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Watchdog: Interest Rate Manipulation Puts Taxpayers at Risk

The manipulation of a global interest rate called LIBOR could be costing U.S. taxpayers money, according to a new federal watchdog report.

Taxpayers "continue to be at risk" from government bailout programs' reliance on the interest rate, the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) said in a report released today.

In June, U.S. and British authorities charged Barclays Bank with attempting to manipulate the London Interbank Offered Rate (LIBOR), a benchmark that affects the cost of borrowing money throughout the world. Even though Barclays agreed to take remedial action, government officials still have questions about the reliability and integrity of the interest rate, according to the SIGTARP.

"Aside from the Barclays situation, market data raises questions about the integrity of LIBOR today," a U.S. regulatory official testified last month.

Previous news reports have explored how alleged LIBOR manipulation could affect home, credit card, and car loans in the U.S. But LIBOR could also spell trouble for U.S. taxpayers who have an ongoing stake in the government's bailout programs, the SIGTARP said.

There are two bailout programs—one managed by the Treasury Department, the other managed by Treasury and the Federal Reserve—that continue to rely on the LIBOR benchmark. These agencies have the authority to use a different benchmark, but they refuse to make the change, according to the SIGTARP.

Taxpayers are still owed more than $5 billion in outstanding debt from one of these programs, the Public-Private Investment Program, which may continue through 2017, the SIGTARP reported.

The SIGTARP did not provide specific examples of LIBOR manipulation leading to taxpayer losses, and concerns about future losses may be largely academic given that LIBOR is under intense regulatory scrutiny.

Nonetheless, the bailout watchdog urged Treasury and the Fed to use a different benchmark, rather than waiting for "global LIBOR reform."

"For Treasury and the Federal Reserve to cling to the status quo of keeping in TARP a rate that is broken, unreliable, and subject to manipulation, is contrary to TARP's historical goal of using unprecedented solutions to promote confidence in the financial system," the SIGTARP said.

In response to POGO's request for comment, spokespeople from Treasury and the Federal Reserve provided letters that their agencies had sent to SIGTARP before the report was released.

Treasury told the SIGTARP it would "need evidence that LIBOR is currently misstated" in order to change the interest rate benchmark, and argued that "[a]bruptly altering the benchmark index at this time" could "harm, rather than benefit, taxpayers."

And the Federal Reserve told the SIGTARP that more than 98 percent of the loans in its bailout program have been repaid, and that "neither the Federal Reserve nor the Treasury has the authority to unilaterally change the interest rate."

The SIGTARP acknowledged that Treasury and the Federal Reserve can't switch to a different interest rate benchmark without the approval of the private firms participating in the bailout programs. But these agencies have "considerable leverage" to tell the firms that the government wants to use a different benchmark "in light of the LIBOR scandal and LIBOR's lack of reliability," the bailout watchdog argued.

This is not the first time the SIGTARP has clashed with federal regulators over their bailout programs.

Neil Barofsky, the former special inspector general, said in a recent interview that he was "taken aback by the reluctance and refusal to adopt a lot of our recommendations, which seemed to be very pedestrian and very straightforward to me."

The current special inspector general, Christy Romero, has also complained about her recommendations falling on deaf ears. "Treasury should explain why they are not adopting recommendations that could prevent waste, fraud, and abuse in TARP," Romero said in a recent interview. "Whatever their reason, it's not good enough," she added.

In April, the SIGTARP reported that "Treasury has only fully or partially implemented about one third" of the watchdog's recommendations.

The government's criminal investigation of interest rate manipulation is ongoing, according to the Justice Department.