A Fed official was told by an employee of British bank Barclays that the institution was "not posting, um, an honest rate" for its London interbank offered rate, or Libor, but only did so because most other global banks were also fudging their public Libor rate.
"Our contacts at Libor contributing banks have indicated a tendency to underreport actual borrowing costs to limit the potential for speculation about the institutions' liquidity problems," Fed officials said in a subsequent report.
The New York Times said the Fed branch in Manhattan was under the direction at the time of Timothy Geithner, who went on to become the current secretary of the treasury. Geithner and other regulators voiced concerns about the accuracy of the Libor rates; however, little was done as the government focused mainly on preventing further erosion of the banking system.
The Fed has said the talk about the sketchy Libor amounted at the time to unsubstantiated "chatter" within financial circles. But Geithner will likely get a chance to elaborate on what went on in 2008 at congressional hearings on the Libor issue later this month.