New York Fed Faces New Scrutiny on Rate-Rigging Scandal

The Congressional scrutiny of the Federal Reserve intensified this week, as the regulator faced new questions about failing to prevent banks from manipulating interest rates.

In a letter to the New York Fed and the Federal Reserve Board in Washington, Senator Sherrod Brown challenged the regulators to defend their response to the rate-rigging scandal. Mr. Brown has questioned why the New York Fed, despite knowing that some banks were reporting false rates, pushed for broad reforms of the rate-setting process rather than penalizing the illegal behavior.

For their part, Fed officials have argued that they lacked the power to pursue the issue further. Mr. Brown, an outspoken critic of lax regulation, was unconvinced.

“It is difficult to accept the argument that the board has no authority to address this problem,” he wrote. Mr. Brown also outlined a series of questions for the regulators, asking them detail what attempts, if any, they made to thwart the wrongdoing.

An Ohio Democrat who sits on the Senate Banking Committee, Mr. Brown is the latest lawmaker to scrutinize the New York Fed's role in the rate-setting conspiracy. But unlike most of the past lawmakers who have voiced concerns in recent weeks, Mr. Brown is a Democrat.

Republicans seized on the issue in recent hearings with Timothy Geithner, the current Treasury secretary who ran the New York Fed at the time of the rate-rigging. Mr. Geithner was grilled on the scandal, which received focus in June when authorities in the United States and London snared a $450 million settlement from Barclays.

The British bank was accused of trying to manipulate the London interbank offered rate, or Libor, a key benchmark that affects the cost of trillions of dollars in loans. The case against the British bank was the first action to stem from a global investigation into more than a dozen banks.

Following the Barclays case, House Republicans demanded that the New York Fed detail its knowledge of the wrongdoing at Barclays.

In releasing e-mails and transcripts of phone calls, the regional Fed bank revealed that it learned in April 2008 that Barclays was artificially depressing its Libor rates to deflect concerns about its health. “We know that we're not posting um, an honest” rate, a Barclays employee told a New York Fed official at the time.

In response, Mr. Geithner pushed changes to the Libor process. He did not, however, refer the illegal actions to the Justice Department.

The various revelations, Mr. Brown said in the letter, raise “troubling questions regarding regulators' willingness to supervise and regulate the world's largest banks.”

The Fed did not respond to a request for comment.

“The board clearly has policies requiring banks to have effective controls, yet, in spite of these policies, it appears that Barclays escaped any meaningful supervision over its U.S. activities,” Mr. Brown wrote.