The clout of the press has decayed enormously over the last 40 years. The fourth estate was feared, resented, and begrudgingly respected in the corridors of power. But rule by beancounters, savvy media spin, and access journalism (journalists who write pointed stories get frozen out) have largely leashed and collared the press. Indeed, a friend who grew up in Eastern Europe when it was Communist said as of roughly 2000 that the news felt controlled.
So to see a front page (and super long) story in the New York Times honing in on Geithner’s close, as in overly close, relationship with Wall Street executives, is a stunner. In the old days, a report critical of a prominent public official would be a leading indicator that they were at least facing headwinds, perhaps in bona fide trouble. But given the new rules of the game, one has to assume a story of this sort is a lagging indicator, that Geithner is perceived to be sufficiently at risk to be fair game.
Thus what is surprising about tonight’s New York Times story, “Member and Overseer of the Finance Club,” on Timothy Geithner is not its content, but that it was written at all, and moreover (as of now) is a front page item. It’s extraordinarily long for a weekday story. the number of column inches usually reserved for natural, not bureaucratic disasters.
Any reader of any remotely plugged in econoblog, or savvy enough to read between the lines of MSM reports will know that Geithner is a creature of the financial establishment. Probably the most important element in his pedigree is that he is a protege of Larry Summers and Bob Rubin. It also appears that he and Summers are working fist in glove (witness the marginalization of Paul Volcker).
At a minimum, Geithner crony capitalist policies are finally leading to a hard look at his loyalties. There is no reason to think Geithner is personally corrupt (well, there was his little tax problem) but rather that he is as die hard a believer of finance uber alles as Alan Greenspan, albeit without the libertarian zealotry.
Of course, if one were Machiavellian, this move may be Team Obama realizing rather late that they have made the success of Obama’s presidency contingent on the Summer/Geithner program, and now they are trying, even more so than before. to pin the policies on Geithner. That may work tactically but in the end, the banking mess is too central a problem for Obama to try to shift blame of policy failures onto his team. He picked the chefs, he has to eat the cooking. If the economy is still a mess in 2012, he will not escape the taint.
And as much as this piece signals that Geithner may be starting to be perceived as a liability, it seems unlikely that he is in serious trouble yet. Sadly, the programs have to flounder first (although with the PPIP, that could happen sooner rather than later…..).
And while the Times piece finally points to the elephant in the room, namely, how bankster friendly the new regime has been, it is far less pointed than it could have been. I suppose one has to treat Treasury secretaries with kid gloves The questionable incidents and relationships are diluted by a lot of narrative. But recall we never saw anything remotely like this treatment (save lots of grumblings) about Hank Paulson. Of course, handouts to the big end of town was standard operation in the Bush administration, so it was hard to work up much outrage about it (at least until the heinous TARP).
From the New York Times:
Last June, with a financial hurricane gathering force, Treasury Secretary Henry M. Paulson Jr. convened the nation’s economic stewards for a brainstorming session. What emergency powers might the government want at its disposal to confront the crisis? he asked.
Timothy F. Geithner, who as president of the New York Federal Reserve Bank oversaw many of the nation’s most powerful financial institutions, stunned the group with the audacity of his answer. He proposed asking Congress to give the president broad power to guarantee all the debt in the banking system, according to two participants, including Michele A. Smith, then an assistant Treasury secretary.
The proposal quickly died amid protests that it was politically untenable because it could put taxpayers on the hook for trillions of dollars…..
Yves here. The story fails to note this was almost assuredly the most bank friendly program possible. Back to the story:
But in the 10 months since then, the government has in many ways embraced his blue-sky prescription….
And more often than not, Mr. Geithner has been a leading architect of those bailouts, the activist at the head of the pack. He was the federal regulator most willing to “push the envelope,” said H. Rodgin Cohen, a prominent Wall Street lawyer who spoke frequently with Mr. Geithner.
Rodg Cohen is the managing partner of Sullivan & Cromwell, which has long had an extremely close relationship with Goldman. Rodg is also considered to be the top bank regulatory lawyer in the US. It may seem like too much inside baseball to point out who Rodg is in more detail, but the fact that the Times quoted him as a defender of Geithner is telling. Back to the article:
Today, Mr. Geithner ….finds himself a locus of discontent… range of critics — lawmakers, economists and even former Federal Reserve colleagues — say that the bailout Mr. Geithner has played such a central role in fashioning is overly generous to the financial industry at taxpayer expense.
An examination of Mr. Geithner’s five years as president of the New York Fed, an era of unbridled and ultimately disastrous risk taking by the financial industry, shows that he forged unusually close relationships with executives of Wall Street’s giant financial institutions….
His actions, as a regulator and later a bailout king, often aligned with the industry’s interests and desires, according to interviews with financiers, regulators and analysts and a review of Federal Reserve records.
In a pair of recent interviews and an exchange of e-mail messages, Mr. Geithner defended his record, saying that from very early on, he was “a consistently dark voice about the potential risks ahead, and a principal source of initiatives designed to make the system stronger” before the markets melted down.
Yves here. Revisionist history. See here and note the date of the speech. Back to the article:
Traditionally, the New York Fed president’s intelligence-gathering role has involved routine consultation with financiers, though Mr. Geithner’s recent predecessors generally did not meet with them unless senior aides were also present, according to the bank’s former general counsel.
By those standards, Mr. Geithner’s reliance on bankers, hedge fund managers and others to assess the market’s health — and provide guidance once it faltered — stood out.
His calendars from 2007 and 2008 show that those interactions were a mix of the professional and the private.
He ate lunch with senior executives from Citigroup, Goldman Sachs and Morgan Stanley at the Four Seasons restaurant or in their corporate dining rooms. He attended casual dinners at the homes of executives like Jamie Dimon, a member of the New York Fed board and the chief of JPMorgan Chase.
Yves here. Presumably someone who was or is at the NY Fed who was plenty upset at the goings-on provided the calendar. Anyone who knows the NY Fed is encouraged to comment, but for a private company, this would be a major breech, and the Fed has to be at least as secretive. The Times has open sourced Geithner’s calendar and is asking for further remarks.
Update: A reader pointed out the Times obtained the calendar via the Freedom of Information Act, but I still find this curious. I haven’t recalled seeing a calendar analysis in a major news story before. Either the journalists were unusually creative or someone suggested this angle of investigation (I suspect the latter). Moreover, the Fed has successfully fought back disclosure at the NY Fed level, claiming it is a private company, but since the Board of Governors would clearly also have the calendar (and it is deemed to be subject to FOIA), they must have pursued this angle. That further suggests that this inquiry has been some time in the making. Back to the article:
…for all his ties to Citi, Mr. Geithner repeatedly missed or overlooked signs that the bank — along with the rest of the financial system — was falling apart. When he did spot trouble, analysts say, his responses were too measured, or too late.
In 2005, for instance, Mr. Geithner raised questions about how well Wall Street was tracking its trading of complex financial products known as derivatives, yet he pressed reforms only at the margins…..
To Joseph E. Stiglitz, a Nobel-winning economist at Columbia and a critic of the bailout, Mr. Geithner’s actions suggest that he came to share Wall Street’s regulatory philosophy and world view….
In theory, having financiers on the New York Fed’s board should help the president be Washington’s eyes and ears on Wall Street. But critics, including some current and former Federal Reserve officials, say the New York Fed is often more of a Wall Street mouthpiece than a cop.
Willem H. Buiter, a professor at the London School of Economics and Political Science who caused a stir at a Fed retreat last year with a paper concluding that the Federal Reserve had been co-opted by the financial industry, said the structure ensured that “Wall Street gets what it wants” in its New York president: “A safe pair of hands, someone who is bright, intelligent, hard-working, but not someone who intends to reform the system root and branch.”….
Throughout the spring and summer of 2007, as subprime lenders began to fail and government officials reassured the public that the problems were contained, Mr. Geithner met repeatedly with members of Citigroup’s management, records show
From mid-May to mid-June alone, he met over breakfast with Charles O. Prince, the company’s chief executive at the time, traveled to Citigroup headquarters in Midtown Manhattan to meet with Lewis B. Kaden, the company’s vice chairman, and had coffee with Thomas G. Maheras, who ran some of the bank’s biggest trading operations.
(Mr. Maheras’s unit would later be roundly criticized for taking many of the risks that led Citigroup aground.)
His calendar shows that during that period he also had breakfast with Mr. Rubin. But in his conversations with Mr. Rubin, Mr. Geithner said, he did not discuss bank matters. “I did not do supervision with Bob Rubin,” he said.
Yves here. Of course not. Rubin knew nothing about anything bad and was determined to keep it that way. Back to the piece:
In a May 15, 2007, speech to the Federal Reserve Bank of Atlanta, Mr. Geithner praised the strength of the nation’s top financial institutions, saying that innovations like derivatives had “improved the capacity to measure and manage risk” and declaring that “the larger global financial institutions are generally stronger in terms of capital relative to risk.”
Two days later, interviews and records show, he lobbied behind the scenes for a plan that a government study said could lead banks to reduce the amount of capital they kept on hand.
The story continues with many of the key decisions of the crisis. The narrative detail has the effect of somewhat dliuting the focus on what Geithner did when, but it also highlights some now largely forgotten incidents like no-bid contracts to BlackRock (most notably, managing the assets the Fed took on in the Bear Stearns deal). And it has some new revelations:
A bill sent recently by the Treasury to Capitol Hill would give the Obama administration extensive new powers to inject money into or seize systemically important firms in danger of failure. It was drafted in large measure by Davis Polk & Wardwell, a law firm that represents many banks and the financial industry’s lobbying group. Mr. Geithner also hired Davis Polk to represent the New York Fed during the A.I.G. bailout.
Treasury officials say they inadvertently used a copy of Davis Polk’s draft sent to them by the Federal Reserve as a template for their own bill, with the result that the proposed legislation Treasury sent to Capitol Hill bore the law firm’s computer footprints. And they point to several significant changes to that draft that “better protect the taxpayer,” in the words of Andrew Williams, a Treasury spokesman.
But others say important provisions in the original industry bill remain. Most significant, the bill does not require that any government rescue of a troubled firm be done at the lowest possible cost, as is required by the F.D.I.C. when it takes over a failed bank.
This is damaging in the eyes of the great unwashed. But there is nothing here that was presumably not fully known by the Obama vetters. This storm, like the tax fracas, will pass. But Geithner is nevertheless looking more and more like damaged goods.
This story now makes official what only those who kept tabs on these matters knew, that Geithner is captured by the industry. It will now be much easier for Obama to cut Geithner loose should that prove necessary. But with Summers still in the mix, I’m dubious that even an outster of Geithner would produce much of a change in policy direction.
Update 3:30 PM Apologies for the headline, now corrected. Some weird problems with posting today, in that a post did not go up and a repost (with correction) did not take.