Has Geithner Overtsayed His Welcome?
I was really excited about Obama's choice of Geithner for Secretary of Treasury. Geithner has worked in the Clinton Treasury and had specialized in crisis roles, dealing with both Russia and Asia in the late 90s. His academic work is in line with Ben Bernanke's -- he's a student of both the Great Depression and Japan and that's what we've been dealing with of late.
I'm also loathe to want to deny a new president access to the cabinet of his choice. Obama chose Geithner not only because of his professional and academic past but because, as chair of the New York Fed, he was pretty much the ranking Democrat involved in the Bush response to the banking and credit problems.
The problem is, Geithner now seems wedded to the Bush era response which was to throw money at Wall Street executives who went to the government with guns held to their own heads, promising to take the entire economy with them if they were allowed to fail.
AIG is not, and has never been, a "systemic" risk to the global economy. There is no such thing. AIG sold Credit Default Swaps to other banks and hedge funds. Those are, in essence, insurance policies against corporate defaults. If you're afraid GM will stop paying its debt (or if you think they'll stop and want to profit from it) you buy an insurance policy that pays you if they go under. If GM doesn't default, you're out the premiums. If they do, you get paid. But what if GM defaults and your insurance provider defaults too? Guess what? you're out of luck. It's called counter-party risk and there's no reason that Goldman Sachs should be protected from it any more than I'm protected if I sign a cell phone contract and my cell phone provider goes out of business.
Even worse -- a lot of these banks are domiciled in Europe. If it's absolutely necessary that they survive losses from the counter-party risks they took willingly, then let the European Union bail them out!
Geithner knew about the AIG "retention" bonuses from the start. He's the one that helped engineer the AIG bailout and who made no effort to curb such excesses. He also fought as hard as possible to keep compensation limits out of economic legislation. Geithner has, in short, supported bank executives and highly paid traders and financial engineers at every turn.
What I find even more galling is that critics of Geithner and the administration are being marginalized as "populists" and make no mistake the populists are on both the left and the right at the moment. I'm really worried that this is going to turn into a range against the Obama machine -- a head needs to roll to prevent that and Geithner's will do just fine. We can also replace him (and maybe Summers) with some more practical, liberal economic thinkers. Robert Reich and Dean Baker will do just fine.
I can still be convinced that the initial bank bailouts, like Bear Stearn's arranged marriage with JP Morgan Chase were legitimate attempts at stabilizing the system but they should have stopped long ago. I'm not surprised that the Bush administration decided to trsnafer enormous sums of wealth from taxpayers to Wall Street. But the Obama Bail-Outs have to stop and I don't think they will unless we get rid of Geithner.
I'm also loathe to want to deny a new president access to the cabinet of his choice. Obama chose Geithner not only because of his professional and academic past but because, as chair of the New York Fed, he was pretty much the ranking Democrat involved in the Bush response to the banking and credit problems.
The problem is, Geithner now seems wedded to the Bush era response which was to throw money at Wall Street executives who went to the government with guns held to their own heads, promising to take the entire economy with them if they were allowed to fail.
AIG is not, and has never been, a "systemic" risk to the global economy. There is no such thing. AIG sold Credit Default Swaps to other banks and hedge funds. Those are, in essence, insurance policies against corporate defaults. If you're afraid GM will stop paying its debt (or if you think they'll stop and want to profit from it) you buy an insurance policy that pays you if they go under. If GM doesn't default, you're out the premiums. If they do, you get paid. But what if GM defaults and your insurance provider defaults too? Guess what? you're out of luck. It's called counter-party risk and there's no reason that Goldman Sachs should be protected from it any more than I'm protected if I sign a cell phone contract and my cell phone provider goes out of business.
Even worse -- a lot of these banks are domiciled in Europe. If it's absolutely necessary that they survive losses from the counter-party risks they took willingly, then let the European Union bail them out!
Geithner knew about the AIG "retention" bonuses from the start. He's the one that helped engineer the AIG bailout and who made no effort to curb such excesses. He also fought as hard as possible to keep compensation limits out of economic legislation. Geithner has, in short, supported bank executives and highly paid traders and financial engineers at every turn.
What I find even more galling is that critics of Geithner and the administration are being marginalized as "populists" and make no mistake the populists are on both the left and the right at the moment. I'm really worried that this is going to turn into a range against the Obama machine -- a head needs to roll to prevent that and Geithner's will do just fine. We can also replace him (and maybe Summers) with some more practical, liberal economic thinkers. Robert Reich and Dean Baker will do just fine.
I can still be convinced that the initial bank bailouts, like Bear Stearn's arranged marriage with JP Morgan Chase were legitimate attempts at stabilizing the system but they should have stopped long ago. I'm not surprised that the Bush administration decided to trsnafer enormous sums of wealth from taxpayers to Wall Street. But the Obama Bail-Outs have to stop and I don't think they will unless we get rid of Geithner.
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Short answer...YES !
C
March 18, 2009 11:11 PM | Reply | Permalink
Short answer ... NO!
March 19, 2009 2:38 PM | Reply | Permalink
. . . Geithner now seems wedded to the Bush era response . . . .
Because he misread and continues to misread the problem as a crisis of illiquidity when it is a crisis of insolvency.
He made the identical mistake when he mismanaged the Indonesian crisis back in the '90s.
N.B. Geithner's earlier mismanagement had consequences. East Asian countries said never again will we let UST jerks destroy our economies. Thus, they built up their foreign reserves and left those poor folks on Wall Street to invest all those excess funds -- or so says Greenspan.
March 19, 2009 1:12 AM | Reply | Permalink
Interesting Ellen. But how about links and/or citations?
March 19, 2009 6:41 PM | Reply | Permalink
Links: here and here.
March 20, 2009 1:13 AM | Reply | Permalink
Ellen, I'm really interested in your distinction between illiquidity and insolvency. Am I unpacking it correctly: Geitner thinks the banks are having trouble unfreezing assets quickly enough, but in reality, no matter how soon the assets flow, there won't be enough IN the flow? To use the circulatory system analogy, it would be like banking on an organisms survival based on the rate of bloodflow without taking into account the amount of oxygen in the blood. Am I barking up the right tree?
If I am, then what does oxygen represent? Objective value? International worth? If that's right, then what gives us the greatest likelihood to supply that?
I think that's exactly why Obama is right to attack this by juggling. I mean, there's not a simple answer to those questions--I don't think. But Geitner, at least from my perspective--at a distance--looks like he's approaching this business as usual. I don't see how that's an option.
March 19, 2009 6:58 PM | Reply | Permalink
Some down-and-dirty definitions and descriptions: Illiquidity and Insolvency
Metaphors aren't necessary. Financial institutions which borrow short and lend long are never prepared to pay more than a small amount of those obligations in the short term. As long as they're solvent the lender of last resort (the Fed in the U.S.) is charged with lending as much money as is necessary to meet the demand.
The LOLR takes back long-term assets as security and charges a high rate of interest to the illiquid institution. Once the pressure subsides, the transaction is reversed (the high rate of interest encouraging the institution to pay off the loan).
An insolvent institution, however, is put into administrative receivership.
Geithner seems to believe that the insolvent banks are merely illiquid -- not surprising for someone who, until recently, was president of a private Delaware corporation owned by the Wall Street banks (namely, the NYFRB).
March 20, 2009 1:04 AM | Reply | Permalink
As we all know, we hired bankers to solve the problem that bankers in their network caused. The fact that Goldman was saved and Lehman wasn't said it all with respect to Paulson. Geithner may have been the best choice at the time. Obviously there is a lot of hanky panky going on, and I'd bet on Goldman to place at least second with the taxpayers somewhere back in the pack. The great thing about a crisis is that the ends get to justify the means. As with the last administration, we can only hope to sort out the ugly details at some later date.
March 19, 2009 10:11 AM | Reply | Permalink
Maybe we need to get out of crisis thinking now? How long are we supposed to tolerate the government acting in a state of panic?
March 19, 2009 10:30 AM | Reply | Permalink
Well , until it's over.
Is it? I don't know.
But I do have a settled belief that there's no point in almost jumping over the Snake River. Rightly or wrongly we started down the path of putting the financial system back to something like normal in the hopes that the rest of the economy would follow. Maybe we shouldn't have, but having started down that road , now , the shortest way out of the forest is the one we're on. Keep on keeping on.
For that strategy I think Obama needs Geithner and Gates, his analog at Defense. Insiders who knows the buttons that have to be pushed. Like you I'd like to see a real democrat in both those positions. But not now, like Augustine on becoming virtuous.
BTW,Is Geithner even a democrat of any kind? I certainly doubt that. The NY Fed doesn't seem like the sort of place where I'd expect one.
So, restore the kind of economy the Geithners of the world understand ,and get the military out of Iraq , then replace those two holdovers . Time for a change.Finally.
I'm not sure Dean Baker would be right for Treasury and I am sure after reading Supercapitalism that Reich wouldn't be. How about Brad Delong or Barney Frank, (really,he is one of the smartest guys in the room).And for Defense: Howard Dean to make the 25% cut in the DOD budget that Frank has been advocating and that Obama needs to provide space for the rest of his program.
March 19, 2009 11:26 AM | Reply | Permalink
It's not that your ideas for Treasury and DoD don't have a certain appeal. But, really, Barney Frank will have to take a tour of the Cabinet Room to get close to Geithner's chair. And I'll be happy to print this comment out, eat it, and wash it down with a pint of tabasco sauce if Howard Dean ever works in the Department of Defense.
March 19, 2009 11:33 AM | Reply | Permalink
Yeah, it seems off the wall but I'm deadly serious.
Barney Franks is incapable of being dumb and has just now finished a crash course in the care and feeding of the Masters of the Universe. Conclusion: Don't
Dean has the same-but in his case justified- St.Grarkelsex self assurance as W. As I recall his mother was a bridesmaid of Barbara's or something like that. When the Chiefs march into his office, stand at attention,salute and threaten to resign over a 25% reduction in their still grossly oversized sandbox his reply will be " I thought you'd never a.....thank you for your service gentlemen, take as long as you want clearing your desks this afternoon."
Then appoint some officers who understand that civilian control of the military , surprisingly, means civilian etc.
And unlike Gates and most of the occupants of that sinecure he has actually run something. As the repeatedly re-elected governor of a state too small to afford a Palace Guard, the buck really stopped with him not with the third assistant to his Chief of Staff.
March 19, 2009 1:46 PM | Reply | Permalink
Oh, I forgot to mention that your comments about staying the course we've already invested in make a lot of sense. Very good insight.
March 19, 2009 11:35 AM | Reply | Permalink
Smart stuff as always flavius. I do suspect Geithner is a Democrat of some kind. He did work for the Clinton Treasury and is close to Larry Summers. He's probably a Democrat of the Summers kind. Which is kind of a Democrat. Kind of.
March 19, 2009 12:06 PM | Reply | Permalink
All compliments gratefully received.Particularly undeserved ones, as in this case.
March 19, 2009 1:47 PM | Reply | Permalink
Flavius, you've given wings to my favorite quotable quote here at tpm today... "But I do have a settled belief that there's no point in almost jumping over the Snake River". My concern, is that like Mssr. Knievel, we may miss the mark, regardless of whether we stay the course with present official's in place or not. Good money after bad and all that.
March 20, 2009 1:41 AM | Reply | Permalink
The largest section of contributors to Obama's campaign was Wall Street. I wouldn't expect Obama's administration to do anything else but help them out.
There is something so squirrely about this bailout and it has nothing to do with bonuses - that bonus payment scam is a smoke screen. From what I gather, this scam was put in place in the first quarter of 2008, when the handwriting was on the wall. Managers of these books must have been bailing out by the droves. In bailing out they were certainly cashing out and in cashing out they were digging into capital such as the "at risk" payments, the performance payments and the books themselves. The "at risk" payments at a tune of 600 million was used to capitalize many of these books. I have no doubt that the fear of "the default of one payment of 25 million" was caused by these very same employees threatening to leave.
In their white paper, AIGFP claims if these managers quit, they would take customers with them, means what? Does it mean that these customers would cash out of these books early, take their funds and follow the managers? The excuse that no one else but those particular employees "understood" the complicated transactions is ridiculous - what if that particular employee died? No one else in that company could step in and manage those books? That's good business practice, isn't it? Employee contracts are written to avoid poaching of clients - that's what non compete clauses are all about and why they are always included in employment contracts.
Another strange thing about the "at risk" payment fund of @600 million, is that the risk is capped at 65 million and I'm guessing per year. I'm guessing that employees were letting that money ride over the years like a parlay bet at a racetrack. It's as if the company was borrowing 10 bucks and using as collateral a 2 dollar horse race ticket but regardless of winning or losing, they want their 2 dollars back. It's interesting that the first order of business at AIGFP after they claim to repay the treasury and Fed Res. is to restore this "at risk payment" account.
It is utterly amazing that the downfall of this company wasn't triggered by the downturn in the economy as much as it was triggered by the greed of their employees - that retention plan wasn't about holding on to employees for their expertise, it was about holding on to employees to keep them from cashing out and triggering a default themselves.
March 19, 2009 12:17 PM | Reply | Permalink
Geithner and the other Obama officials who worship their corporate masters were never appropriate picks to begin with. You don't hire the fox to fix the henhouse.
What Geithner and Summers are doing should come as no surprise. There isn't a dime's worth of difference between their DLC/pro-corporate philosophy and the Bush/Republican philosophy as demonstrated quite clearly in the Obama administration's simple continuation of the Bush giveaway to big corporations and the rich.
This, of course, is the problem with electing people who declare quite clearly and loudly their corporate centrist BS and then wink and nod at the gullible liberals during the election who think that means they will actually pursue liberal policies when elected. Well, is it not now as plain as day how untrue that is? Unless they wake up and smell the coffee soon, expect a whole helluva lot more of this BS coming out of the administration.
Woulda been nice if we had fleshed out just what was meant by the slogan "change" during the campaign. Well, it's getting fleshed out now and it appears in the context of the financial crisis to mean more or less change faces at the very top and little else.
March 19, 2009 12:18 PM | Reply | Permalink
Although the heart of this point is very understandable, I have to disagree with its major conclusions. This is such a complex crisis and financial system and Geithner has to deal with it as it is, not as we all wish it to be.
I don't understand the unequivocal statement that AIG is not a systemic risk. While you're absolutely right that counter-party risk is part of the game, it's wrong to say that AIG going under won't deliver a shock that will spread throughout the system. Everything in the financial system is way too interconnected. Why do you think Buffet said CDS was a financial WMD? The lack of regulation of CDS is to blame for that very real systemic risk. If there was a central clearing house for CDS, your point would be correct. Unfortunately for all of us that's not the reality we're dealing with here.
It's amazing that progressives are saying that Geithner is a Wall Street lackey while simultaneously, CNBC and investors are complaining about Geithner every chance they get. I don't have the link, but yesterday the FT had a cover story that quoted some Wall Street folks who said Geithner had no credibility with the markets. Even though I have a 401k, I'm happy the market dropped so much before last week, because it hastened the destruction of the bubble.
I think its ridiculous to assume that Geithner didn't want executive compensation limits because he wants to protect his 'friends' on Wall Street. First off, the guy has never worked on Wall Street. Secondly, as I mentioned Wall Street complains about him and they are very upset that the bailout wasn't just a handout of cash.
What I think my fellow progressives forget on this issue, is the strong possibility for unintended consequences. Geithner needs to have every option at his disposal to fix an economy that is inches away from long-term depression. There is potential that compensation limits will hamstring his efforts. No offense, but I think it's pretty arrogant to assume that the solutions are so obvious and cut and dry. Geithner is working 80 - 100 hours a week solving a million different problems. It's easy to complain from the cheap seats.
While I respect Reich, Baker, and Roubini, and I lean towards their ideologies, they are too ideological for this role at this time. Geithner has no obvious ideology, which is exactly what we need. He seems to be looking at things objectively and is dealing with the crisis based on all the facts and the potential solutions and their consequences.
March 19, 2009 1:14 PM | Reply | Permalink
this looks like exactly what it is.
one of wall streets own taking care of his buddies at the taxpayers expense.
why do you think the people are so pissed off about this?
anyone who doesnt see that this has the potential to sink the obama presidency is a nit wit.
in fact i put the odds at 2-1 that obama has lost so much support that he will not get a single major piece of legislation done because the dems are now willing to do against him.
obama appears weak and his people look like they do not have his interests and the USAs interests as their first priority.
geithner must go and raum most go asap!
obams support will dip to 45% because of this alone.
March 19, 2009 2:16 PM | Reply | Permalink
2-1? I'll put $100 on that proposition right now.
Calling for Geithner's and Emanuel's heads is (1) a knee-jerk reaction, and (2) based in some very strange alternate reality. When Darrell Issa agrees with you, it's time to change your thinking.
I'm going to regret asking this, I know, but...what the hell does this even mean?
March 19, 2009 2:35 PM | Reply | Permalink
It means there are -- and we use the term loosely -- full-grown adults among us who believe Mr. Smith Goes to Washington is a true story.
March 19, 2009 8:19 PM | Reply | Permalink
Destor,
Did Geithner act independently and without the cognizance or approval of Obama?
March 19, 2009 2:53 PM | Reply | Permalink
No, I don't think he acted independentally of Obama but I think Obama needs some more diverse opinions in his stable of economic advisers. Obama's a smart guy. Give him good advice and I'll bet you get good results.
March 19, 2009 3:06 PM | Reply | Permalink
Hmm. I can't help but wonder why he so vociferously backed Geithner for being "the absolute best person for the job" (my paraphrasing), and even went to the extent of spending quite a bit of political capital to attain his confirmation.
The writing on the wall had been written in a font large enough for even a podunk like yours truly to make it out. Geithner = questionable ethics and flimsy managerial skills.
Indeed we live in interesting times, I s'pose.
Thanks.
March 19, 2009 3:52 PM | Reply | Permalink
Do you think Obama might believe that Geithner is the best person for the job? Is it possible, Obama sees something positive that isn't obvious to us all or being reported by the media? Does Obama strike you as the type who would make a statement like that if he didn't believe it?
Given the enormity of Geithner's task to save almost every aspect of the world economy, I think it's entirely unfair to say he's a bad manager or unethical, especially since he's all by himself at Treasury (even though there are twice as many appointments made by the Obama administration at this point in time as compared to Bush and Clinton).
I wrote about this last week:
http://tpmcafe.talkingpointsmemo.com/talk/blogs/samrash21/2009/03/progressives-give-geithner-a-c.php
March 19, 2009 5:04 PM | Reply | Permalink
Though it's not been revealed that, indeed, Geithner did push for the loophole that allowed the AIG bonuses to be paid. Maybe he had his reasons but it doesn't look good.
March 19, 2009 5:51 PM | Reply | Permalink
Destor, I first read this and thought you were a bit quick in judging Geithner. But then I saw this from his letter to Congress
"We will impose on AIG a contractual commitment to pay the Treasury from the operations of the company the amount of retention rewards just paid," Geithner wrote. "In addition, we will deduct from the $30 billion in assistance an amount equal to the amount of those payments."
God i want this guy fired TODAY just for writing this crap. Does he think we're all complete idiots?! - Oh, you'll use the tax-payer subsidy to reimburse us the amount of the bonuses.
He's literally telling us to go fuck ourselves. asshole!
March 19, 2009 6:47 PM | Reply | Permalink
Many were excited to see Paulson replaced, myself included. IT seemed Geithner had the skills and experience to make a good Treasury Secretary.
What we all forgot is that salesmanship is as necessary as economic skills. Geithner has absolutely none. Is Buffet still available?
HedgeFundBlogMan
http://hedgefundblogman.blogspot.com
March 19, 2009 6:56 PM | Reply | Permalink
This all just shows how the government can completely screw up a "nationalization". AIG should have been placed in bankruptcy last fall under some type of government sponsorship. But instead Geithner has totally screwed this up. He had known about the bonuses for quite some time. And therefore Obama knew about them too. I have no idea how long Geithner knew about the bonuses. But when you own 80% of AIG, you BETTER know what's going on. Clearly the government is out of their league on this one.
Obama and Geithner are doing the best acting job I've ever seen.
For some reason Obama & Team are willing to cram down mortgages to the banks but they aren't willing to cram down salaries that are "owed" to the idiots at AIG?
March 19, 2009 8:55 PM | Reply | Permalink