Keep Tim Geithner
Tuesday, 11/24/2009 - 11:00 am by Bo Cutter | 22 Comments
Shaping the future with today’s choices.
I don’t think for a moment that Tim Geithner is in any trouble with his boss. But given Congress’ general idiocy as they talked to him last week, and a similar lack of regard I’ve heard from way too many progressives, someone should stand up for him and make the vastly-stronger counter arguments. It comes down to this: the combination of brains, guts, calmness, and a willingness to act are virtually non-existent in Washington in any era, but particularly in this one. When you find the combination in a significant cabinet level job, you should value it.
At the moment, progressives or liberals hate him because he did not take over or dismember the banks, and publicly execute their senior managements. He also manages to be tarred by proximity to the now much despised Goldman Sachs — although he is not an alumni. Conservatives hate him because they feel he was unkind to the banks, and hurt senior managements’ feelings. Of course, he also caused the financial debacle, and the recession; and mis-designed the Federal Reserve Board 97 years ago. And no one thinks he is tall enough. If you read the accounts of Secretary Geithner’s hearings last week, you know this is all classic Washington behavior. If there is one thing at which the glibocracy in DC excels, it is coming out of the hills after the battle is over and shooting the wounded. This is Washington today, a system in total gridlock, in which counting coup is the central activity.
Lets review the bill of accounts against Tim Geithner more dispassionately.
First, he did not anticipate and head off the crisis and the recession. This is a tough one. Clearly he did not, and clearly, as the head of the New York Fed, he was there when it happened. But by my account no-one, anywhere, did. A couple of people, Nouriel Rubini and Stephen Roach, get credit for being close to right, although neither actually predicted this particular crisis, and both have a bit of a tendency to predict 4 or 5 of the last 1 recessions. Merrill Lynch’s economists were closest to getting the macroeconomic disaster right, but not the crisis. EPRI got the leading indicators right. In fact, by 2006 and early 2007 everyone thought we were headed to a cliff, but no one knew when or what the triggering mechanism would be. The capital market experts I was listening to all thought the banks were going crazy, and that the terms of major loans being offered by the banks were nuttiness of epic proportions. I spoke directly with Tim Geithner during this period, and he was deeply worried, anything but optimistic.
To take this point deeper, this crisis was long in coming and it was a totally integrated failure of intellectual traditions, global macro-economic imbalances, government policy making, regulatory supervision, financial sector greed, incomprehensible boards of directors absences without leave, and breath-taking management short-sightedness. No one and no institution put together an understanding of the set of factors that triggered this particular debacle. Tim is included in this “no one”, but so is everyone else.
Second, Tim Geithner misplayed the crisis once it began to happen. The exact opposite is true. Starting from late 2007, as the crisis began to unfold, Geithner was at the spear point of every issue and, along with Bernanke, was a creative policy maker who clearly saw the immense dangers we faced and stretched all of the powers of the Federal Reserve Board to find solutions no one else could. I have close friends who understand the capital markets at a level I do not and who believe that the decision to let Lehman go was a horrible mistake and should have been known at the time. Maybe, but neither they nor anyone else has ever faced a set of issues of this magnitude all going red simultaneously. That weekend AIG was going; Lehman was going, and Merrill was going. I have been in, by comparison, minor league circumstances like that and you do not have a single moment to think, you are besieged by innumerable individual interests, and the crowd of people willing to join you in taking responsibility gets smaller by the second. Then, beginning with his assumption of the Treasury job in November — long before he was confirmed, so he was clearly going to be beaten up on every action he took, but he went ahead and took them - he was at the lead of every major decision made in the recovery effort. (During this presidential transition period, it would have been easy to keep away from the decisions by saying that power was still in the hands of President Bush. But the Bush Administration by that point was completely spent. Someone had to step up and Tim Geithner did.)
After the inauguration of President Obama, Geithner’s policy was undramatic, a muddling through, not philosophically clear, emotionally unsatisfying to the Democratic base, but against all of the assertions at the time it was basically right and it worked. As David Brooks said in his Friday column, 49 economists gave him an “F” (which should have been a pretty good forward indicator, since when did any group of economists have a view of public policy worth taking seriously?) but his judgment turns out to have been pretty good. His use of stress tests, which was roundly laughed at by everyone, worked, helping enormously to make much more transparent and less scary the situations all of the major banks were in. I have no idea what the counter-factual might have been with another policy: maybe there was a choice available which would have led today to a completely recovered economy, an unemployment rate of 4%, and the conversion of the bank/investment bank cultures into warm, supportive, loving environments. Maybe.
Third, he is accused of being far too easy on the banks, the investment banks, AIG, and everyone else in the course of arriving at his policy. Paul Krugman said it on Friday. Gretchen Morgenstern said it over the weekend. I have a lot of sympathy with this point of view, but am not entirely sure it matters. I think the last two years have revealed the single largest failure of senior management in the financial sector, and of the board system in American history. I think I am correct in saying that there was not a single independent director in America who stood up on this issue. I do not understand why every board of every institution that failed was not asked to resign immediately. But I guess the answer is “when you are up to your ass in alligators, it is hard to think about draining the swamp.” Geithner had other things to do at that moment than settle scores.
More to the point, he is accused of being far too soft in the AIG settlement — allowing the banks and investment banks — and particularly Goldman Sachs — to get away with being paid off 100% on the dollar for their bad investments in credit default swaps. There are two problems with this analysis. First, most of the banks had either insufficient or no capital. It is not as though you were dealing with plush and successful businesses. So every penny you whacked them for in a settlement simply increased the level of capital inadequacy you were then going to have to solve. Second, the credit default swaps were insurance contracts. (That they could be sold as insurance companies without any of the capital reserves normally required and with almost infinite leverage was an enormous regulatory failure but they were.) I have been told by securities lawyers who deal with this stuff that every “haircut” forced on the banks could have been a legal claim involving totally different and completely plain vanilla lines of insurance. So if AIG is only required to pay off to the banks some percentage less than 100%, there is no legal reason why AIG would not also be able to pay off less than 100% to the holders of perfectly legitimate other insurance. This is an endless morass.
I come back to where I started. Tim Geithner acted. He acted at the moment action was required, in circumstances no one else had every faced, and with the full knowledge that he would face exactly what he is now facing. I’ve known cabinet officers who would have found a way to run away from these decisions. But he acted, he was essentially right in his actions, and we are a lot better off today than we would be if he had avoided these decisions. Get off his back.
Roosevelt Institute Braintruster Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team.
It’s hard to separate what is personal, what is exaggerated for headlines, and what Geithner’s true strengths and weaknesses really are. Obviously Mr. Cutter has a direct experience with the man that informs his perspective. I haven’t made up my mind on Geithner, but I’m glad to have as many informed perspectives as possible to help me to it. So thank you, Mr. Cutter.
Posted by Nellie | November 24th, 2009 at 11:11 am
OK. So what’s stopping him from doing the moral, just and equitable thing now? Why is he obstructing attempts to conduct a review of actions taken thus far? Why is he seeking to expand his powers and authority and setting the stage for a similarly irresponsible response in possible future “crisis” situations?
Posted by Usha Abramovitz | November 24th, 2009 at 11:15 am
But you didn’t excuse his refusal to publicly execute bank executives
Posted by Zach P | November 24th, 2009 at 11:23 am
I suppose my biggest gripe with Geithner would be his role in ensuring that the bailout did not displace any senior figures of note at the banks in charge, and the offering of extremely preferential terms backed by government risk, with little chance of corresponding public reward. I do concur that he and Bernanke have had to face an exceptional set of circumstances. I’m not sure Geithner is a terrible improvement on Paulson, however. I applaud them for not allowing the situation to utterly collapse, but I must say I’m incredibly displeased by their lukewarm proposals for reforms to ensure that this situation does not happen again.
Ultimately, the buck stops with the President. It was fashionable to attack Cheney, Rumsfeld et al, when Bush was in charge, and it’s fashionable to attack Geither now that Obama is. Still - one has to wonder what the situation might look like if someone like Simon Johnson were at Treasury, instead of Geithner.
Posted by James Call | November 24th, 2009 at 11:56 am
“But he acted, he was essentially right in his actions, and we are a lot better off today than we would be if he had avoided these decisions.”
Maybe we are better off if he avoided the decisions he made, but I think we could have been way better off had he made the correct ones. I am not sure how apologizing for an incompetent Cabinet official just because you happen to know what it’s like to be a Cabinet official is really all that helpful. What about standing up for something that’s more important than what might be right in front of your face?
Posted by laney | November 24th, 2009 at 11:59 am
As you would expect, I continue to believe not simply that Geithner did kind of ok; but rather given the hand he was dealt and the incredable delicacy of the circumstances, he performed extremely well. But these comments all suggest that Pres. Obama, Secretary Geithner, and the economic team have a lot of convincing to do, a lot of work to complete.
I’m not pleased either that there were few if any real consequences. You might be surprised to know that every “real” businessperson I know, i.e. not people who run banks or Ibanks, feel about as strongly as any who have commented here on the absence of consequences. I’ve already said what I think about the boards.
But that is all mostly in the past. The big issue how is what do you do about preventing the next crisis? I don’t think the Obama Administration has led enough here. My own view is pretty simple: if you do not find a way to take leverage out of the sytem, and if you do not end the possibility of the shadow banking system cratering everything again, there will be another crisis. Tim Geithner has to lead here, but to be clear about it he has to have the support of the White House and of his President.
Which brings me to a point I have made before. The administration erred from the beginning by taking on way too much. Presidents and White Houses do not have infinite capacity and they have proven it this year. Richard Cohen has a column in today’s Washington Post in which he argues that what is missing with President Obama today is the sense of moral clarity that was so apparent during the campaign. The problem with taking on so much is that the White House and President wind up hedging their bets on everything. For a president, moral clarity does not consist as it does for a senator or a campaigner simply of saying a lot of things, it consists of making clear choices so you can do a few things. This was the year to “do” the economy and the financial system.
Posted by Bo Cutter | November 24th, 2009 at 2:49 pm
http://www.slate.com/id/2236460?nav=wp
I’m afraid I go with the governor on this one, Bo. Geithner’s protestations would have been more persuasive if he had forced some element of conditionality on the banks, as he and other members of the Obama team did on the car industry.
His whole record as President of the NY Fed was one of enabler, a person who facilitated these very practices that he was forced to deal with as Treasury Secretary. And tell me, what was NY Fed President Geithner doing in those 6 months between the failure of Bear and Lehman?
To me the most telling aspect of his appointment as Treasury Secretary was the daily he was appointed on Nov. 21st, 2008. The Dow rose more than 500 points that day. In retrospect, the market was very prescient: the banks realised that Santa Claus was coming to town.
Posted by Marshall Auerback | November 24th, 2009 at 5:29 pm
He is not an alumnus of GS YET.
He was instrumental in funneling through AIG, dollar for dollar of worthless paper back to GS. From the New York Times…
“The Fed, under Mr. Geithner’s direction, caved in to A.I.G.’s counterparties, giving them 100 cents on the dollar for positions that would have been worth far less if A.I.G. had defaulted. Goldman Sachs, Merrill Lynch, Société Générale and other banks were in the group that got full value for their contracts when many others were accepting fire-sale prices.”
He is a protege of Rubin and Sommers. How close can you be to GS and still avoid the tar. But hey, there is a change coming sooner than later…some are touting another fox, Jamie Daimon, to replace Giethner as chief hen house guard. Now we’ll be safe???
Posted by G. L. Monahan | November 28th, 2009 at 12:35 am
“brains, guts, calmness, and a willingness to act”
1) Brains? Seriously? Geithner? Who, exactly, do you think you’re kidding?
Geithner is responsible for the ham-handed IMF response to the Asian crisis in the late 90’s. He’s also responsible for the NY Fed’s refusal to regulate Wall Street.
Unless, of course, you believe that infinite leverage is perfectly fine and poses no systemic risk. If that’s your position, Geithner’s a genius!
2) Guts? The man has guts if and only if he tells Greenspan / Bernanke / Summers to go take a flying leap. He hasn’t done that yet.
At any point in time from 03-08, he could have singlehandedly stopped the securitization garbage. His lack of action is not demonstrative of guts - rather, he is a political hack.
3) Calmness? Well, yes, he is calm. He is a bought-and-paid-for lapdog who is pathologically incapable of independent thought — of course he’s calm.
4) Willingness to act?
This is preposterous. The singular personality trait of Geithner is his UNwillingness to act. Remember, people are measured by their actions, not their intentions. Although I’m sure he’s a great guy to grab a drink with.. he is not a man of action. In his professional life, Geithner is a man of gratuitously long contemplation followed by a fawning, unquestioning performance of others’ decisions.
You spoke directly with Geithner? Well then, mr. connected, why didn’t you tell him to stop simply waiting to die and actually DO his job of regulation?
You are completely wrong - he is NOT “essentially right,” rather, he is one of the top 5 figures in the economics profession (only Bernanke, Greenspan, Summers, and Rubin are above him) who are directly responsible for this crisis. His lack of action from 203-2007 was 100% inappropriate, and he will not escape judgement regarding those choices.
Posted by Unsympathetic | December 2nd, 2009 at 9:25 am
Were Geithner, Bernanke and the Fed Board all wrong to assume an AIG bankruptcy in tandem with that of Lehman would have been a total disaster? There’s every reason to believe it would have been. Among other things, it likely would have undermined a chunk of the U.S. retirement system, caused money market funds to break the buck and other horrors. But to say Geithner should have forced the institutions to which AIG had sold credit default swaps to accept a big haircut on what they were owed is to argue that an AIG bankruptcy was okay. Two of those creditors were French institutions, and that country’s banking regulator to the NY Fed that it would be illegal for them to accept a haircut if AIG were not in bankruptcy. About three-fourths of creditors and the Fed had no regulatory leverage to use against them. Any one of them probably could have forced AIG into bankruptcy. And they all knew the Fed was trying to prevent said bankruptcy. So that was the choice, bankruptcy or not, and to criticize Geithner’s action is to claim a bankruptcy would have been better. Can you really believe that?
Posted by John Berry | December 2nd, 2009 at 1:57 pm
The two places on this planet most clueless about reality are Wall Street and Washington DC.
The establishment has little to do with political party, much more to do with money.
I’m not a pitchfork populist (I’m a boring CPA) but in my long lifetime this is the greatest divorce of elite versus Main Street, and Main Street is getting the worst of it. Main Street is angry.
Obama may well have destroyed his credibility by the first anniversary of his inauguration. Does he really want to throw away his presidency protecting Geithner and Summers? They are hired hands, if nothing else they should understand the need for president to throw people off the bus and get new help.
Posted by rustyrustbelt | December 2nd, 2009 at 2:06 pm
An interesting analysis.
You’ve framed the discussion around the benefit to the big banks, and not to the economy as a whole.
Geithner is the Secretary of the Treasury, not the Secretary of the benefit of the big banks.
The effect of his policies, along with Summers and Bernanke, has been to benefit the banks at the expense of the American taxpayer and the American economy in general.
The big banks may have been saved, but that isn’t translating into loans to the average, middle-class American or small business. In fact, banks are now charging a usurious 30% on consumer credit while they pay virtually nothing.
Obama is President of the United States. His job is not to just send taxpayer money to the bank executives.
With the stimulus they promised no greater than 8% unemployment. It’s over 10%. It seems they spend more time trying to lower expectations than doing anything. In fact, after almost a year in office, there are STILL no new regulations to control bad banker behavior. Apparently the dog ate his homework.
Posted by Cary King | December 3rd, 2009 at 4:39 pm
@ John Berry
Had Geithner not been in support of unregulated CDS’s, he would not have have had to worry about a bankrupt AIG in the first place.
Posted by Robin H. | December 3rd, 2009 at 7:24 pm
Except, while had the FRBNY Geithner spearheaded a CDS reform effort, and cleaned up a great many problems. Had he not, the fall of 2008 would have been a much bigger fall.
He may be the only person working under Alan Greenspan who was able to increase regulation in a environment that was openly hostile to all regulation of any kind.
Posted by JCH | December 3rd, 2009 at 8:57 pm
Carl King - had they not done it, loans to the ordinary American would have gone to zero. They are not at zero; not even remotely close. Lending is off. But look around. Houses are still selling. That takes lending. Cars are still selling. That takes lending. Malls in Houston have very full parking lots lately. That takes ending. The economy is damaged, not dead. That it is alive is largely the doings of Timothy Geithner.
Posted by JCH | December 3rd, 2009 at 9:01 pm
“Geithner’s action is to claim a bankruptcy would have been better. Can you really believe that? …” - John Berry
John, I started making this same argument on the Huffington Post months ago. People seemingly wanted them to fill the fire truck, AIG, with water (85 billion taxpayer dollars), and then lock it in the fire hall and let the houses (16 bank counter parties and mutual funds and retirees) burn to the ground and thus detonate the systemic bomb.
The list of people who believe this was the right thing to do includes Neil Baroksky, Elliot Spitzer, the editorial board of the WSJ, etc. The stupidity of it all is just awe inspiring.
But they, in their lunatic outrage, cannot see the abject folly of what they think should have been done.
Dodd was lecturing Bernanke on the AIG counter parties yesterday, so he joins the list of the brain dead.
Posted by JCH | December 4th, 2009 at 7:25 am
The real issue for me, as a US citizen, is the underlying sympathies of government officials. For decades, I’ve seen government officials (Geithner among them, but also Bernanke, Rubin, Clinton, and others) act in ways that reveal their sympathies are for the top .3% of income earners in this country, not the 99% plus who are not and will not ever be millionaires. Ideally, government policy should balance the interest of all Americans. For decades, policy has advantaged the wealthiest at the expense of the vast majority who are not.
Geithner’s responses to this crisis, and its follow on, clearly shows that he will do everything to help the wealthiest in this country. That’s great if you’re in the chosen group, perhaps the 100,000 Americans who have real wealth. It sucks if you’re in the 300 million who do not. Even worse, I get the impression Geithner (and Bernanke, and others) don’t even get what they’re doing: they believe the economic statistics which say the recession is over. It’s not for people who have lost their homes and are unemployed who then see Wall Street hand out tens of billions in bonuses to the same people who crashed our economy.
As a distant observer, reading only the papers and articles like this one, it strikes me that what has happened is not only massive greed but also knowing fraud, for example, back dating stock options for senior executives and funding political candidates who then rolled back Glass Steagel (sp?). Much of it was not illegal. But all of it was profoundly wrong and guaranteed to fail (while making a few people very rich).
I’ll believe our government is in balance when I see fraud prosecutions, when I see Geithner et al force banks to lend to small businesses so they can hire. Until then, this is the same greedy policy group as always, different political party.
Posted by Tim | December 4th, 2009 at 11:23 am
Thanks for the encouraging article, Bo. I think many people are going to have a sense of shame when the history of this financial crisis becomes known. I’ve read and studied Tim Geithner’s involvement and am convinced that, not only is he decidedly NOT in the pocket of Wall Street bankers, but in fact put more pressure on them to do “the right thing” than anyone else. (Read Andrew Ross Sorkin’s new account.)
Timothy Geithner is the government official most responsible for bringing us through this crisis to this point, beginning with his effort post-Bear Stearns. We owe him a debt of gratitude.
History will vindicate him.
Posted by Robby Z | December 5th, 2009 at 6:53 pm
Tim: How about keeping quiet until you know the relative facts of the matter? By your own admission, you have not studied this closely. Engage the data first BEFORE opening your mouth, friend.
Posted by Robby Z | December 5th, 2009 at 6:57 pm
Unfortunately, the praise for the tireless efforts of Secretary Geithner, on behalf of a most ungrateful nation, will come in another lifetime.
Thanks for this piece!
Posted by Elizabeth Miller | January 9th, 2010 at 10:13 pm
Those of your who support Geithner are truly delusional people.
Read Bill Black’s work if you want some reality……
Posted by No More Bubbles | January 10th, 2010 at 2:45 pm
It’s Bill Black who is delusional. His nonsense would have destroyed the American economy.
Posted by JCH | January 14th, 2010 at 11:31 pm