Troubled Asset Relief Programs that rely on the London Interbank Offered Rate should cease using LIBOR as a benchmark for interest rates to protect taxpayers from potential manipulation, the Office of the Special Inspector General for TARP said in a report to Congress Tuesday.

LIBOR is a commonly used benchmark for short-term interest rates for international financial institutions to lend money, primarily to each other. LIBOR came under scrutiny when allegations of participating banks manipulating the rates to increase lending profits surfaced in the marketplace.

The latest quarterly SIGTARP report to Congress asserts LIBOR served as an interest benchmark for several TARP programs and continues to be used in the TARP Public-Private Investment Program as well as the Term Asset-Backed Securities Loan Facilities program.

"It is imperative that Treasury determine whether taxpayers who funded TARP were harmed by LIBOR manipulation and publish the results of its analysis," the SIGTARP Inspector General report said. "Equally important, Treasury and the Federal Reserve must protect taxpayers against any risk of future harm from LIBOR manipulation."

SIGTARP also advised the Treasury and Federal Reserve to encourage the Financial Stability Oversight Council to include AIG on its list of systemically important financial institutions that require heightened oversight. The Treasury took a stake in AIG in 2008 to stabilize the insurer during the financial crisis.  As of Sept. 10, the Treasury had sold enough AIG TARP stock to reduce its ownership stake to under the 50% mark.

The TARP Capital Repurchase Program, which was used by the Treasury to inject capital into banks, also is the subject of some scrutiny in the report with SIGTARP suggesting the Treasury is functioning as a private investor when auctioning its preferred TARP shares in banks.

In some cases, the banks linked to the original shares before the bailouts are buying them back at discount, SIGTARP said.

"Such a signal could discourage those banks that have the ability to pay in full from making taxpayers whole if they believe that they could exit TARP at a discount," the report added. "SIGTARP is concerned that TARP banks that may have the ability to repay TARP in full, either on their own or by raising new capital, may try to buy back their own shares in auctions at a significant discount."

The Treasury issued a sympathetic response to the report on LIBOR, but noted that neither the Federal Reserve nor the Treasury have the authority to change the interest rate on the small number of remaining loans that depend on LIBOR rates.

"Moreover, if we sought to renegotiate the rate, it is likely that borrowers either would not agree to a rate change or would agree only to a change that would result in a lower payment to the taxpayers," the Treasury said in report.

Click here to read the Treasury's full response.