Senate Banking Committee Questions Geithner About LIBOR , Housing
AT TODAY’S SENATE BANKING COMMITTEE HEARING, members discussed the Financial Stability Oversight Council’s (FSOC) annual report to Congress and questioned Treasury Secretary Timothy Geithner about the LIBOR manipulation scandal.
In his testimony, Geithner discussed the progress regulatory agencies have made in implementing reform and FSOC’s 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 & Answer
Much of the question and answer portion of the hearing focused on the LIBOR manipulation scandal. Geithner said he first became aware of possible LIBOR manipulation in early 2008 and then 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 LIBOR with the then Governor of the Bank of England, and sent him a “very detailed memorandum recommending a series of changes.” Geithner said the Governor was receptive to his recommendations.
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.
Chairman Tim Johnson (D-S.D.) asked what else could be done to reduce systemic risk. Geithner said FSOC is examining reforms and possible alternatives to LIBOR and said there needs to be a global effort to reform.
Ranking Member Richard Shelby (R-Ala.) asked why LIBOR is so important. Geithner explained that LIBOR is set in 10 different currencies with 15 different maturities and said many financial contracts around the world reference LIBOR. He said the loss of trust resulting from the scandal could have a greater damaging effect on the financial markets than the financial implications themselves.
Senator David Vitter (R-La.) asked why LIBOR was used for the Troubled Asset Relief Program (TARP) bailouts when Geithner had knowledge of potential misreporting. Geithner said the Treasury made use of the best rate available at that time, “like many investors.” He added that it is currently unknown whether borrowers were disadvantaged by using LIBOR yet.
Senator Patrick Toomey (R-Pa.) asked why Geithner did not warn the American people or use his influence to persuade financial institutions to adopt an alternative rate when he learned of the risk in 2008. Geithner argued that the system works through enforcement actions and consequences and said the CFTC started their investigation at that time. He added that the problems were there for people to see and said the Wall Street Journal did a “good job” of reporting on the issue.
Senator Jeff Merkley (D-Ore.) said there are four million families locked into high interest, non-GSE loans that are at a high risk for foreclosure. Merkley mentioned his proposal to help families refinance who are unable to do so now and asked for Geithner to comment on the proposal. Geithner said he thought the policy is “very good,” and the Treasury would be interested in launching pilot programs, but said he is unsure if the Treasury has the legal authority or resources to launch such programs.
Senator Michael Crapo (R-Idaho) said care must be taken not to undermine the housing market as regulations move forward. He asked Geithner if there needs to be a broad qualified mortgage definition and cited the Consumer Financial Protection Bureau (CFPB) comments that if it is drawn too narrowly it could upset the mortgage market.
Geithner agreed and said mortgage credit is tighter than it should be because banks and creditors feel more vulnerable now. Geithner said the CFPB is trying to balance the “obvious need for more prudent underwriting standards, more standardization, and better disclosure” without going too far. He said the rules should be designed together and carefully so as not to restrict mortgage credit more than may be necessary.
More information and a webcast of the hearing can be found here.
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AT TODAY’S SENATE BANKING COMMITTEE HEARING, members discussed the Financial Stability Oversight Council’s (FSOC) annual report to Congress and questioned Treasury Secretary Timothy Geithner about the LIBOR manipulation scandal.
In his testimony, Geithner discussed the progress regulatory agencies have made in implementing reform and FSOC’s 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 & Answer
Much of the question and answer portion of the hearing focused on the LIBOR manipulation scandal. Geithner said he first became aware of possible LIBOR manipulation in early 2008 and then 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 LIBOR with the then Governor of the Bank of England, and sent him a “very detailed memorandum recommending a series of changes.” Geithner said the Governor was receptive to his recommendations.
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.
Chairman Tim Johnson (D-S.D.) asked what else could be done to reduce systemic risk. Geithner said FSOC is examining reforms and possible alternatives to LIBOR and said there needs to be a global effort to reform.
Ranking Member Richard Shelby (R-Ala.) asked why LIBOR is so important. Geithner explained that LIBOR is set in 10 different currencies with 15 different maturities and said many financial contracts around the world reference LIBOR. He said the loss of trust resulting from the scandal could have a greater damaging effect on the financial markets than the financial implications themselves.
Senator David Vitter (R-La.) asked why LIBOR was used for the Troubled Asset Relief Program (TARP) bailouts when Geithner had knowledge of potential misreporting. Geithner said the Treasury made use of the best rate available at that time, “like many investors.” He added that it is currently unknown whether borrowers were disadvantaged by using LIBOR yet.
Senator Patrick Toomey (R-Pa.) asked why Geithner did not warn the American people or use his influence to persuade financial institutions to adopt an alternative rate when he learned of the risk in 2008. Geithner argued that the system works through enforcement actions and consequences and said the CFTC started their investigation at that time. He added that the problems were there for people to see and said the Wall Street Journal did a “good job” of reporting on the issue.
Senator Jeff Merkley (D-Ore.) said there are four million families locked into high interest, non-GSE loans that are at a high risk for foreclosure. Merkley mentioned his proposal to help families refinance who are unable to do so now and asked for Geithner to comment on the proposal. Geithner said he thought the policy is “very good,” and the Treasury would be interested in launching pilot programs, but said he is unsure if the Treasury has the legal authority or resources to launch such programs.
Senator Michael Crapo (R-Idaho) said care must be taken not to undermine the housing market as regulations move forward. He asked Geithner if there needs to be a broad qualified mortgage definition and cited the Consumer Financial Protection Bureau (CFPB) comments that if it is drawn too narrowly it could upset the mortgage market.
Geithner agreed and said mortgage credit is tighter than it should be because banks and creditors feel more vulnerable now. Geithner said the CFPB is trying to balance the “obvious need for more prudent underwriting standards, more standardization, and better disclosure” without going too far. He said the rules should be designed together and carefully so as not to restrict mortgage credit more than may be necessary.
More information and a webcast of the hearing can be found here.