Philly Deals: Geithner's silence, or not, about Libor says a lot

Posted: July 23, 2012

When do leaders who discover wrongdoing have a duty to warn the public?

Penn State's Freeh report blames the late coach Joe Paterno, ex-university president Graham Spanier, and other school executives for caring more about the football program's reputation than stopping a child rapist in their midst.

Philadelphia prosecutors convinced a jury to draw a similarly damning conclusion about former Archdiocese of Philadelphia priest administrator Msgr. William Lynn and, by implication, his late boss, Cardinal Anthony Bevilacqua.

How different are those cases from that of Treasury Secretary Timothy Geithner?

Back in 2008, as head of the New York Federal Reserve — a job in which he argued he lacked the power to go after abusive investment banks and insurers, until they wrecked the property market and fried the economy — Geithner learned from Fed staff that bankers were cooking the London InterBank Offered Rate, according to documents made public recently by the Fed and Barclays Bank.

Those disclosures followed Barclays' confession that its traders had manipulated that benchmark — used to set prices for bonds, loans and derivative securities — for their benefit and customers' loss. The boss resigned. The bank paid big penalties. Investigators probed the other banks that supply Libor data.

At least no kids were hurt, right? But they were:

•Bank clients worldwide, including cash-strapped Philadelphia and its school district, were ripped off as traders cut Libor below the market price of money, which it was supposed to represent.

•Interest-rate swaps and other financial hedges that were supposed to protect school-bond expenses from rising interest rates instead lost value as Libor fell, pushing the district to pay tens of millions of dollars to get out of those contracts since 2008.

A lot of that money would have been lost even if Libor had been honest, but the traders' phony numbers made the dollar damage worse. Philadelphia has been closing schools and firing school workers as it copes with the resulting swaps payoffs and other revenue losses.

Last week, Geithner defended his 2008 response. He said he was "very forceful from the beginning," warning British front-line regulators and recommending changes. He pointed to the fines levied against Barclays and the public disclosure that followed — four years later.

In testimony last week before the Senate Banking Committee, Fed chairman Ben Bernanke praised this as "rapid follow-up," adding that Libor calculation is "structurally flawed" and ought to be reformed.

They say it's not their fault others chose not to act more forcefully or immediately on information they provided. Or that victims, very sadly, got hurt in the meantime.

Sounds like Penn State; sounds like church leaders.

There is plenty to say in Geithner's behalf. He was a leader among decision-makers who kept the financial crisis from getting a whole lot worse. The President values his management and moderation, resisting critics from the left and right who would break up and cripple the big banks.

As Bob Eisenbeis, a former Fed research director now with Vineland-based Cumberland Advisors, has noted in his nuanced coverage, the conflicts of interest inherent in Libor calculation were known in the banking industry years before Geithner was confronted with the problem.

You might make a case that if Geithner had picked 2008 to denounce Libor and question the validity of financial instruments based on phony values, the financial system would have been thrown into even greater confusion than it was by the Lehman Bros. failure and the home-mortgage collapse. The Fed especially, and Treasury too, has to balance what's best for banks against the needs of the public at large. More conflicts of interest.

But read another way, Geithner has again given powerful companies and their millionaire bosses and traders the benefits of silence, study and delay, making it easier for them to sin again, at the public's expense.

Can we expect private institutional leaders — cops and coaches, professors and priests — to promptly call out wrongdoers if our national leaders aren't expected to do the same?

Contact columnist Joseph N. DiStefano at 215-854-5194, JoeD@phillynews.com, or @PhillyJoeD on Twitter.

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