Tim Geithner Admits Banks (And AIG) Were Bailed Out At Rigged Libor Rates, Costing Taxpayers Billions
One-minute clip from yesterday of Geithner being questioned by Rep. Hensarling regarding the Fed's and Treasury's decision to use an artificially low Libor as the interest rate on hundreds of billions in crisis loans to AIG and other bailed-out banks.
Timothy Geithner claimed on Wednesday that the government had no choice during the financial crisis but to lend to banks and AIG using an interest rate, Libor, that everybody knew was flawed.
Call it a back-door bailout: By using an artificially low Libor, the government saved the banks and AIG millions, maybe billions -- and cost the taxpayers the same amount.
The use of Libor in the bailouts also rubber-stamped that hopelessly manipulated interest rate as a market measure, raising still more questions about just how worried Geithner and other regulators really were about it.
In a House Financial Services Committee hearing on Wednesday, Treasury Secretary Geithner was asked why Treasury and the Fed used the London Interbank Offered Rate as a basis for loans to insurance giant American International Group and to U.S. banks under the Term Asset-Backed Securities Loan Facility -- even though Geithner and other regulators had long suspected that Libor was artificially low, as Geithner testified.
"We were in the position of investors around the world," Geithner shrugged. "You have to choose a rate, and we did what everybody did -- use the best rate available at the time."
Geithner repeated his claim that he warned other U.S. and British regulators in the spring of 2008 about possible manipulation of the key interest rate and recommended changes to the way the rate was set.
But he also said that, months later, when it came time to set bailout terms for the Too Big To Fail Set, the government just had no other choice but to use Libor.
Sure, that's one way to look at it. Another, less charitable way to look at it is that the Fed was fully aware that Libor was being manipulated lower, and was fine charging an artificially low rate to lend money to banks and to AIG, in what amounted to yet another kind of bailout. Why make life harder for them, right? They had enough problems dealing with the crisis they had created. Raising red flags about Libor might have only made the crisis worse, making it harder for banks to borrow money.
But in the process, the government left untold mountains of cash on the table for U.S. taxpayers. Even if Libor was only manipulated a tiny bit lower, these small breaks add up.
In fact, if you wanted to be cynical about it, you could say this is yet another example of the Treasury Department and the Fed once again putting the needs of banks ahead of all else, including such niceties as "faith in the market" and "taxpayers."
I wrote a story for the Wall Street Journal back in 2009 estimating that banks may have saved $24 billion by borrowing at unusually low rates in another crisis-era government lending program, the Term Liquidity Guarantee Program -- loans that were frequently based on Libor.
There's still a lot of number crunching to be done in the weeks ahead, but it would not be surprising if TALF banks and AIG saved similar amounts by borrowing from the government at an artificially low Libor rate.
Aug 3, 2012 at 2:23 PM
Reader Comments (8)
Says he was unaware of Barclays April 2008 admission
http://www.marketwatch.com/story/geithner-comes-under-fire-for-lack-of-libor-action-2012-07-25
Rep. Randy Neugebauer, a Republican from Texas, said he thought the New York Fed had an obligation to make a criminal referral to the Justice Department once it learned that Barclays was committing fraud.
“It is a little puzzling to me” why such a referral was not made, Neugebauer told Geithner at a hearing of the House Financial Services Committee.
http://www.cnbc.com/id/48319054
Written comments, not video.
For UBS, a Record of Averting Prosecution
http://www.nytimes.com/2012/07/21/business/ubss-track-record-of-averting-prosecution-common-sense.html?pagewanted=all
U.S. Cities Get Fleeced in Libor Scandal
http://www.thefiscaltimes.com/Articles/2012/07/23/US-Cities-Get-Fleeced-in-Libor-Scandal.aspx#page1
Baltimore takes lead in suit against banks over alleged Libor manipulation
http://www.washingtonpost.com/business/economy/baltimore-takes-lead-in-suit-against-banks-over-alleged-libor-manipulation/2012/07/11/gJQAN3V7dW_story.html
Libor Lawsuits Are Piling Up And Could Cost Billions, Banks Brace For Another Big Legal Battle
http://www.forbes.com/sites/halahtouryalai/2012/07/12/libor-lawsuits-are-piling-up-and-could-cost-billions-banks-brace-for-another-big-legal-battle/
http://www.ibtimes.com/articles/381353/20120906/aig-aia.htm
American International Group, Inc., will sell as much as $2 billion worth of shares in its Hong Kong-based AIA Group Ltd. unit to help raise funds for a planned repurchase of as much as $5 billion of its own shares from the U.S. government, the company said Thursday.
The New York-based insurance giant's $2 billion stake in AIA Group is about a quarter of the $7.6 billion stake that the company could have sold, Reuters said. Word of the sale of AIA stock was widely expected.
American International Group, Inc., (NYSE:AIG) shares fell 66 cents to $34.15 in premarket trading.
http://www.reuters.com/article/2010/08/23/us-aig-axa-idUSTRE67M3RS20100823
[snip]
While rejecting AIG's claim that the case should have been arbitrated, the U.S. 2nd Circuit Court of Appeals on Monday said AXA waited too long to sue -- more than five years after being put on notice that something might be amiss. It directed a lower court to enter a judgment in favor of AIG.
Note: Cheyenne nailed it in one of his comments a day or so ago regarding the 5 year limitation on fraud.
Here is the latest from yesterday.
http://www.ibtimes.com/articles/382287/20120909/cuts-aig-stake-american-international-group-treasury.htm