Senator Chuck Grassley (R-IA), ranking member of the Senate Judiciary Committee, along with Senator Mark Kirk (R-IL), are turning up the heat on Treasury Secretary Tim Geithner about what he knew and when he knew about the LIBOR manipulation scandal.

The Senators also say that in the wake of the scandal, the creation of a new American-based interest rate index is a better alternative and they are requesting a meeting with key Treasury staff on first steps towards that goal.

In a letter sent today, obtained exclusively by the FOX Business Network, the Senators are demanding a full explanation of what they call the Treasury Secretary’s complacency after finding out the LIBOR rates were flawed.

Click here to read the full letter

In the letter, Geithner is accused of doing nothing to “diminish use of this flawed index in U.S. financial markets” and, on the contrary, it says the Treasury’s use of LIBOR increased.  The Senators say the inaction by Geithner contributed to litigation that is emerging on a state and local level that “threatens to clog our courts with multi-billion dollar class action lawsuits” that the manipulated rates had on the debt burden of state, municipal and local governments.  The letter references legal observers calling this new litigation boom as “the New Asbestos” of lawsuit cases.   

The legislators also questioned Geithner’s lack of communication with Congress and the American public during the LIBOR manipulation scandal when it was discussed with the Bank of England in 2007 and 2008.  Geithner at the time was head of the New York Federal Reserve and has said the concerns over the LIBOR rate were brought to the attention of the British central bankers, and he felt it was going to “be on them to take the responsibility for fixing this.”

The LIBOR manipulation scandal erupted this summer when Barclays Bank was fined millions of dollars for attempting to manipulate the London Interbank Offered Rate used between banks.  Barclays CEO Bob Diamond lost his job over the scandal, and the bank was fined almost half a billion dollars by the U.S. Commodity Futures Trading Commission and British regulators.

Charles Gasparino joined FOX Business Network (FBN) in February 2010 as Senior Correspondent.