The Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) has urged the removal of the London Interbank Offered Rate (LIBOR) from the Troubled Asset Relief Program (TARP).
In its latest quarterly report to Congress, SIGTARP recommended that the U.S. Department of the Treasury and the Federal Reserve change the set-up of two TARP-related endeavors – the Term Asset-Backed Securities Loan Facility (TALF) and the Public-Private Investment Program (PPIP) – that currently rely on LIBOR. SIGTARP warns that the recent controversies surrounding allegations of LIBOR manipulation create a risk for taxpayers funding TARP's activities.
‘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,’ says SIGTARP in its report. ‘These TARP programs last as long as 2015 and 2017. 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 also called for having American International Group (AIG) designated a systemically important financial institution. SIGTARP points out that AIG is currently regulated by the Federal Reserve as a savings and loan holding company, but that it would no longer be subject to banking regulatory oversight if it proceeds with plans to sell the ownership of its banking operation.
‘Taxpayers still on the hook for billions of dollars for their TARP investment in AIG deserve to have strong regulation of AIG, whether AIG keeps or sells the bank,’ SIGTARP says. ‘Taxpayers need to be protected against the potential impact of any future AIG financial distress on the broader economy based on AIG's size, as one of the largest insurance companies in the world, and interconnectedness [with the wider economy].’
SIGTARP's full report is available online.