Treasury Rejects Request to Stop Using Libor in Bailouts

The U.S. Treasury Department and the Federal Reserve defended the use of Libor in rates tied to the Troubled Asset Relief Program, rejecting a request from the watchdog of the U.S. financial crisis bailouts.

Neither the Treasury nor the Fed has “the authority to change unilaterally the interest rate on the small number of remaining loans that rely on Libor,” Timothy Massad, the Treasury’s assistant secretary for financial stability, said in a letter to Christy Romero, special inspector general for TARP.

“If we sought to renegotiate the rate, it is likely that borrowers either would not agree to a rate change or would agree only to a change that would result in a lower payment to the taxpayers,” according to the Oct. 9 letter obtained by Bloomberg News.

Romero had asked the Treasury and Fed to use other reference rates instead of Libor for Treasury’s Public-Private Investment Program, or PPIP, and the Fed’s Term Asset-Backed Securities Loan Facility, or TALF.

U.S. taxpayers “may have been at risk and may continue to be at risk from the manipulation of Libor,” the London interbank offered rate, Romero said in an August letter to Fed Chairman Ben S. Bernanke and Treasury Secretary Timothy F. Geithner.

Rate Rigging

Bank of America Corp. (BAC), Citigroup Inc. (C) and Royal Bank of Scotland Plc are among the banks under investigation for Libor- rate tampering. Barclays Plc (BARC), Britain’s second-biggest lender by assets, was fined $450 million in June when it became the first bank to settle with regulators over the rigging of interest rates. Chief Executive Officer Robert Diamond and Chairman Marcus Agius resigned in the aftermath.

“The time for Treasury and the Federal Reserve to act is now, rather than wait for global Libor reform, because there are $598.6 million in outstanding TALF loans and $5.685 billion in outstanding PPIP debt with interest rates tied to Libor,” the special inspector general for TARP said in a quarterly report to Congress released today.

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 the program. Under TALF, a bailout program that started in March 2009, the Fed lent funds to investors in highly rated asset-backed securities and commercial mortgage-backed securities.

Repaid Loans

“About half of the TALF loans extended had interest rates that were based on Libor,” William Nelson, deputy director in the Fed Board’s division of monetary affairs, said in a letter obtained by Bloomberg News and addressed to Romero. “Over 98 percent of those loans have already been repaid.”

TARP was enacted under the George W. Bush administration amid the 2008 financial crisis and continued under President Barack Obama. About $417 billion of taxpayer money has been spent on bailouts of companies including Citigroup and Bank of America, insurer American International Group Inc. (AIG), and automakers General Motors Co. (GM) and Chrysler Group LLC.

The Treasury estimates that it will lose $63 billion over the lifetime of TARP.

To contact the reporters on this story: Ian Katz in Washington at ikatz2@bloomberg.net; Meera Louis in Washington at mlouis1@bloomberg.net

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

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