Meanwhile, the furor over how banks fiddled with the London interbank offered rate, or Libor, for their own advantage is now in the buck-passingphase, as bankers and regulators alike attempt to minimize their role.
It is a disturbing and disheartening spectacle. On CNBC last week, Treasury Secretary Timothy Geithner defendedhis actions in 2008, when he headed the Federal Reserve Bank of New York — a time when the New York Fed knew Barclays was reporting false rates but did not stop or expose the misconduct. Mr. Geithner told CNBC he briefed other American regulators and British authorities on his concerns that the Libor process was “flawed and vulnerable to misrepresentation.” But to hear him tell it, the issue was a plumbing problem, not a potentially criminal and certainly improper pattern of rate rigging.
The British authorities to whom Mr. Geithner directed his concerns — Mervyn King and Paul Tucker, the governor and deputy governor, respectively, of the Bank of England — have testified that the New York Fed’s warnings did not set off any alarms because they contained no allegations of wrongdoing and seemed to echo many concerns raised about technical difficulties in setting the rate. But documents released on Friday by the Bank of England suggest that the central bank knew about potential manipulation in 2007.
Further investigation will have to settle the who-knew-what-when controversy. For now, the trans-Atlantic back and forth is yet another example of the deplorable state of financial regulation during the run-up to the financial crisis. It also shows how hard it is to get to the bottom of a controversy when the officials in positions of power now — like Messrs. Geithner, King and Tucker — are the same people who were running things when the misconduct occurred. Going forward, Mr. Geithner should recuse himself from any investigations into the rate rigging, including any inquiries that may be conducted by the Financial Stability Oversight Council, a panel of regulators created under the Dodd-Frank law and led by the Treasury secretary himself.
And when the time comes to choose a new Treasury secretary — Mr. Geithner has said he does not expect to remain if President Obama is re-elected — the next president would do well to look for candidates among the regulators who have distinguished themselves by their willingness to confront the banking system’s manifest problems. One such person is Gary Gensler, the chairman of the Commodity Futures Trading Commission, which pursued the rate-rigging allegations against Barclays, securing a record fine and referring the matter to the Justice Department for criminal investigation.
Equally important, the Libor scandal cannot be reduced to a technocratic issue over how to best set interest rates. Central bankers and other financial officials need to find a replacement for Libor, which is deeply flawed.
But the real issue is how to reform the banks themselves. The Libor scandal is, in large part, the result of the bonus-driven bank culture, built on big returns and excessive risk. Speculative impulses also drove the recent multibillion-dollar losses at JPMorgan Chase and, obviously, the mortgage bubble. These impulses have not yet been curbed, let alone eliminated in federally insured banks, and until they are the taxpayers who stand behind the financial system remain in peril.