Geithner choice is ‘more of the same’ — was Paulson’s bailout cohort
If news accounts are true, and Presidet-Elect Barack Obama has indeed decided on Timothy F. Geithner to be his Treasury Secretary nominee, it represents a giant step away from Obama’s promise of “change you can believe in.”
The Geithner nomination would be “more of the same” in almost every respect — more bailouts, more lack of transparency in the bailouts, and more corporate welfare. Geithner was the architect of the Bear Stearns bailout and cohort of Treasury Secretary Paulson in American International Group and the TARP bailouts. In choosing Geithner, Obama might as well have nominated Hank Paulson to another term!
Geithner’s financial qualifications are in many respects quite thin. He has never been a banker nor an academic economist. As liberal columnist Robert Kuttner noted recently in the American Prospect, Geither “has neither a doctorate in economics nor an M.B.A.”
Geithner’s career rise has consisted largely of falling upwards after organizing bailouts, even if the bailouts fail or prove to be unnecessary. With a B.A. in government and Asian studies from Dartmouth and an M.A. in International Economics and East Asian Studies from Johns Hopkins, Geithner went to work at Kissinger Associates before coming to the Department of Treasury under the first George Bush in the late 1980s. In 1999, he was promoted to Under Secretary of the Treasury for International Affairs under Clinton Secreataries Rober Rubin and Larry Summers. Geithner was an active player at Treasury around the time of the bailout of Long-Term Capital Management hedge fund, which didn’t involve any taxpayer money, but set the precedent for government intervention in bringing banks together to prop up failing non-bank firms.
He became President of the Federal Reserve Bank of New York in 2003, but elevated himself to one of the top government financial officials earlier this year by organizing the Federal Reserve’s bailout of Bear Stearns that Paulson and Fed Chairman Ben Bernanke quickly signed off on. Despite questionable evidence of whether Bear would even go bankrupt — its creditors may have delayed their collateral calls if they would have been wiped out too –the Fed guaranteed JP Morgan $29 billion from the government to take over Bear, and the government set the stock price Bear’s shareholder’s would get. According to Conde Nast Portfolio, “It was Geithner’s Federal Reserve bank, not the Treasury, that came up with the $29 billion loan that made the deal possible or, more precisely, acceptable to J.P. Morgan.” The magazine noted that Geithner “was the central figure in that drama” who “brought the parties together, [and] hashed out the details.”
The Bear deal faced criticism from the left and right as both an abuse of Fed power and as a precedent that spread “moral hazard” leading to the further bailouts down the line, bailouts that Geithner would be heavily involved in, working hand-in glove with Hank Paulson. Conservative columnist Robert Novak wrote, “The Federal Reserve’s unprecedented bailout of Bear Stearns was crafted not at the White House or Treasury, but in secret by a New York central banker.” The precedent of Geithner’s plan, Novak wrote, “can effectively substitute the central bank for the market in determining financial outcomes.”
But Geither’s actions received similar criticism from from former Fed Chairman Paul Volker, an adviser to Obama who himself was considered for the Treasury job. In a speech to the Economic Club of New York, Volcker said Geithner took actions that “extend to the very edge of its lawful and implied powers, transcending certain long-embedded central-banking principles and practices.” Volcker later told Conde Nast Portfolio, that the Bear deal “was a proper action, but it was extraordinary—something that’s never been done before, in terms of calling upon that emergency power.”
But having inserted himself in the Bear deal, Geithner got used to being a major player and argued for more power for — you guessed it — the Federal Reserve. In a Financial Times op-ed, Geithner declared, “Because of its primary responsibility for the stability of the overall financial system, the Federal Reserve should play a central role” in a new regulatory framework. As I wrote in Open Market at the time, “Geithner uses the bailout he rammed through to argue that the Fed’s role has changed, and now that it has assumed the responsibility for bailing out investment banks, it needs to add regulations as well.”
Also disturbingly, and disturbingly for his role as Treasury Secretary, Geithner made no mention of the Fed’s own role in the financial crisis through its monetary and interest rate policies. Nor did he address transparency issues in the Fed’s operations — highlighted recently by Bloomberg in the ongoing bailouts –that would be especially necessary to address if it assumed a larger role.
Geithner became the go-to guy for failing financial firms, and was at the “center of action” for the AIG bailout, according to the New York Post. He “quarterbacked and advised” the government’s “taking control of tottering insurance giant AIG for a bailout deal,” the Post wrote. But more and more, it looks like Paulson and Geithner “quaterbacked” with a flawed playbook with AIG that moved the meltdown much further down the goal line.
Taxpayers are on the hook for $85 billion, and the government granted AIG another $40 billion. But taxpayers are not the only parties who lost from this “rescue.” The government bailed out creditors holding AIG-issued credit default swaps as well as top employees who are still partying hearty at fancy resorts. But the govenment’s effective nationaliztion of AIG — taking 80 percent of its stock and stopping the issuing of dividends — left millions of ordinary shareholders high and dry. As Alan Reynolds of the Cato Institute writes, this bailout gave “bondholders more protection than they’d otherwise see – at stockholders’ expense.”
The arbitrariness of the goverment’s action has made it much harder for other financial institutions to raise money through issuing stock, because investors have to take into account the risk of a government wipeout of their shares as well as market risk. As Reynolds writes, “This new risk of forced mergers or a government takeover artificially depresses the stock prices of vulnerable firms.”
Market conditions worsened, and this led Paulson to come up with the TARP, which Paulson rammed through Congress, and which again, Geithner was heavily involved in designing. Geithner, reports the Wall Street Journal, was “at the center of the government bank rescue, which has drawn criticism from Democrats — as well as Republicans.”
And Republicans and Democrats who dislike corporate welfare and like transparency in government, should express a bipartisan concern about Geithner’s nomination. Open Market will probably disagree with most of the views of anyone President-Elect Obama chooses, but candidates like Volcker and Larry Summers would bring more experience to the job and aren’t tied to Paulson’s sordid dealings. One thing Obama should not want to do is fulfill the prophecy from that profound poltical philsopher Pete Townsend of “Meet the New Boss.”