SIGTARP Advises Discontinued Use of LIBOR

The Office of the ""Special Inspector General for the Troubled Asset Relief Program (SIGTARP)"":http://www.sigtarp.gov/Pages/home.aspx is advising Treasury to discontinue use of the London Interbank Offered Rate (LIBOR) as a benchmark for interest rates on TARP programs.

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""Continued use of LIBOR for TARP while it is broken, unreliable, and remains potentially subject to manipulation undermines public confidence in financial markets and TARP and could put taxpayers at risk,"" SIGTARP stated in its ""quarterly report"":http://www.sigtarp.gov/Quarterly%20Reports/October_25_2012_Report_to_Congress.pdf to congress, released Thursday.

LIBOR's soundness was brought to question in recent months when it was alleged Barclays executives conspired to manipulate the rate. Their alleged manipulation is suspected to have started in 2007.

Three executives ""left their posts"":http://dsnews.comarticles/barclays-loses-two-more-in-backlash-of-libor-scandal-2012-07-03 at the bank, and Barclays settled the charges for almost $0.5 billion.

However, LIBOR is not in the clear. SIGTARP cites several officials who question LIBOR's credibility. For example, the Office of Financial Research at the Treasury stated the manipulation ""poses significant risks to market integrity and investor trust.""

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Additionally, Martin Wheatley of the United Kingdom's Financial Services Authority said LIBOR is ""built on flawed incentives, incompetence and the pursuit of narrow interests that are to the detriment of markets, investors and ordinary people.""

Also, importantly, the U.S. Commodity Futures Trading Commission Chairman Gary Gensler suggests LIBOR's integrity may not yet be restored, according to SIGTARP's report.

""Given the LIBOR manipulation and its current lack of reliability, the Federal Reserve has a solid basis to reach out to TALF borrowers and Treasury to the six PPIP managers, to express the need to amend the TALF/PPIP contracts,"" SIGTARP stated in its report.

The Public Private Investment Program (PPIP), which provides support to the mortgage-backed securities market, holds $5.685 billion in outstanding debt to Treasury.

The Term Asset-Backed Securities Loan Facility (TALF), which supports asset-backed securities such as student, auto, and credit card loans, holds $598.6 million in outstanding debt to the Fed.

SIGTARP also addressed the future regulation of AIG in its report. Following years without regulation, AIG was under Treasury's influence following the financial crisis until last month with Treasury's stock holdings fell below 50 percent.

Currently, AIG falls under the regulatory reach of the Federal Reserve because the corporation currently owns a small bank. However, AIG has plans to sell the bank, according to SIGTARP.

This would leave, AIG, ""one of the largest insurance companies in the world,"" according to SIGTARP, without a regulator.

SIGTARP recommends designating AIG ""systematically important under Dodd Frank, which if approved would provide the strongest regulation available.""