Bank-rates ruckus turns spotlight to regulators

Article by: BEN PROTESS and MARK SCOTT , New York Times
Updated: July 9, 2012 - 9:44 PM

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As big banks face fallout from a global investigation into interest rate manipulation, U.S. and British lawmakers are scrutinizing regulators who failed to take action that might have prevented years of illegal activity.

Politicians in both London and Washington are questioning whether regulators allowed banks to report false rates in the run-up to the 2008 financial crisis and afterward. On Monday, Congress stepped into the fray, requesting information about the role of the Federal Reserve Bank of New York, according to people close to the matter.

The focus on regulators and other financial institutions has intensified in the past two weeks after the British bank Barclays agreed to pay $450 million to resolve its case. British and U.S. authorities accused the bank of improperly influencing key interest rates to deflect concerns about its health and bolster profits.

The Barclays settlement is the first action stemming from a broad investigation into how banks set key benchmarks, including the London interbank offered rate, or LIBOR. The pricing of $350 trillion of financial products, including credit cards, mortgages and student loans, is pegged to LIBOR and other such rates.

Authorities around the world are now considering action against more than 10 big banks, including UBS, JPMorgan and Citigroup. The banks also face a raft of civil litigation from municipalities, investors and other financial firms that claim they lost money from the misreporting of rates. These lawsuits could end up costing the industry tens of billions of dollars, according to analysts.

On Monday, the oversight panel of the House Financial Services Committee sent a letter to the New York Fed seeking transcripts from at least a dozen phone calls in 2007 and 2008 between central bank officials and executives at Barclays.

The political firestorm also escalated in London on Monday, where a British parliamentary committee grilled a top Bank of England official over his knowledge of wrongdoing at Barclays. British politicians chided Paul Tucker, deputy governor at the Bank of England, the country's central bank, for not taking a more active role in LIBOR. He denied wrongdoing.

In November 2007, Tucker led a meeting in which some officials raised concerns that banks were underreporting LIBOR submissions to temper concerns about their health, a process known as lowballing.

"This doesn't look good, Mr. Tucker," Andrew Tyrie, head of the parliamentary committee, said Monday, referring to minutes of the meeting.

Authorities are also focused on Barclays' conversations with the New York Fed, including discussions between senior bank employees and officials from the Fed's trading desk, another person briefed on the matter said who also requested anonymity.