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* Fed's Lacker alleges Geithner told banks of rate cut plan
* Former officials: confidentiality on rates is sacrosanct
* One former official: matter would be one for Fed's counsel
* Fed declines to say whether the matter was investigated
By Rick Rothacker and Jonathan Spicer
Jan 24 (Reuters) - As U.S. Treasury Secretary Timothy Geithner prepares to step down on Friday, former colleagues are posing awkward questions about an allegation he leaked information on a planned interest rate cut when he led the New York Federal Reserve Bank.
Several former officials said the allegation, if true, suggests a likely violation of agency rules since interest rate discussions are confidential, and one said the central bank should have investigated the matter. Whether it did is unclear.
"Pending discount rate decisions and discussions were absolutely confidential," said former St. Louis Fed President William Poole, who was on the central bank's policy panel at the time but did not participate in the 2007 conference call in which the allegation was raised.
Both the Fed board in Washington and the New York Fed have declined to comment.
U.S. central bank interest rate decisions are extremely market sensitive, with the power to move asset prices from New York to Tokyo to London, and the Fed guards them jealously.
Regional Fed bank presidents "should strictly preserve the confidentiality of (Fed) System information that, if revealed, could benefit any person or impair the effectiveness of System operations and policies," according to guidance on ethics in a Fed administrative manual.
The allegation that Geithner told Bank of America about plans to cut the so-called discount rate was raised by Richmond Fed chief Jeffrey Lacker on Aug. 16, 2007, just as the financial crisis was gaining traction. It surfaced publicly last Friday when the Fed released transcripts of its 2007 policy meetings, and was reiterated in a statement Lacker issued after the transcripts were made public.
Geithner, who some analysts see as a potential future Fed chairman, denied the allegation during the call. The Treasury has declined to comment further and Geithner himself has remained silent.
Former Minneapolis Fed chief Gary Stern, who took part in the call, said he recalled the discussion clearly. "That was an unusual exchange by Federal Reserve standards," he said.
Stern emphasized that he did not know the merits of the case, but said he thought everyone on the Fed would feel strongly about the confidentiality of rate discussions.
"I would avoid tipping off anybody about anything. I would work hard not to do it unintentionally. There are things in the Fed that are confidential ... Crisis or not, I wouldn't do that," he said.
The day the Fed held the call, U.S. stock markets staged an explosive late-day rally, partly fueled by speculation the central bank was moving toward a rate cut. They rallied further the following day when the Fed lowered the discount rate it charges banks for loans and signaled growing chances of a cut in the federal funds rate, its main economic lever.
A former participant in Fed meetings said the secretary of the policy panel or the central bank's general counsel should have looked into the allegation raised by Lacker to see if any rules were broken. Both the general counsel, Scott Alvarez, and the committee's secretary, Brian Madigan, were on the call.
According to a person familiar with the matter, Lacker had a conversation with Bank of America's then-CEO Ken Lewis that led him to believe that on the day of the conference call Geithner had talked with some banks, including Bank of America and JPMorgan Chase, about a plan to lower the discount rate.
It was part of an effort to get JPMorgan, Citigroup and Bank of America to borrow $25 billion each from the Fed and channel it into the asset-backed commercial paper market, which was in disarray. That plan never came to fruition. All three banks declined to comment for this article.
Geithner's conversation bothered Lacker because he felt it broke with protocol for a Fed president to talk to a bank in another district without speaking with that president first, according to the source. It also troubled him because he believed it violated the integrity of the Fed's policy panel to be discussing a potential action ahead of time, the source said.