Geithner Bullies Financial Regulators to Accept Fed as Top Dog

The Wall Street Journal reports that Timothy Geithner tongue-lashed Federal financial services regulators over their bucking the Obama Administration initiative for the Fed to become The One Regulator to Rule Them All. This comes on the heels of Congressional testimony which showed rather clearly that the key actors were not singing from the same hymnal.

This display of pique seems badly misdirected. I doubt that the show of disarray will make much difference in the outcome. Congress is engaged in a turf war against the Fed, justifiably unhappy with the Fed acting, as Willem Buiter put it, as quasi fiscal agent, effectively circumventing Congress’ control over budgetary purse-strings via stretching the TARP through various off-balance-sheet vehicles (from the Treasury standpoint). If Lyndon Johnson were still Senate majority leader, you’d have had a Constitutional crisis before things would have gotten this far. Congress was far more zealous about protecting its sphere of influence, but successive Presidents have managed to cut it down to size.

The question is whether Congress continues in its opposition. Given the trouble Obama is having with his big agenda item, health care, and the considerable unhappiness in Congress, and even to a degree in the electorate, over the Fed taking on tasks that legitimately call for more accountability, which the Fed refuses to entertain, it remains to be seen whether Congress will blink. I wouldn’t bet on it.

Obama seems unable to recognize he has pinned the fate of his presidency on two people, Geithner and Summers, who are part of the problem. The stillborn PPIP was a terrible idea. Paulson had two efforts on variants of the “buy toxic assets” idea and failed. The stress tests were a farce. The Potemkin reform plan puts more regulatory authority in the Fed, which was far and away, of all the regulators, least interested in supervision.

The only thing that the Treasury and Fed have succeeded in doing is cheerleading to get stock prices up so that banks could raise equity at not-hugely-dilutive prices. I spoke to a hedge fund manager yesterday who sees this rally as driven by technical and relative performance concerns, not supported by fundamentals. He is also not the first I have heard speculate that the media boosterism, particularly from sources not known for that sort of thing, like Bloomberg, suggests that official pressure has been applied to keep financial news upbeat. He thinks the markets, not just the bond market via Fed intervention, but even equity markets, are being used to try to goose the economy.

And if that fails and we have another downdraft, what successes will Geithner be able to point to? The canard of the banks repaying the TARP, when as Roger Ehrenberg points out, the warrants were massively underpriced? The only one is the goosing the markets exercise, and if that ends badly, it calls a lot else into question.

From the Wall Street Journal:

Treasury Secretary Timothy Geithner blasted top U.S. financial regulators in an expletive-laced critique last Friday as frustration grows over the Obama administration’s faltering plan to overhaul U.S. financial regulation….

Mr. Geithner told the regulators Friday that “enough is enough,” said one person familiar with the meeting. Mr. Geithner said regulators had been given a chance to air their concerns, but that it was time to stop, this person said.

Among those gathered in the Treasury conference room were Federal Reserve Chairman Ben Bernanke, Securities and Exchange Commission Chairman Mary Schapiro and Federal Deposit Insurance Corp. Chairman Sheila Bair.

Friday’s roughly hourlong meeting was described as unusual, not only because of Mr. Geithner’s repeated use of obscenities, but because of the aggressive posture he took with officials from federal agencies generally considered independent of the White House. Mr. Geithner reminded attendees that the administration and Congress set policy, not the regulatory agencies.

Mr. Geithner, without singling out officials, raised concerns about regulators who questioned the wisdom of giving the Federal Reserve more power to oversee the financial system. Ms. Schapiro and Ms. Bair, among others, have argued that more authority should be shared among a council of regulators..

The government’s proposal would empower the government to take over and break up large financial companies, merge two bank regulators, and toughen oversight of mortgages, among other things.

Administration officials say they aren’t worried about the overhaul’s prospects, adding that there is consensus on key aspects, including the regulating of over-the-counter derivatives. Treasury officials say they expected a big debate over the complex legislation. The first piece, which addresses executive pay, passed the House Friday.

“The industry is already back to their pre-meltdown bonuses,” said White House Chief of Staff Rahm Emanuel. “We need to make sure we don’t slip back to risky behavior where the institutions have all the upside and the taxpayers have all the downside, which is why we need regulatory reform.”

Neal Wolin, Treasury’s deputy secretary, said Mr. Geithner told regulators “they have the prerogative to express their views, but he wanted to make sure that, since everyone had agreed on the importance of achieving reform this year, everyone stayed focused on that goal.”…

The administration has pushed for Congress to complete the overhaul by the end of the year. House Financial Services Committee Chairman Barney Frank (D., Mass.) and Senate Banking Committee Chairman Christopher Dodd (D., Conn.) have both said that remains the goal.

Both men, however, have suggested the overhaul could change from Treasury’s proposal. Sen. Dodd favors giving extra powers to an oversight council rather than the Fed. Mr. Frank said Monday lawmakers were still working on a way to “make sure you have a sufficient broad base of participation and input” and “to make sure you have effective authority.”

He said the flap several months ago over the Federal Reserve’s role in allowing American International Group Inc. to pay large bonuses to employees “damaged the Federal Reserve politically.”

The top Republicans on these committees, Sen. Richard Shelby (R., Ala.) and Rep. Spencer Bachus (R., Ala.), have also expressed skepticism over ceding too much power to the Fed.

“A rush to judgment where they basically throw these things together without any consensus is going to be a disaster,” Rep. Bachus said.

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  1. Anonymous

    Doesn't seem to understand the notion (advanced by Congress some time ago) that some agencies are "independant," does he? What an idiot.

  2. Alexandra

    There is no such thing as an 'independent' agency. Every agency has its power delegated to it by Congress which represents the people of the United States.
    Currently those agencies and the Fed do not serve the people of the United States but some other interests, in fact they are unaccountable to and incontrollable by Congress.
    Now, Larry Summers thinks that he can solve the problem if he was just made Fed chairman and given unlimited power.
    Sounds dangerous to me.

  3. fresno dan

    I really would like to see a balanced critique on the Fed. I don't expect gubermint employees to be able to predict the future but was this low interest rate, enabling high leverage situation that unforseeable? On the other hand, I find it hard to believe that if (ever)the FED raises interest rates there won't be endless whining about that.
    I don't mind blaming the FED, but I fear the fault lies not in our FED, but in ourselves.

  4. Siggy

    The Congress is us. As a political body we pretty much get what we want. The fact that much of what we get is mediocre is, in my view, reflective of how mediocre are society is. If we genuinely want something better we need to lose roughly 100 million people. And that's not just the oldies nor the illegals, that's across the cohort spectrum. As to Geithner, he is the product of a seriously flawed financial system. What he wants is the centralization of financial power and ultimately and elitist controlled economy. What has transpired, and is continuing, is that market participants have been largely absolved of personal responsibility, moreover lacking sound analysis and proofs, our financial system has been guided by an idealogue he believed in an efficient market. I am incredulous that and educated and erudite man could adhere to such a hypothesis in the face of mountainess evidence that unfettered markets do seek equilibrium points, they do not maintain those points and with patently obviously regularly oscillate around equilibrium points. Geithner should be asking for a new Glass-Steagell law coupled with a commitment by the Fed, the Treasury, the CFTC to enforce the laws now on the books. While Yves would readily abrogat a contract where she views it necessary to effect equity, such actions must be approached with great care. Trampled the established body of contract law as in the case of GM, Chrysler and AIG will not in the mid-term correct our problems. What lies in fron of is the mercantilist challenge of a nation that is running away from complet government control of production to one that is soon to be much like our system semi government management. The great lessonbefore us is that as a society intent on preserving personal liberty we cannot allow the profligate and fraudulent action of a narrow group of individual impair our financial system and the economy that it supports.

  5. "DoctoRx"

    "The industry is already back to their pre-meltdown bonuses," said White House Chief of Staff Rahm Emanuel. "We need to make sure we don't slip back to risky behavior where the institutions have all the upside and the taxpayers have all the downside, which is why we need regulatory reform."

    The industry only got the upside because of the unbelievable actions of Bernanke, Congress and of course the Bushbama Continuity.

    Reform is needed so that the commercial banking system can function independently of the gambling of bank holding companies, the entire concept of which FDR hated and tried to eliminate.

    And if you want reform: Ban all derivatives other than plain vanilla options. This is Taleb's proposal. To the point and not lobbyable.

  6. Anonymous

    "The industry is already back to their pre-meltdown bonuses," said White House Chief of Staff Rahm Emanuel. "We need to make sure we don't slip back to risky behavior where the institutions have all the upside and the taxpayers have all the downside, which is why we need regulatory reform."

    No shit, Sherlock. What did you think was going to happens when you throw a party and provide all the food, drugs, booze, and hookers?

    The only real regulatory reform you need is not covering their losses. But this is coming from the same administration that wants everyone else to be fiscally conservative while they continue to spend like drunken frat boys. These goofs can't even get their own re-acquired pals Fannie and Freddie to shape up – mostly because they don't even WANT them to.

    If people look to their leaders to set a behavioral examples, the only example Rahm Emmanuel has ever set in his life is how to be a complete asshole and gain power from it. Wall Street is your mirror, Rahm.

  7. Hugh

    I often call the times we are living in the Age of Stupid where fools and knaves hold sway. So "Wrongway" Geithner thinks that the Fed should be the pre-eminent regulator, despite the fact that as President of the NY Fed with the best seat in the house, Geithner managed to see squat. It is hard not to despair when I see the dumbasses who created this mess still in charge and still making one idiotic decision after another.

  8. emca

    The argument for a stronger Fed reminds me somewhat of the case of unitary executive privileges made in the recent (if distant) past. While the idea of centralizing decision seems an efficient and effective strategy going forward, in actuality, it depends, as Joseph Fielding remarked in his epic tale of human foibles, "Tom Jones", wholly on the abilities of the governing; to whit, why would you vest absolute authority with an absolute incompetent? Such authority has no innate attributes to insure wisdom, tack, insight or any other characteristics by which means this role is balanced.
    In point of fact, very few have those salacious quirks to make this strategy work, and I certainly don't think Alan Greenspan, Ben Bernanke, Tim Geithner, George Bush, Hank Paulson or a host of other assorted characters (and even – gasp – Barack (CAC)Obama) are in full (even in some cases partial) possession of those skills.

    For the love of God and country, I don't think that our founding fathers embraced a representative form of government pattern after that of Britain, sans a "King" to have it abdicated at this time in fit of piecemeal, surface expediency. Washington (George)had the foresight to reject those who thought kingship was a good idea (perhaps because he saw first hand the antics of English George), we should continue his example. Giving more authority to fewer, if nothing else (let alone other questions of structural, systemic concentration of power), restricts or eliminates dissent and as the alternate viewpoint is sometimes the one verified by the actual , is a dangerous ambition.

  9. haljett

    I find this disturbing because I think it's continued evidence of the bullying tactics this administration is willing to employ. Other evidence of that to me is the President's interaction over the college professor and police officer incident. I am wonder about more of his appointees to Czar positions as well and their previous ties to community organizations who employed the bullying tactic. We shall see. But it's becoming more and more clear to me that this administration is trying to force its desires upon every aspect of the nation, whether the citizens want it or not. Don't get me wrong. I'm just as fed up with the Republican side of the isle who continue to shirk their duty to the people.

  10. Anonymous

    The government is already picking who wins, and who loses, on a grand and arbitrary (to us, not to those holding power) scale.

    Regulations are deck chairs at this point.

  11. moslof

    Our leaders were little kids the last time there was real growth in a broad spectrum of basic industries that were not support or subsidized by government. Therefore they think everyone and everything can be manipulated to make things "look good" which is more important than being good. Companies that live off of the government are swarming with young managers like Geithner who wouldn't give Paul Volcker the time of day if nobody was looking. Real skills will be in demand again after the collapse!

  12. egominumus

    Mostly drivel out of the complainertariat in the commnets section here, the whining goes each direction, long breathless noise about an the lack of action and the captivity of government institutions. And then a week later, the same crowd screeching away about Adminstration knocking heads at regulatory institutions. The chattering classes trully live on.

    Obama for one, has poor political chops. The public mood is straight forward, according to them nothing much has been done to deal with the perpetrators, and both the cops in congress and the regulators were asleep at the switch, which means these turf wars garner NO! sympathy from them.

    What Obama does not grasp, is that people want decisive action, that cracks skulls, and if he was to act, and use his political machine to deliver a simple narrative to the public, he would be succesfull at reforming the regulators and outmanouvering congress. Since the beggining of this crises, the public have watched the rules being bent to "fix" it, so regulators or congress, or complainers harping on about constiutional, rules is not cutting it.

    Obama should call in the regulators, to the white house, read them, riot act, and FIRE Somebody, in that way o0nly a president can. He can tell them that if they want to take him oin, that's their perogative as independant regulators, but he will scorch thyem in the process. My contention is he should have done this right at the beggining. All the heads should have been told to fall in their swords, whilst the pitchforks were still sharp, and the messages would have been clear. Instead nobody has been accountable at all, anywhere.

    That said I do think, the fed has been second only to the SEC as incompetent within this crises, if not more so.

  13. Anonymous

    Did anyone else notice that both of the regulators Geithner was probably aiming his swear words at were women?

    In general, women are less comfortable hearing such language than men are. Especially if it is directed at them.

    I hope they find a way to ace him out. Ideally, out of the job entirely.

  14. Anonymous

    Did anyone else notice that both of the regulators Geithner was probably aiming his swear words at were women?

    The most polite thing that I can say about Geithner is a walking disaster whose policies are going to result in an absolute catastrophe.

    Having said that, I don't think Schapiro and Bair are defenseless parties that don't understand politics. SOMEBODY leaked this story, and you can be sure it wasn't Geithner. This is just another round in the spin cycle.

    Incidentally, FDIC is close to absolutely needing Geithner's approval soon. Maybe they shouldn't protest too loudly just yet.

  15. Avl Guy

    Back in January i wrote:
    "A 70% Approval Rating Is A Terrible Thing To Waste on Appointees like Timmie Geithner".

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