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Recent spate of financial scandals raises ire in Washington

July 12, 2012
In The News

WASHINGTON, July 10 (Reuters) - A fresh burst of scandals, including allegations that major banks tried to manipulate global benchmark interest rates and another case of missing customer funds at a futures brokerage, has raised Washington's ire on both sides of the political aisle.

One leading Republican in Congress blasted regulators for failing to detect banks' attempted manipulation of the London Interbank Offered Rate, or Libor, and House Republicans have requested documents to determine when U.S. regulators knew of problems with the index.

Some Democrats, meanwhile, called that scandal, and the discovery that Iowa-based futures broker PFGBest had misused more than $200 million of customer funds, proof of the need for tougher regulation of financial markets.

It is unclear what impact the growing anger in Washington will have on markets. The scandals could hamper the financial industry's efforts to scale back recent financial reforms or lead regulators to tighten rules, analysts said.

Observers do not expect Congress to step in yet.

"Based on what Congress has done up until now as these scandals pop up, no one should think that Congress is going to do anything too serious about this," said Dennis Kelleher of Better Markets, a nonprofit that advocates stricter regulation of financial markets.

Interest in the Libor scandal, in which Barclays Plc agreed to pay $453 million to settle allegations it gave false reports about lending rates in order to fiddle with the index, has been slow to build among lawmakers in Washington.

The scandal has so far been mostly confined to London, with Barclays executives resigning and a public outcry that regulation by the British government was lax.

But as concern over the consumer impact of the scandal grows and questions arise about the involvement of U.S. regulators, U.S. lawmakers have become more outspoken.

The index, which is calculated daily from rates submitted by the major banks, is the benchmark for numerous consumer lending rates. So while manipulating the index could allow a bank to make profits or mask liquidity problems, it would also boost or lower rates for mortgages and other loans.

Additionally, reports have surfaced that the Federal Reserve Bank of New York may have been alerted to the problem as early as 2007 but did little in response.

Representative Randy Neugebauer, who chairs the oversight and investigations subcommittee of the House Financial Services Committee, has asked the New York Fed to provide transcripts of communications with Barclays about interbank lending rates.

Financial Services Committee Chairman Spencer Bachus, also a Republican, seized on reports of the New York Fed's knowledge.

"The regulators since 2007 knew there were problems with Libor," he said during a hearing on Tuesday. "They knew there was a problem ... they didn't do anything about it," he said.

Senator Tim Johnson, a Democrat who leads the Senate Banking Committee, said on Tuesday his committee would ask Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner about the developments during hearings this month.

Geithner was president of the New York Fed from late 2003 through early 2009.


Representative Maxine Waters, ranking Democrat on the Financial Services subcommittee on capital markets, listed Libor among other recent scandals that she said show financial markets need to be reined in.

On the list were last year's implosion of futures brokerage MF Global and the discovery that $1.6 billion in investor funds had gone missing; JPMorgan's recent multibillion-dollar trading loss due to a massive bad bet in London; and the Facebook initial public offering, in which a collapse in the stock price slammed retail investors.

Lawmakers have railed against the parties involved and hauled several people, such as JPMorgan Chief Executive Jamie Dimon and former MF Global head Jon Corzine, in for hearings.

But those scandals did not lead to significant new legislation. Now some observers are looking at the PFGBest blowup as MF Global-2.0.

Observers said without a public outcry to match that in the UK, lawmakers in the United States would not try for a legislative response to the Libor situation.

Karen Petrou of Federal Financial Analytics said lawmakers' grandstanding i s more likely to prompt action by industry regulators.

"What they will do through these hearings and document demands is put a lot of pressure on the regulators," Petrou said. "Despite the fact that Congress is hurtling toward the election and is incapable of doing an awful lot of much of anything, their inquiries do have an impact."

Gary Gensler, chairman of the Commodity Futures Trading Commission, said on Tuesday that the futures regulator would work to protect benchmarks such as Libor from outside influence.

"Banks must not attempt to influence Libor or other indices based upon concerns about their reputation or the profitability of their trading positions," Gensler said.

But tough talk from regulators did not soothe Republicans.

"In the wake of MF Global, this latest failure raises serious questions about our current regulators and whether they are capable of doing their jobs," said Richard Shelby, the top Republican on the Senate Banking Committee.