By Sheila Bair
August 17, 2012

FORTUNE – A lot of fingers are pointing in a lot of directions in the Libor price-fixing affair. Tim Geithner is pointing his finger at the Bank of England. Republicans in Congress are pointing their fingers at Geithner. The big banks are pointing their fingers at one another. But one party to this fiasco is not a regulator or a bank but a law: the Commodity Futures Modernization Act (CFMA).

We have a lot of financial regulators with different responsibilities. Like Lou Costello in the old vaudeville baseball skit “Who’s on First,” it can be hard for us to sort out the identities of the key players. We have “safety and soundness” regulators, who basically focus on an institution’s profitability, and we have “market” regulators, who focus on trading and look out for things like manipulation and fraud.

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In 2000, during the heyday of deregulation, former Federal Reserve Board chairman Alan Greenspan and Treasury Secretary Bob Rubin told Congress that we didn’t need market regulation over the massive and rapidly growing off-exchange derivatives markets because the Federal Reserve Board System provided safety and sound oversight of the major derivatives dealers. Congress agreed and passed the CFMA, which took the nation’s derivatives market regulator, the Commodity Futures Trading Commission (CFTC), out of the game. It left the off-exchange derivatives markets unregulated, including the massive $350 trillion Libor-based interest rate swap market. No one had responsibility for monitoring the markets as a whole to make sure pricing was transparent and reflected market realities. To the extent there was oversight, it was done dealer by dealer. The markets themselves were a free-for-all.

The folly of the CFMA can be seen in how the New York Federal Reserve Bank reacted when alerted to potential rate rigging and fraud by Barclays (BCS) employees in 2007 and 2008. (Much of the rate rigging appears to have occurred on Barclays’ New York trading desk.) The allegations did not immediately relate to safety and soundness. Indeed, the bank’s low-balling of the rate in 2008 arguably helped its financial position by making it look healthier than it was. Instead of launching a thorough investigation, the New York Fed sent a memo to the Bank of England recommending policy reforms. But the Bank of England had no regulatory authority. (In the U.K. at that time all regulatory power rested with the Financial Services Authority.) So it dutifully forwarded the memo to the British Bankers Association, the unregulated trade group that surveyed the banks to set Libor.

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But it was the CFTC that led the investigation unearthing the Libor scandal. Fortunately for us, there was a smart, alert CFTC enforcement attorney by the name of Vince McGonagle, who in 2008 read an article in the Wall Street Journal about the suspected gaming of Libor. Unlike the New York Fed, he had no insider tips or monitors present at the big derivatives dealers to help him see what was going on. And he had no apparent jurisdiction. But a few Libor-based derivatives were traded on-exchange, and the CFTC prohibited filing false reports on the price of a “commodity.” So McGonagle found a loophole and, aided by his colleagues Gretchen Lowe and Anne Termine, launched an investigation, which they doggedly pursued for four years.

The CFTC launched an investigation, and the New York Fed wrote a memo. Why the difference in response? It just reflects the difference in each regulator’s DNA. The Dodd-Frank Act restored much of the CFTC’s authority over derivatives, though it will take years to rein in these markets where deregulation is well entrenched.

No agency is perfect, and the CFTC has had its own problems. But amid all the finger-pointing, let’s give credit where credit is due. The New York Fed was “on first” in this case and bobbled the ball. It took three CFTC enforcement attorneys who had been relegated to the dugout to find a way to enter the game and protect us all.

This story is from the September 3, 2012 issue of Fortune.

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