By Mike Wereschagin

Published: Thursday, July 26, 2012, 12:01 a.m.
Updated: Thursday, July 26, 2012

U.S. Sen. Pat Toomey lashed out at Treasury Secretary Tim Geithner on Wednesday for failing to do more to protect Americans from an interest rate-fixing scandal that's spreading from Great Britain through the world's financial markets.

Geithner, defending his handling of the scandal to a U.S. House committee hours earlier, said he alerted American and British regulators when he learned that London banks might be manipulating a key interest rate in 2008, while he was president of the Federal Reserve Bank of New York. The rate — called the London Interbank Offered Rate, or LIBOR — affects the cost of mortgages, student loans, interbank loans and other deals.

“It's now more than four years later and throughout these four years, the secretary of the Treasury ... allowed literally trillions of dollars of transactions in the United States to go ahead and be executed based on what they knew to be an inaccurate index,” said Toomey, R-Lehigh County, who will question Geithner at a Senate Banking Committee hearing on Thursday.

Municipalities and school districts across the state entered into credit swap deals pegged to LIBOR and might have been cheated out of returns on certain investments by artificially low rates, Toomey said.

“How could they have allowed that to continue?” asked Toomey, a former investment banker with years of experience in global financial markets.

Despite Geithner's concern about the reliability of LIBOR, the government used that rate to set the terms of the $182 billion bailout of insurance giant American International Group Inc., or AIG, during the 2008 financial meltdown, Geithner told the House Financial Services Committee.

“We were in the position of investors all around the world,” Geithner said. “We did what everybody else did, which was to use the best rate available at the time.”

Toomey called that “hard to understand.”

When Geithner became suspicious of rate-fixing, he said he notified then-Treasury Secretary Henry Paulson and the heads of the Securities and Exchange Commission and Commodity Futures Trading Commission. The resulting investigation led to Barclay's, one of Britain's largest banks, agreeing in June to pay a $450 million settlement to U.S. and British regulators, Geithner said.

The AIG bailout and much of the rate fixing took place before Geithner ran the Treasury Department, said Rep. Barney Frank, D-Mass., ranking member of the Financial Services Committee.

“This all happened under the administration of President Bush, and the president's working group to which (Geithner) reported was President Bush's working group,” Frank said. “There was a failure to be tough enough with these private-sector people who were doing this, but the notion that it was really all the problem of the president of the Federal Reserve of New York is striking.”

Frank said the LIBOR scandal shows the need for tighter regulation of the financial sector, something Toomey disputed.

“It's already illegal to commit fraud. This is fraud,” Toomey said. “What it tells me is the regulators were not getting this job done.”

Toomey said he plans to ask Geithner whether any U.S. regulators encouraged or turned a blind eye to the LIBOR scandal.

Toomey and Geithner have sparred several times in the past two years, most notably during the debt ceiling showdown of 2011, when a disagreement between the two over whether the Treasury could avoid defaulting on U.S. debt dominated the debate for days.

The Associated Press contributed to this story. Mike Wereschagin is a staff writer for Trib Total Media. He can be reached at 412-320-7900 or mwereschagin@tribweb.com.

Subscribe today! Click here for our subscription offers.