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Timothy Geithner Doesn't Get It

Yale University corporate law professor Jonathan Macey filed this guest blog post:

Yesterday, Treasury Secretary Timothy Geithner made his first appearance before the Congressional Oversight Panel, which is one of the cadre of government-sponsored entities overseeing the massive bailout and recapitalization of the U.S. financial industry.

In an article called “The Quiet Coup” that appears in the May issue of Atlantic magazine, Simon Johnson argues that the finance industry effectively has captured the U.S. government. The bailout, under this view, is not about the U.S. economies, it is about serving the interests of the financial institutions that are in charge of the political process.

While Johnson does not have a smoking gun to point to as evidence (such as a document in which Geithner admits to serving the interests of Wall Street and selling U.S. taxpayers down the drain), he amasses an impressive array of circumstantial support for the position. Specifically, he points to a startling list of government initiatives that greatly contributed to the financial crisis, including, but not limited to: regulatory forbearance; the congressional ban on the regulation of credit-default swaps; the vast increases in the amount of leverage allowed to investment banks; a no-show Securities and Exchange Commission; the promotion of homeownership; cheap money from the Federal Reserve; and last, but not least, Basel, which is the international agreement to allow banks to measure their own risk.

Add Geithner’s speech yesterday as another major piece of evidence in support of this hypothesis.

First, as reported earlier in the Financial Times, Geithner is not only declining to force banks to repay the bailout money they have received from the government, he is forbidding them to do so. Claiming, farcically, that his “basic obligation is to make sure the system as a whole...has the ability to provide the credit that recovery requires," Geithner is going to allow the banks receiving bailout funds to have the best of both worlds. They get to keep the government money and they also get to claim to an outraged public that they would pay it back if only they could. No private sector creditor would behave so outrageously as to refuse to be repaid by its debtors, particularly debtors in such fire financial straits as these big companies.

It would be irresponsible for Geithner not to make vigorous efforts to obtain repayment of the public money that the government is owed. To refuse repayment in full from these borrowers appears downright sinister.

The core of Geithner’s remarks focused on identifying the major challenges facing the financial system. Geithner’s concerns reveal that his focus is not on the health of the economy; not on inflation; not on the growing tax burden facing Americans; and certainly not on whether the government will be repaid the hundreds of billions of dollars it has transferred to the financial industry. Rather, the Treasury secretary’s principal concern was the fact that major financial institutions have reported unprecedented losses.

Further to the idea that the federal government is by the banks, of the banks and for the banks, and consistent with the government policy that no bank should be left behind, Geithner promised that, “We cannot allow doubts about the viability of major institutions to undermine the financial system as a whole. The U.S. government must continue those policies critical to sustaining confidence in the core of the system.” In other words, what’s good for America is bailing out the banks.

Geithner went on to say that regulators did not do enough to help the banks. I have no doubt that the government will do a lot more in the future.

Perhaps the most amusing part of Geithner’s testimony was his observation that “in early phases of the crisis, some financial institutions were able to raise significant amounts of private capital. But as the crisis deepened, this became impossible.” Geithner appears unable to comprehend the fact that the reason that private capital has dried up is because it has been supplanted – pushed out – by the government. As we have seen over and over again, no private sector financial institution will lend money when there is eminent risk that it likely will lose its investment entirely (or find its investment seriously diluted) by subsequent government interventions of precisely the kind we have observed in the U.S. lately.

Elizabeth Warren, the law professor who heads the oversight panel patiently tried to point out to Geithner that, “People are angry because they are paying for programs that haven't been fully explained and that have no apparent benefit for their families or the economy as a whole.” The Treasury is not there to mollify the public. It is there to preserve and protect its clientele -- the financial industry -- down to the last derivatives trader.

--Jonathan Macey, is Sam Harris professor of corporate law, securities law and corporate finance at Yale University, a member of the Hoover Institution Task Force on Property Rights, and author of “Corporate Governance: Promises Made, Promises Broken."

By Sara Goo  |  April 22, 2009; 6:03 AM ET
 
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Comments

The Gaithner hearings are being replayed in c-span as I write.

It is impossible that we have sunk so far and this complete buffoon is US Treasurer.

He did a virtuoso performance of "double talk" moving his lips throwing out every word he could thnk of but saying nothing of any meaning.


The current game-plan of these usurpers of course is to be take as much taxpayer money they can get but not so much as to trip outrage among the citizens. All behind the scenes crafting by these usurpers needs to be exposed byt anyonoe in the know.

It was a shocking staged performance form Gaithner and he really has to go.

Congress has already been 'taken over' and will not act. It is the affirmative responsiblity of all other americans to
step in this vacuum of responsibility.

Gaithner is a complete buffoon but a dangerous one.

Posted by: JohnAdams1 | April 22, 2009 6:26 AM | Report abuse

Just one more comment:

At the end of the hearing Gaithner stated
to the chriman that his efforts must ( must) be meassured always against the alternative.

But the deception is that the Gaithner and all the economic advisors and Obama never have an alternative. they can never seem to come up with an alternative that benefits the ameircan people. All thier alternatives benefit wall street and the looters of our treasury.

all talk, all self promotion both from Gaithner and the administration.

really when are we going to get at the 'beef' all we have is self promotion.

Posted by: JohnAdams1 | April 22, 2009 6:48 AM | Report abuse

Dr. Johnson - I enjoyed your testimony yesterday and support your views.

However, I thought this blog was intended to present the debate taking place in Washington -- not just your side of the argument, or opinion that closely mirrors your views.

There is a conversation taking place between many voices concerning financial regulation and economic policy. Yours is heard and appreciated, but there are many others that will inevitably play a major role in shaping an outcome. Please let us consider these as well.

Respectfully,

Miklos

Posted by: MiklosS | April 22, 2009 9:40 AM | Report abuse

@ Mr Macey
You have misconstrued the issue of banks repaying government loans. You omitted the word YET. Several times during Mr Geithner’s testimony he reiterated what he said in the initial statement-- the payments will be accepted when the bank is judged to be sound by the FED regulators. The criterion is the soundness of the bank within the overall system, not the ability of any individual bank to scrape together enough money to pay back the government. Since you cite Simon Johnson, let me refer you to his recent interview on NPR ( http://www.npr.org/templates/story/story.php?storyId=103122382 ). He states that repayment of the loans is a major indicator of whether the financial oligarchy or the government controls public policy. If the banks can set the terms of repayment, the government would be capitulating to the banks' self-interest.

Since the government position appears counterintuitive, it's easy to incite public rage against a step that actually reinforces the power of the financial institutions to resume business as usual.

Posted by: aimzzz1 | April 22, 2009 9:59 AM | Report abuse

Let me correct my last sentence-- I was trying to say: Since the government position appears counterintuitive, it's easy to incite public rage and assist the financial institutions to resume business as usual.

Posted by: aimzzz1 | April 22, 2009 11:09 AM | Report abuse

Hi This is really for the IT people - the feed link seems broken if you could take a look please.

http://feeds.voices.washingtonpost.com/wp/hearing/index.xml

Posted by: cembo | April 22, 2009 12:11 PM | Report abuse

"Since the government position appears counterintuitive, it's easy to incite public rage and assist the financial institutions to resume business as usual."

To the contrary: I understand the government's position in totality. It just makes no damn sense. This money should never have been distributed in this manner in the first place. Once these banks got it, what did they do? Buy other banks, sit on it, take the corporate jet to the Super Bowl, or just refuse to disclose how it was used.

You posit that "public rage" at Geithner's skip-no-beat continuation of Paulson's malfeasance will assist these institutions to resume business as usual. In fact, the person assuring that these institutions will resume business as usual is Tim Geithner himself. That's his job, or at least, that's how he defines it.

Geithner is one of the patron saints of the deregulation that brought us to this precipice. As the sitting head of the NY Fed he denied being a regulator at his confirmation hearings. And he's right: he won't be regulating anything, believe me.

What I'm enraged about is that I watched this financial industry insider testify before the TARP Committee for what I'd guess was about two hours. He didn't answer a single dog-gone question during that entire period of time. He's not a stupid man: he knew the downside of diversionary answers. He himself lauded transparency as giving him credibility, and then delivered the largest bullpucky tsunami since Bush justified Iraq.

Why did he do such a thing? Because he couldn't give straight answers. He couldn't tell Ms. Warren why taxpayers are funding credit card companies who in turn are jacking up rates and fees and reducing credit lines on those very same taxpayers.

He couldn't because the only conceivable answer is these companies are his true and only constituents, and define the limits of his raison d'être. The American people are just a bothersome impediment to this individual -- just a nation of whiners too stupid to accept that allowing the fat cats to suckle unrestrained at the teat of the Treasury is good for all Americans.

So don't attribute a wholesale public rejection of your defense of Geithner's actions with a lack of understanding of what you call "counter intuitive" aspects. It's not as difficult to observe the obvious as you'd make it out.

Posted by: dgblues | April 22, 2009 1:35 PM | Report abuse

@dgblues
I too was frustrated by several of Mr Geithner's non-answers & I don't support all his policies.

The question of whether the money should have been distributed does not alter the fact that it already happened and it must be dealt with. Given this reality, we stand to lose even more unless we obtain the best possible result under existing circumstances. The goal is to stabilize the financial system. The money loaned to the banks should be used to that end. In order to repay its loan, each bank should be required to demonstrate that it is viable, that it is capable of executing its role as a financial institution and that it is willing to do so.

The way the banks can repay the American taxpayers is to give us back a functioning economic system when they refund the money. Geithner is right on this one. The banks are in no position to make this determination. They must earn their way out of their obligations or we will be ripped off yet again.

Posted by: aimzzz1 | April 22, 2009 3:23 PM | Report abuse

Ok, I'm not a big fan of Geithner either...but who is his boss? Obama...shouldn't he have some skin in the game here? It shocks me that his approval rating is 60% and yet Geithner's name elicits 4 letter words. And I'm sure Obama is getting his advice from Summers (how many people can even tell you how he is?). I think by focusing only on Geithner, we're missing the bigger picture. If Obama's approval ratings were to start dropping, he would do something about it. As long as all the heat is on Geithner, Summers will continue to pull the levers as he pleases...with apparent little pushback from Obama. In my last post, I equated Summers with Cheney (behind the scenes brainmasters and puppeteers)...I was very glad to hear Obama say he wasn't going to prosecute any of the lower level people involved in torture...and that's kind of how I see Geithner...while he probably agrees with what Summers/Obama, he's probably just following orders. Let's put some heat on Obama if we want anything to change.

Posted by: DesolationRow | April 22, 2009 4:22 PM | Report abuse

Are there any controls over executive compensation that are would be lost if bank repaid their bailout debts?

Posted by: rlplant | April 22, 2009 4:42 PM | Report abuse

Timothy Geithner is a mere stool-e for Wall Street. President Obama is either very uninformed or a stool-e for Wall Street as well.

Geithner, Summers, Rubin and Paulsen need to be included as suspects in any government investigation of criminal wrong doing. Lets remember that the definition of fraud is an intentional deception made for personal gain.

William K. Black stated that those who created the meltdown through acts of fraud had also created a "systemic ponzi scheme." http://en.wikipedia.org/wiki/Fraud states that "Acts which may constitute criminal fraud include: investment frauds, such as Ponzi schemes".

Geithner showed his true colors when he chuckled while explaining his credentials, or lack thereof during his questioning by Damon Silvers, General Council - AFL-CIO. If you missed this slip, go to http://www.freedomfromthepress.net and play the 4.5 minute audio clip.

Steven Thompson
Independent News Services

Posted by: mediareformer | April 25, 2009 3:57 AM | Report abuse

I have to disagree with Mr. Adams and Mr. Macy. Geithner has not shown himself to be up to the task at hand YET, but he is FAR from a buffoon. He's a young man in over his head (and let's face it, almost no one wouldn't be). He's smart, ethical and focused and could WELL be the right man for the job.

Unfortunately, he still has too much reverence for the system he's a product of. He's drunk the Wall Street Kool Aid that makes most members of this insular cadre believe that stabilizing these big banks is the same thing as stabilizing our financial system.

Their definition of the American financial system is extremely limited. It feels like the pompous cliches that reflect shabby aristocratic attitudes in 1930s films, such as: "'NO ONE' does that." or "'EVERYONE' will be there."

The denizens of this cloistered world are simply too addicted to and or sheltered by it to recognize that these large banks are one of the MOST SIGNIFICANT sources of the risky, unstable climate so much of the rest of the world is experiencing.

Stabilizing the big banks was a good thing because we didn't want the collateral damage that rapid and/or complete collapse of these institutions would create across the broader economy. But now that they're stablized it's time to TAKE THEM APART.

Obama and Geithner are both smart, committed and moral enough to to see that breaking up these massive "banks" is ESSENTIAL for stabilizing the American financial system, but neither of them have grokked it yet. It's a big bite to take out of the hand that either feeds you (Geither) or was your largest collective donor (Obama).

Geithner can do it but it will require a revolution in his thinking. Obama can make the revolution happen, but he's loathe to destroy anything. He doesn't see yet that this is necessary, but he's too good not to have a good whiff of it by now.

It's significant that Obama has gone to extremes to build a highly successful "team of rivals" that provides debate and dissent across most of the major areas he's challenged by. Finance and the economy is a notable exception.

It's time to call Obama on this omission and challenge him to open up the debate.

Simon Johnson's perspective on this problem is clear for two reasons: he's seen this dance this over and over at the IMF and he's an immigrant. The outsider's perspective is EXTREMELY valuable in this situation and Obama needs plenty more outside perspectives (apart from Johnson's) to shake loose the Wall Street grippe.

It's worth commenting that Brooksley Born, an outsider of another kind, had it right a decade ago...

I agree with MikiosS. I'd like to see more points of view from other professionals in this area on this blog (or collected together somewhere).

Posted by: kalliek | April 27, 2009 9:27 AM | Report abuse

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