Why did Geithner and the NY Fed do so little about the manipulation of Libor?

An editorial by the Wall Street Journal asks a critical question about the entire Libor manipulation scandal:  why did Geithner and the NY Fed do so little about banks manipulating the Libor interest rate?

Did they not think that manipulating the price off of which hundreds of trillions of dollars of financial assets were based was important?

Did they not see stopping manipulation as under their mandate?  If not the NY Fed, then who?

One of the reasons for requiring the banks to provide ultra transparency and disclose on an ongoing basis their current asset, liability and off-balance sheet exposure details is so Libor can be based off of actual trades.

Another reason is that it eliminates reliance on the regulators to protect financial market participants from bankers taking advantage of them by manipulating interest rates behind a veil of opacity.

The Federal Reserve Bank of New York released a trove of documents on the Libor scandal Friday, and the official Fed spin is that they show that regulators were "highlight[ing] problems" with Libor in 2007-2008, and "press[ing] for reform." 

Well, let's see. 

In June 2008, Timothy Geithner, then head of the New York Fed, sent Bank of England Governor Mervyn King two pages of recommendations for "Enhancing the Credibility of LIBOR" and wrote that he would be "grateful if you would give us some sense of what changes are possible." 

This is not exactly the language of a regulator who has just uncovered what we're now told is the financial crime of the century....

As previously discussed, Mr. Geithner sent Mr. King the industry talking points without bother to say a) Barclays had confessed to manipulating the Libor interest rate or b) the recommendations came from the same banks that were manipulating Libor. 

the evidence and testimony coming from regulators show they were well aware of price-fixing behavior at the time, but were not all that alarmed by it.

That's especially clear from the New York Fed's document dump, if not from its spin.

On the surface, this looks like yet another example of regulatory failure.

In August 2007, for example, one unidentified Barclays employee wrote to a Fed official, Fabiola Ravazzolo, to say, "Today's USD libors have come out and they look too low to me. Lloyds for instance has printed 5.48% for 3 months. Probably the lowest rate you coud [sic] attract liquidity in threes would be 5.55% and I am not too sure how much you would get at that level." It doesn't appear that anyone called the cops....

This is a problem.

The New York Fed says that Ms. Ravazzolo was merely gathering market intelligence as part of the Fed's crisis response and not engaging in a criminal investigation. Which is precisely the point. It would be a strange, not to say incompetent, criminal conspiracy if traders were openly discussing it with government officials.

Actually, the trader's comments could reflect the culture of banking.  Everyone is cheating behind a veil of opacity and the regulators have been doing nothing to stop it.  As a result, why should the trader think this time will be any different?

Another phone-call snippet, from October 2008, at the peak of the panic, with another Fed official went similarly: 

Barclays trader: "[T]hree month Libor is going to come in at 3.53 . . . . It's a touch lower than yesterday's but please don't believe it. It's absolute rubbish. . . . [R]ecently you've had certain banks who I know have been paying 25 basis points over where they've set their Libors . . . " 

[Unscandalized Fed official] Tania: "All right, well thank you very much for your time. I appreciate it." Which is exactly how you'd expect a federal official to respond upon being informed of the existence of a multibillion-dollar bank heist.

Perhaps the response from the Fed official is an indication of just how clueless the regulators are.  Maybe the Fed official was unable to make the connection between manipulating Libor and its impact on borrowers and investors.

And lest there be any doubt, the New York Fed's own "explanatory note" makes clear that in the spring of 2008 briefing notes covering the underreporting of Libor were "circulated to senior officials at the New York Fed, the Federal Reserve Board of Governors, other Federal Reserve Banks, and the U.S. Department of Treasury." The Fed also briefed the President's Working Group on Financial Markets, the so-called committee to save the world, that June. 

Fed officials might argue that the middle of a financial crisis was no time to shout from the rooftops about bank borrowing costs. 

But the documents released Friday suggest that even in private, in his emails with fellow central bankers in the U.K., Mr. Geithner was not exactly calling in the shock troops over Libor. Instead, he was suggesting ways to "eliminate [the] incentive to misreport" Libor rates. 

In other words, the question is not what did regulators know, and when did they know it. They knew it all along. 

The real question is when did a Libor rate that the New York Fed itself calls "increasingly hypothetical" during the panic switch from being a sign of distress to a criminal conspiracy?

Since Libor manipulation occurred well before the beginning of the financial crisis, it was always a criminal conspiracy.

After he decamped to Treasury from the Fed, did Mr. Geithner merely drop the subject?...

Pretty clearly as it was not a major part of the discussion as Dodd-Frank was being debated.

The regulators and their media cheerleaders can't have it both ways. 

If the problem with Libor bidding was merely an "incentive to misreport" and thus nothing for regulators to get too worked up about, then let's fix the way banks report the rates, or find some other way to determine such a rate, and move on. 

But if this is really the epic deceit and crime we are now reading about, then either new evidence needs to come to light....

Actually, there is already a confession by Barclays that Libor was manipulated with the intent to profit. So no new evidence is needed.  Although plenty of new evidence is likely to be forthcoming as Deutsche Bank signed up to be a witness for the prosecution in the EU.

the regulators who smiled and nodded and "Okayed" and "Mm hmmed" through the panic years are complicit with the banks now in the dock. 

They had ample opportunity to shut down this behavior, but nothing released by the New York Fed or the Bank of England suggests much more than a raised eyebrow at the time. 

If heads are going to continue to roll over Libor, they should also include those of Mr. Geithner and the rest of the regulators who let this slide.

Included on the list of the regulators who let this slide is Ben Bernanke.