U.S. Sen. Pat Toomey (R-Pa.) questioned Treasury Secretary Tim Geithner about LIBOR at today's Senate Banking Committee hearing.
A full transcript of the senator's questioning is below.
SEN. TOOMEY: Thank you Mr. Chairman. Mr. Secretary, thanks for being with us.
Just briefly, I want to follow up on a discussion that we had in the anteroom earlier about the money market funds and I, I just want strongly to strongly urge you to reconsider the position that the SEC needs to adopt a new round of regulations now for several reasons.
First, I am not aware - we certainly have not seen the evidence - that the new wave of regulations that was already in imposed in 2010 is somehow inadequate. And we have seen that this industry is now on a stronger footing and got through some very difficult times last summer without a single hitch, suggesting in fact that they're in pretty good shape.
Second point I would make is this notion that I see repeated often, that they're somehow very susceptible to runs, is quite ironic to me given that over the 40-year history of hundreds and hundreds of funds through all kinds of extraordinary historical moments - there haven't been runs.
So, so to suggest that we need this new regulation, this new wave of regulation - some of the proposals of which I'm concerned would destroy the product. I mean the capital requirement, I don't think achieves its stated objective; I think it's unaffordable. Withholding requirements, I think, badly damage the product. So, I'd like to just urge you to reconsider this. I think this is the wrong way to go.
The question I'd like to get to, if I could, is on LIBOR. First of all, there has been some suggestion that some of the British regulators may have known, and in fact may have condoned or even encouraged, some misreporting at - during the financial crisis for fear that otherwise a perception of risk at these banks might cause problems.
So, I think I know the answer, but just for the record, did you or any of the other regulators you are aware of ever actually condone or encourage misreporting of LIBOR?
GEITHNER: Absolutely not.
SEN. TOOMEY: Okay, that's what I thought. Here's what I don't understand. That is, how you were aware of this in early 2008 and for the last four years, you never took - used the bully pulpit that you had to A: warn the American people.
All right, so there's literally hundreds of municipalities across Pennsylvania that were engaging in interest rate swaps where they're paying a fixed rate, typically, and receiving LIBOR payments and we know - and you knew - that those LIBOR payments may not be the correct payments, in fact, might very well be less than what they ought to be getting. These municipalities didn't know that.
And they should have.
And the second thing - and then I'll let you answer - but the second thing is: Why did you not use the enormous influence that you have had, both at the Fed and at Treasury, to persuade the financial institutions to adopt a different mechanism that would not be subject to this kind of manipulation when there are other alternatives available?
GEITHNER: On your first question, again, I, I did what I thought was the most effective way to get to the heart of this. In general, you're right. There are some problems that you can address by talking about them, but generally I'm of the view that it's better to act on these things and that's what we try to do. Now, these concerns that you refer to as you know were in the public domain at that time. The Wall Street Journal, among others, did a very good job reporting these concerns.
And the, the vulnerability that we were worried about was, was there for people to see. Now, in this period, between that time - the spring of '08 when we acted and the CFTC announced a settlement earlier this month - they were involved, to their credit, in a far-reaching, complicated, difficult investigation which ultimately uncovered the damage you refer to. And again they ultimately involved the SEC and Justice in that context, fully appropriate I'm sure in this context, and that process took some time.
But in the interim, the British did do some things to try to reform the way the rate was structured. I don't think those reforms went far enough. But our system has to work this way. Which is, you have to combine reforms to the underlying problem - which we set in motion - with enforcement action with consequences. And that's exactly what happened in this context.
SEN. TOOMEY: I'm not at all suggesting that we should not have had enforcement. I think we should have. Absolutely.
My concern is that, knowing that this rate did not have integrity, you nevertheless stood by while thousands of transactions were being executed - you know, interest rate swaps, loans, all kinds of agreements - and it seems to me you could have used the enormous persuasive power that the secretary of the Treasury has to encourage and, in fact, persuade the financial institutions to fix this or start using an alternative mechanism.
GEITHNER: Well, that's exactly the - that was exactly the objective of the actions I took at that early stage in the process. I do think it's important to recognize that the market began some time ago - because the market was broadly aware of these concerns, both investors, borrowers and lenders were aware of these concerns - has, has started to evolve toward other alternatives and that's happening. And that was driven by the recognition that their interest might be better served.
Again, I want to just caution though that it's important to take some time to carefully examine what was the impact of the behavior on those rates. We - again we don't - I don't think we know with confidence now the direction of the impact, or the magnitude of the impact, but that's a very important issue to - and critical to restoring trust and confidence in the system - and I think the relevant authorities are doing a careful job now of looking through that.
SEN. TOOMEY: My time has expired. I'll just close by saying I, I understand that we don't yet know exactly the direction or the magnitude of the cost, but we know that this was a process that lacked integrity, and I would suggest that some of the transactions that were entered into - and subsequently resulted in significant losses - might never have been entered into in the first place had the participants understood the lack of integrity in this rate-setting process.
GEITHNER: I think that's one reason why it was so important that we did what we did, which was to try to set in motion reform - not just reforms to the process - but make sure that the authorities responsible for abuse and manipulation were, had the ability to act on those concerns.