‘Federal Ex’ Pressed: What Tim Geithner’s Testimony Illustrates About Regulation Reform

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Recent front page woes of JPMorgan Chase and MFGlobal – as well as Barclays manipulation of Libor interest rates – have spurred debate as to whether our regulatory bodies are failing to meet watchdog standards of prosecuting financial crimes on Wall Street, and to what degree offending banks and brokers alone should be held accountable for their illegal activities. When Timothy Geithner, the current Treasury secretary and ex-president of the Federal Reserve Bank of New York (herein referred to as “the Fed”) testified before the House Financial Services Committee last Wednesday, the discourse centered around concerns of cronyism between regulators and those they supervise, as well as a lack of legislative power for regulators to prosecute financial crime. For a thorough listing of New York regulators and industry associations available to consumers, visit the Resources page of our firm’s website.

The Fed, located in Lower Manhattan, places examiners inside the office’s of the nation’s largest banks. The office believes that those examiners sent into the field are said to be among the most “battle tested” and willing to challenge Wall Street wrongdoers on their violations. Yet the Fed itself does not enforce financial law, leaving punishments and fines to the Federal Reserve and other agencies such as the CFTC and SEC. “They focus on the safety and soundness of the banks, which ultimately means they are not particularly focused on market manipulation,” said Sheila C. Bair, the former chairwoman of the Federal Deposit Insurance Corporation, a fellow regulation branch.

The Fed is at once hindered by its lack of jurisdiction, while also being criticized for being considered by many to be excessively corroborative with the banks they are to supervise. Particularly noteworthy is the revelation that the Fed has allegedly known Barclays had been reporting false rates since 2008, yet did not stop (or in their view, were not authorized to stop) these actions. Given that the Fed cannot levy fines, it instead typically requests policy changes from a bank, alerting authorities at the Federal Reserve board only when the bank fails to comply for a sustained time period. It is then up to Federal Reserve to take disciplinary action.

Mr. Geithner purports to have urged British authorities via a June 2008 e-mail to “eliminate incentive to misreport” Libor rates, but argues it was out of his jurisdiction to take further action. Yet he also is said to have failed to notify the Federal Reserve to these misreportings. In April 2008, the New York Fed learned from Barclays that it was artificially depressing its Libor reports to deflect concerns about its health. “We know that we’re not posting um, an honest” rate, a Barclays employee allegedly told a New York Fed official. Fed regulators are now focusing on how the Libor investigation may require America’s largest banks to conserve reserves of cash to fight potential lawsuits.
“We gave them very specific detailed changes,” said Geithner, who argued that responsibility finally lies with the British regulators. “This is a rate set in London.”
On the same date of that conversation, New York Fed officials purportedly wrote in a weekly internal memo that underreporting concerns were rampant. “Our contacts at Libor contributing banks have indicated a tendency to underreport actual borrowing costs,” New York Fed officials wrote, “to limit the potential for speculation about the institutions’ liquidity problems.”

It has also been suggested by critics of the Fed that it is populated by too many former Wall Street executives. Fed president William C. Dudley was formerly the chief domestic economist at Goldman Sacha. Dudley’s wife Ann E. Darby collects deferred compensation from her days at JPMorgan. After Bear Stearns collapsed in 2008, the New York Fed hired the firm’s chief risk officer.

“The regulator has an obligation to make a criminal referral if it suspects a crime may have occurred,” said Bart Dzivi, who served as special counsel to the Federal Financial Crisis Inquiry Commission. “How this doesn’t rise to that level, simply boggles the mind.”

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