A growing scandal surrounding manipulation of a key benchmark interest rate is feeding public anger towards banks, a top Federal Reserve official said on Friday.
The debacle over the setting of the London interbank offered rate, a global benchmark for $550 trillion of interest rate derivatives contracts, has already cost Barclays' CEO Bob Diamond and other top executives at the London-based bank their jobs and the fallout continues to broaden.
On Friday, the New York Federal Reserve Bank released emails that showed its then-president, Timothy Geithner, was told about problems with Libor in 2008 -- including that some banks had indicated a tendency to under-report their borrowing costs -- and he pressed the Bank of England to take action. Geithner is now U.S. Treasury secretary.
In an interview with Reuters, Richmond Fed President Jeffrey Lacker said the procedures used for determining the rate, in which financial institutions submit borrowing cost estimates rather than their actual borrowing rates, was ripe for abuse.
"If you just looked at it, without having read any of these stories, you'd suspect that it provides some measure of discretion within narrow margins to an individual institution as to what they report," he said during the interview in his Richmond office, which overlooks the James River.
In the wake of a global financial crisis that continues to reverberate in Europe, Lacker saw the developments as another blow to perceptions of Wall Street.
"The revelations broadly are another episode that is damaging to people's confidence in the financial services industry and that's a shame," he said.
