bailout funds.
Rep. Gary Miller (R-Calif.) asked Geithner to update the Committee on the Office of Financial Research’s (OFR) study analyzing the asset management industry, specifically asking if the OFR is accepting input from the industry and when the study will be completed. Geithner said OFR is making a lot of progress on the study, but he is unsure when OFR will complete it. He said the OFR is using publically available information about the systemic risk and structure of the asset management industry, implying that OFR is not asking for direct input from asset management firms.
Miller also asked what the FSOC is doing to ensure that global SIFI oversight is coordinated and not preempted by existing foreign regulations. Geithner said U.S. and foreign regulators have negotiated a set of uniform rules that apply to all SIFIs, and noted that the Fed is working with other central banks to make sure that those rules are enforced consistently.
Rep. Brad Sherman (D-Calif.) asked about the potential effects of eliminating the home mortgage and property tax deductions. Geithner said that housing prices would fall, weakening the health of Fannie and Freddie and increasing foreclosure rate. Noting that there is a “very long way to go” in repairing the housing market, he encouraged Congress to consider legislation to refinance underwater homeowners.
Rep. Carolyn Maloney (D-N.Y.) asked Geithner to comment on the effects of the debt ceiling crisis last summer. Geithner said the threat of default is “very damaging” and caused economic growth to slow last summer. Noting a “precipitous drop” in consumer and business confidence during last year’s debt crisis, he said it would be detrimental to the economy if such a crisis occurred again.
Rep. Scott Garrett (R-N.J.) expressed his distaste for the idea of a non-bank SIFI and announced that he will be drafting legislation to prevent regulators from using this designation, arguing that it will lead to consolidation in the asset management and insurance industries, and provide the designees a “financial advantage.” Geithner disagreed with Garrett’s characterization of the non-bank SIFI designation, saying that he does not believe the designation will confer a financial advantage because the designation requires an entity to hold greater capital against its risk.
Rep. Gregory Meeks (D-N.Y) asked for Geithner’s opinion on recent proposals that use eminent domain to purchase underwater mortgages at a fair market value and reissue them to homeowners. Geithner said he was carefully reviewing the proposal, but noted that it raises complicated legal issues. He made a point to stress the “broad range of other tools available…within existing authority” to provide principal reduction to underwater homeowners.
Rep. Patrick McHenry (R-N.C.) asked if the European Debt Crisis will get worse before it gets better. Geithner said the answer is entirely dependent on the choices European countries make going forward. He said the Eurozone is implementing tough reforms to make their member state economies’ more efficient and competitive, but acknowledged that they must focus more attention on instituting better fiscal discipline and better management of their financial systems. In the short term, Giethner said Europe must do more to promote confidence in their markets and banking system.
Following up, McHenry asked Geithner to detail the Administration’s plan to address the Debt Crisis. Geithner said the U.S. has been encouraging European leaders to move more aggressively to contain the damage from the crisis. He said the Fed and Treasury have also been working to mitigate the effects of the crisis on the U.S. economy, referencing the recent swap line agreements with the European Union. However, Geithner said the ultimate solutions to the problems that Europe is facing “will have to come from the Europeans.”
Rep. Luis Gutierrez (D-Ill.) asked Geithner to expand on the annual report and discuss measures the FSOC has taken to protect the economy. Emphasizing the difficulties and complexities of writing financial regulation, Geithner highlighted banks’ higher capital levels, increased derivatives oversight, reduced potential for systemic failure, and improved disclosure standards for credit cards and mortgages.
Rep. Nydia Velazquez (D-N.Y.) asked Geithner how to restore confidence in the economy. Geithner said that new rules need to be enforced by strong authoritative bodies and bad actors must be held accountable for their actions.
For testimony and a webcast of the hearing, please click here.