TARP Watchdog Wants Libor Out Of Bank Bailouts

“The Treasury Department’s bailout watchdog wants to stop using the flawed Libor rate in setting the terms of bank bailouts.

Too bad she wasn’t around four years ago when the bailouts began.

“We can’t continue to use for TARP a measure in which there’s no confidence or assurance that it’s reliable, which could potentially be subject to manipulation,” Christy Romero, special inspector general for the Troubled Asset Relief Program, told Bloomberg.

Libor, or the London Interbank Offered Rate, is an interest rate that affects borrowing costs throughout the economy, from floating-rate mortgages to more than $350 trilion in derivatives contracts. As the benchmark for global lending, Libor might have seemed a natural choice for setting the terms of the government’s bailouts of banks and American International Group during the crisis. Borrowers all over the world routinely use Libor. The government used it as the base interest rate — or in the case of AIG, ultimately, the only interest rate at which bailed-out banks and AIG had to pay back their loans.

Treasury Secretary Tim Geithner, who helped set the terms of those bailouts, has said the Treasury Department and Federal Reserve had no choice but to use Libor in the myriad lending programs that propped up the financial sector.

Romero directly contradicted that assertion in her interview with Bloomberg, saying that replacing Libor is “easy to do because there are alternative interest rates in the contracts” for the TARP programs still in operation. There were also plenty of other rates available that the government could have used, including the federal funds rate set by the Federal Reserve (also manipulated, but legally).”

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