2012.07.13 05:28:58 WSJ(7/13) UPDATE: Geithner Wrote Libor Memo

(From THE WALL STREET JOURNAL)
By Damian Paletta and Jon Hilsenrath
At the time the memo was sent, Mr. Geithner was president of the
Federal Reserve Bank of New York and the financial industry was about
to enter one of the darkest periods of the financial crisis. Mr.
Geithner is now U.S. Treasury secretary. As Mr. Geithner sent the memo
to London, U.S. regulators also began conferring about concerns
related to possible distortions of Libor and what the impact might be,
people familiar with the matter said.

The June 2008 memo, reported earlier by the Washington Post, provides
a window into the role played by U.S. regulators in the Libor scandal,
though possibly an incomplete window. More documents are due to be
released Friday by the Federal Reserve Bank of New York, in response
to demands by lawmakers for more information about Mr. Geithner's and
the New York Fed's efforts to address questions about Libor.

The latest disclosure makes clear that Fed officials were aware of
irregularities in the Libor interest-rate market. What is less clear
is how far Mr. Geithner and other officials went to address the
problem.

The Geithner recommendations, which came in a June 1, 2008, memo,
included a call to "eliminate incentive to misreport" by banks.
Investigators in the U.S. and U.K. are now probing whether banks
intentionally misreported interbank lending rates in a way that
distorted Libor, which could have affected interest rates for
trillions of dollars-worth of financial banking products all over the
world, including mortgages, student loans and complex derivatives. The
misreporting of this interest rate also could have given the public
and regulators a false sense of the health of the big banks involved
in this market.

Mr. Geithner recommended that the British Bankers' Association, which
sets Libor based on data submitted by different banks, "collect
quotes" from a number of different banks but "randomly select a
subset" of banks when determining Libor. This would take away the
incentive of individual banks to game the system.

Mr. King responded favorably to the memo, a person familiar with the
discussions said, and there were follow-up communications, though it
couldn't be learned how close the Bank of England came to implementing
any of the changes.

Mr. Geithner's memo was sent after an April 2008 article in the Wall
Street Journal raised questions about the way Libor was set.


(END) Dow Jones Newswires

July 12, 2012 23:28 ET (03:28 GMT)