Sunday, July 27, 2014

Timothy Geithner: A Regulator Beholden to a Bank?

In her article in The New York Times, Gretchen Morgenson raises the possibility that Tim Geithner, president of the New York Federal Reserve from 2003 to early 2009 and U.S. Treasury Secretary during Obama’s first term, was a captured regulator, “a man locked into the mind-set of the very bankers he was supposed to oversee.”[1] I contend that while a shared mindset was part of the mix, he was actively doing the bidding of Wall Street, and one bank in particular, which he owed big time. That is to say, it is not just that he worked with Republicans such as Ben Bernanke, chairman of the Fed, and Henry Paulson, Bush’s Treasury Secretary. There is more to it in him being portrayed throughout his confirmation hearing for Treasury as “a tool of Wall Street.”[2]

In his book on his stint as Treasury Secretary, Geithner writes that in his early days as president of the New York Fed, he had deep concerns about the sufficiency of bank capital levels. Notwithstanding this concern, Morgenson continues, “he didn’t require these institutions to fatten their capital cushions before the debacle.”[3] As a defense against the obvious conclusion that he was doing the bankers’ bidding, he claims the rules to raise regulatory capital requirements “were then mired in protracted international negotiations.”[4] So Morgenson did some digging. 

The intrepid journalist “asked Sheila C. Bair, the former chairwoman of the Federal Deposit Insurance Corporation, for her recollection of these events. She replied with an email recalling that in 2006, she attended her first Basel Committee meeting, the international negotiations that Mr. Geithner was referring to. While there, she pushed unsuccessfully to raise bank capital levels. Why was she unsuccessful? ‘I was actively undermined by the Fed, the New York Fed and the comptroller of the currency,’ she said. ‘I later complained to Tim about the way his representative on the Basel Committee had undermined me. He was unapologetic.’”[5] Back in the late 1990s, the trio of Greenspan, Summers, and Rubin turned Congress against Bair when she dared to propose that the financial derivatives markets, including that of sub-prime mortgage-based bonds, be regulated. So the regulatory capture may be much larger than Geithner, with the wider implication that the American democracy had already slid into plutocracy—rule by wealth.

Morgenson argues that Geithner’s “dealings with executives at Citigroup, a bank overseen by the New York Fed, are Exhibit A for regulatory capture. While he notes that the New York Fed banned Citi from making major acquisitions in 2005 after illegal activity was found in its Japan operations, he does not mention that a year later his colleagues lifted the ban, wrongly persuaded that the bank had fixed its internal controls. Mr. Geithner writes repeatedly that Citi’s risks were hidden from its regulators. But did he want to see them? His close associations with Citi officials may have blinded him — he was on a charity board with Sanford I. Weill, the creator of Citigroup; was an acolyte of Robert E. Rubin, the former vice chairman; and had frequent meetings with the bank’s top officials as the credit storm gathered.”[6]
What is not said in a memoir can be more revealing that what is said. Of course, Geithner could have been “on overdrive” in his writing to counter the criticism of his ties with the banks leveled at him during his confirmation hearing to be Treasury Secretary. He barely won the confirmation vote in the U.S. Senate.

An even stronger case of regulatory capture at the hands of Geithner can be made. Crucially, Morgenson misses and Geithner does not mention that Sanford Weill, Citigroup’s largest single stockholder in 2003, had the bank nominate and push for Geithner for president of the New York Fed. Lawrence McDonald mentions this “power behind the throne” in his book on Lehman Brothers,  A Colossal Failure of Common Sense. It is reasonable to assume that while at the New York Fed and even at the U.S. Treasury, Geithner never forgot who brought him to the dance. I’m guessing he also knew how he could be dealt out of the game—meaning by Wall Street, not Main Street.

1. Gretchen Morgenson, “Geithner, Staying on Script,The New York Times, May 17, 2014.
2. Timothy Geithner, Stress Test (Random House: New York, 2014), p. 2.
3. Morgenson, “Geithner, Staying on Script.”
4. Timothy Geithner, Stress Test.
5. Morgenson, “Geithner, Staying on Script.”
6. Ibid.