WASHINGTON (MarketWatch) — The Treasury Department should stop using the Libor overnight interest rate in its loan programs given that it is “potentially subject to manipulation” and undermines confidence in the markets, a government watchdog said Thursday.
The rate is at the center of a massive industry-wide, international investigation into the setting of interbank-lending rates after Barclays PLC BCS -1.64% was fined roughly $450 million in June for fixing the London rate for interbank lending, or Libor.
The payments taxpayers earn from many government investments in banks through the Troubled Asset Relief Program, or TARP, are based on Libor. According to TARP’s inspector general, taxpayers are owed over $6 billion in long-term loans indexed to the rate.
Instead of indexing to Libor, the inspector general recommends that TARP contracts should be amended to use alternative rates permitted by the program.
In response, Treasury said that changing the benchmark Libor rate in some contracts would be difficult despite the Barclays fine.
“Treasury would need evidence that Libor is currently misstated to have the right to change the benchmark rate,” said Treasury Assistant Secretary for Financial Stability Timothy Massad in a letter. “To date enforcement agencies have not released any findings, documentation or other evidence that the rate is currently misstated.”
Nevertheless, Massad added that global regulators are “moving forward to address structural vulnerabilities and weaknesses” regarding the Libor-setting process. “Of course those reviews are still ongoing,” he said.
However, Christy Romero, who runs the inspector general office, told MarketWatch that the impact of the rate controversy goes beyond the specific risk of taxpayer losses.
“The manipulation undermines confidence in the markets,” Romero said. “We know the interest rate was potentially artificially low.”
The inspector general recommendation was made in a broad report that also sought to press the Treasury Department and other regulators to designate American International Group Inc. AIG -0.42% as systemically important to ensure that its troubled financial products unit — considered a key contributor to the financial crisis of 2008 because of its complex derivatives products — continues to be supervised.
AIG became regulated by the Federal Reserve in September based on the massive insurance firm’s ownership of a small bank, which the company may sell. If the unit is sold, Romero added, AIG’s financial division won’t have federal oversight unless a panel of regulators designates the firm as systemically significant. Such a designation would subject the institution to new capital, liquidity and long-term planning obligations that Romero said are needed as soon as possible.
“Regulation for a savings and loan holding company is not going to be as strong and forceful as regulation that comes with a systemically important designation,” she said.
The report said that the massive AIG sale in September brought down the government’s 53% stake to 16%, leaving Treasury’s with roughly $6.7 billion in outstanding shares.
Taxpayers are still owed $84.2 billion in TARP funds as of Sept. 30, 2012. [...] continues...