Watchdog Says Libor Should be Stopped in U.S. Bailouts

The watchdog for the U.S. financial crisis bailout program said the Treasury Department and Federal Reserve should stop using the London interbank offered rate for transactions tied to the Troubled Asset Relief Program.

“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 TARP, said in an interview. The Treasury’s Public-Private Investment Program, or PPIP, and the Fed’s Term Asset-Backed Securities Loan Facility, or TALF, should use rates other than Libor, she said.

“It’s easy to do because there are alternative interest rates in the contracts for both those TARP programs,” Romero said in the Sept. 21 interview.

Confidence in Libor, the benchmark interest rate for more than $500 trillion of securities, was shaken following Barclays Plc’s admission in June that it submitted false rates. Barclays was fined 290 million pounds ($471 million) by regulators in the U.S. and U.K.

Fed spokeswoman Barbara Hagenbaugh said in an e-mail yesterday that the central bank had received the request from Romero and plans to respond. Under TALF, a bailout program that started operating in March 2009, the Fed lent funds to investors in highly rated asset-backed securities and commercial mortgage- backed securities.

Student Loans

TALF supported the origination of almost 3 million auto loans, more than 1 million student loans and 900,000 loans to small businesses, the Fed said in a statement in June. The program had no losses, according to the Fed.

The Treasury Department also has received Romero’s recommendation on PPIP and plans to respond “shortly,” spokesman Matthew Anderson said yesterday. PPIP was started in 2009 to help revive the mortgage-backed securities market. The Treasury has estimated that taxpayers will get a $3 billion profit from PPIP.

TARP was enacted under the George W. Bush administration amid the 2008 financial crisis and continued under President Barack Obama. The government used funds to rescue banks including Citigroup Inc. (C) and Bank of America Corp. (BAC) and automakers General Motors Co. (GM) and Chrysler Group LLC.

The U.S. cut its stake in insurer American International Group Inc. (AIG) to about 16 percent from 53 percent in a share sale this month. The U.S. has recovered its full $182.3 billion commitment to New York-based AIG with a profit. The $15.1 billion return includes results from the Fed portion of the rescue, such as a credit line and the purchase of mortgage- linked securities.

To contact the reporter on this story: Ian Katz in Washington at ikatz2@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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