If Timothy Geithner doesn't want to make bank shareholders or bondholders pay a price, the only remaining entity left to foot the bill for the bailout of Wall Street is the federal government--i.e., taxpayers.
March 23, 2009
AT THE center of the firestorm over $165 million in federally funded bonuses for employees of the insurance company AIG was Treasury Secretary Tim Geithner, whose tenure so far has unfolded in a series of disasters.
Most of the criticism of Geithner has focused on what he hasn't done: that his heavily hyped February unveiling of a plan to fix the banks left too many details out, or that he failed to prevent the AIG bonuses from being paid out long after he knew they were planned.
The problem with this line of criticism--however well deserved--is that it doesn't get at the nub of what Geithner and the rest of the Obama economic team are actually doing. Here, the policy failures are much more serious.
John Hussman, manager of the Hussman Strategic Growth mutual fund, supports government takeovers and restructuring of insolvent financial institutions. Recently, he chided the administration for its "misguided policy response...[that] has focused almost exclusively on squandering public money and burdening our children with indebtedness in order to defend the bondholders of mismanaged financial institutions (blame Paulson and Geithner--I've got a lot of respect for our President, but he's been sold a load of garbage by banking insiders)."
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WHY WOULD Geithner--who, we were told, was one of the most qualified and smartest people for the treasury secretary's job--fall for such obviously wrongheaded policies? A long February 25 profile by Bloomberg News reporters Yalman Onaran and Michael McKee offers some insight into this question.
First, Onaran and McKee show that the hallmark of Geithner's career has been playing second fiddle to bigger players--especially former Treasury Secretaries Robert Rubin, Larry Summers and Henry Paulson.
Rubin and Summers are as implicated as anyone in creating the deregulatory climate that led to the explosion of exotic and risky securities at the center of the financial crisis--and the development of "too big to fail" financial institutions. Paulson, a former CEO of investment bank Goldman Sachs, dreamed up last fall's massive federal bailout of Wall Street, including his former employer.
At each crucial moment, Rubin, Summers and Paulson found in Geithner an accomplished technocrat who helped to implement their policies. Today, many doubt that Geithner is an independent actor. Most think of him as a cipher for Summers, one of Obama's chief White House economic advisers.
Second, it's clear that Geithner is completely enveloped in the Wall Street money culture that has brought the world economy to the brink of catastrophe.
As chair of the New York Federal Reserve before becoming Treasury Secretary, Geithner had regulatory authority over all of the Wall Street banks, including Rubin's Citigroup. Yet for most of his time in office, he did little to rein in the biggest excesses that have brought these firms to the brink of ruin.
In one case in 2006, Onaran and McKee noted, Geithner supported the Federal Reserve's lifting of Citigroup's requirements to report on its risk management. The Fed had required Citigroup to make these reports only three years earlier, when Citigroup had been identified as helping the collapsed Enron Corp. set up the "off balance sheet entities" that Enron used to hide its fraudulent activities.
Chris Whalen, a former New York Fed official and co-founder of a risk advisory firm told the Bloomberg reporters: "You have the old boys' network here...So it would be unnatural for Geithner to turn around to any of these guys at Citi and say, 'Hey, you have a problem.'"
One aspect of this "old boys' network" is the behind-closed-doors insularity that turns momentous public policy decisions into opportunities for self-dealing by Wall Street insiders.
As has been reported in the media, the decision to nationalize insurance giant AIG last fall was made by three principal actors--Geithner, Federal Reserve Chair Ben Bernanke and Goldman Sachs CEO Lloyd Blankfein.
Perhaps it was merely coincidence that Blankfein's firm was owed billions by AIG--and that almost $12.9 billion given to AIG by federal government ended in Goldman Sach's coffers.
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THIRD, IT'S clear that because of his experience and Wall Street ties, Geithner can't conceive of a solution to the financial crisis that isn't pre-approved by Wall Street.
One would think that a treasury secretary, acting in an era of unprecedented crisis, should be able to take forceful actions to make financial institutions do what's needed re-stabilize the system.
Geithner had no worries about offending the sensitivities of Asian bankers when, as an International Monetary Fund official during the 1990s Asian financial crisis, he ordered dozens of banks shuttered. Yet almost all of the major initiatives Geithner has announced require huge taxpayer subsidies to banks and other financial firms to prod them to do what a forceful government should be able to order them to do.
The two major plans announced to tackle the banks' toxic assets and jump-start consumer lending envision trillions in federal subsidies to lure private investors to buy toxic securities. Taxpayers will be forced to bear almost all the risk for these worthless securities, and major financial institutions will be shielded from the consequences of their disastrous decisions.
Just about any price paid for these securities will amount to a massive rip-off of taxpayers, who will be forced to pay billions more than any private investor is currently willing to pay for them. Even Obama's plan to help homeowners includes bribes to banks to coax them to approve mortgage restructuring and refinancing.
And all of these plans seem to assume that all the financial sector needs is a lot of government money to get it back to its freewheeling ways. Commenting on the latest plan to clear toxic assets from the bank's balance sheets, liberal economist and New York Times columnist Paul Krugman wrote, "The Obama administration is now completely wedded to the idea that there's nothing fundamentally wrong with the financial system--that what we're facing is the equivalent of a run on an essentially sound bank."
This, as David Kotok, chief strategist of the Cumberland Advisors investment fund, put it bluntly isn't "change, as Obama promised, but just the same old stuff."
Banking analyst Paul Miller, another expert that Bloomberg's Onaran and McKee consulted, said Geithner was too protective of the big Wall Street banks to act against them. "His philosophy is don't wipe out the shareholders because they'll never come back," Miller said. "But the only way to get to the problem is to dilute shareholders away. These guys are unwilling to take these big steps."
If Miller is right that Geithner doesn't want bank shareholders to pay a price, and if Hussman is right that Geithner doesn't want bank bondholders to pay a price, then we really are in trouble. Because the only remaining entity left to pay is the federal government--i.e., the taxpayer.
If this is truly the end result of Geithner/Obama economic policy, then we are in the midst of witnessing one of the biggest-ever transfers of wealth from ordinary people to the Wall Street gamblers who ran the financial system into the ground.
All of which makes you wonder: Why, when Obama's transition team was announcing its picks for major economic posts, did Geithner emerge as the odds-on, and almost unchallenged, favorite to pick up where his predecessor Paulson, left off?
If nothing else, it appears that the more than $69 million that the finance, insurance and real estate sector gave to Barack Obama's presidential campaign is one investment that may pay off.
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