Geithner defends Libor scandal response saying it was 'very powerful'

Confirming that the Financial Services Oversight Council is as effective at discipline of the banking industry as a wet noodle, Reuters reports that US Treasury Secretary Tim Geithner said that under his leadership the NY Fed's response to the Libor interest rate manipulation scandal was a 'very, very powerful enforcement response'.

The enforcement response four years ago was so powerful that two days ago, Fed Chairman Ben Bernanke testified before Congress that he could not guarantee the reliability of the Libor interest rates.

To the average person, a powerful enforcement response would have consisted of two parts:

1. To publicly acknowledge that Libor was being manipulated and to advise market participants not to use it until such time as the structural flaws underlying Libor had been fixed;
2. To address the structural flaws by creating a data warehouse where all of the banks report their actual trades so that these trades can be used as the basis for Libor.

Please note, your humble blogger does not assume that the NY Fed should have understood the need to require ultra transparency and requiring the banks to disclose all of their current global asset, liability and off-balance sheet exposure details.

I do not assume that the NY Fed would understand that in order to keep the interbank lending market from freezing, banks need to have the ability to update their independent assessment of each of the borrowing banks and adjust the amount and price of their exposure to each bank based on this assessment.

What I assume is that the NY Fed would not want the market to continue to rely on an interest rate that is manipulated solely for the benefit of the banks and this would drive its response.

By not telling anyone, including the Bank of England and the US public before the Dodd-Frank Act policy debate, that it knew Libor was being manipulated, the NY Fed did not engage in a very powerful enforcement response, but rather it was complicit in allowing the ongoing manipulation.

U.S. Treasury Secretary Timothy Geithner defended his response in 2008 to concerns that emerged over the benchmark Libor interest rate, arguing on Wednesday that U.S. regulators pushed early and forcefully for reforms. 

Geithner, then head of the New York Fed, sent an email to Bank of England Governor Mervyn King in June 2008, recommending six ways to enhance the credibility of Libor after Barclays had flagged concerns as early as 2007.

The email did not say the Fed knew that Barclays was manipulating Libor.  A key fact that should never have been omitted.

The six ways to enhance the credibility of Libor were all talking points directly from the banks that were manipulating Libor for their benefit.

U.S. regulators set in motion a "very, very powerful enforcement response," Geithner said ... adding more enforcement on Libor is yet to come.