“Geither, Fix the Problem, Don’t Fake It”

Yves here. Several readers wrote, appalled by a Time Magazine article defending Timothy Geithner. Marshall Auerback took it upon himself to examine the quality of its reasoning.

By Marshall Auerback, a fund manager and investment strategist who writes for New Deal 2.0.

It was only a matter of time before someone emerged to defend Tim Geithner and his actions in light of the odious decision to bail out AIG. Michael Grunwald of Time Magazine (the publication which anointed Ben Bernanke “Person of the Year” in 2009), has likened the attacks on Geithner to someone who “booed Lassie for tracking mud on the carpet after saving that kid in the well”.

In Geithner’s defense, Grunwald trots out the usual “sanctity of contract” arguments, although it is interesting that such a sacrosanct principle was deemed to be irrelevant when thousands of UAW workers were forced to rework their supposedly inviolable contracts to save GM and Chrysler: “Nobody has explained how or with what authority anyone could have invalidated AIG’s contracts with all those far-flung institutions on the fly, or why that wouldn’t have worsened the panic.”

Let’s be clear: contracts are modified all the time, provided the stakes are high enough. It seems absurd for institutions to invoke “sanctity of contract” when the large financial firms who insist on invoking this principle conveniently omit the fact that they would be toast other than by virtue of the munificence of the bailouts Grunwald is seeking to defend.

The putrid nature of these contracts aside, the justification for defending Geithner’s actions seems questionable. The bailouts “worked”, we are told. The banking system is supposedly functioning and the cost of inaction allegedly would have been far greater panic, untold bank runs, and vastly greater economic misery. Well, if one defines the practice of banking as proprietary trading, the creation and sale of toxic instruments such as credit default swaps, and generating profits via credit card loan sharking activities, then yes, the banking system is “working” again. But how is that helping the rest of us? And how does it contribute to future financial stability?

Additionally, the “cost” of TARP (to which Grunwald alludes) allegedly represents a mere 1% of GDP (versus the normal 5%-10% cost normally associated with crises of this magnitude, according to the Cleveland Fed). However, such superficial accounting conveniently ignores the additional trillions of dollars of financial guarantees and hidden subsidies which have boosted banks’ profits, the regulatory forbearance embraced in regard to ‘mark to market’, the reduction of interest rates to near zero, guaranteeing billions of dollars of financial institutions’ debts via the FDIC. All of these “off balance sheet” items helped banks produce “profits”, subsequently paid out in the form of large bonuses…plus ca change… And that is before we have begun to quantify the social and economic costs associated with the privations that come with double digit unemployment.

It is far too premature to argue that the bailouts have worked, so the question of costs and “profits” is nonsensical. The $45 billion in “profits” recorded by the Federal Reserve simply constitutes a reshuffling of assets on the government’s consolidated balance sheet. It was money that could have been well spent propping up real demand in the economy, not “returned” to the Treasury (which can always create new net financial assets).

And there were alternatives to the bailouts: the government, via the FDIC, could have just taken over the operating concerns, repaired the capital bases and carried on offering services, which would have obviated the need to pay out sums to other banks via credit default swaps, given that the issue of solvency is no longer an issue when the liabilities are fully backstopped by the government.

It is worthwhile contrasting the behavior of the government today with the actions undertaken by FDR. During the period in which the banking system was being restructured under Jesse Jones, Chair of the Reconstruction Finance Corporation, the RFC required letters of resignation from the top three bankers of any institution receiving aid. These were not always accepted, but their mere existence was a potent deterrent to repeat behavior.

How many managers have been replaced during the current crisis? How many are being charged for fraudulent behavior? In the words of former S&L investigator Bill Black: “Zero indictments and zero convictions of senior insiders at specialty lending companies.” http://www.commondreams.org/view/2010/01/15-8 It is also noteworthy to contrast the minimal resources provided to the Department of Justice and FBI today with the vast institutional and regulatory support for criminal convictions during the Savings & Loan crisis.

Which leads to a broader point: how is it possible to proclaim the actions undertaken to “save’ the system a success, when we still have little understanding of how the crisis occurred? Why do the Treasury and the Federal Reserve persistently frustrate every attempt to gain better understanding via endless court challenges, obfuscation, lies and delaying tactics? Why is Congress being so dilatory in subpoenaing JP Morgan Chase, Goldman Sachs, Bank of America, Lehman Brothers, Bear Sterns or any other financial institution that pushed toxic mortgage-related securities? Do they too have something to hide?

This is one of the reasons why there is so much outrage being directed at the decision makers who, allegedly made the best of a horrible situation. Grunwald fails to understand this. Yes, there should be (and is) legitimate anger directed at the compulsive gamblers who created that situation (especially given the extent to which they are using taxpayers dollars which rescued their institutions to lobby against reforms designed to prevent a recurrence). But it is totally wrong to assert that “the House of Representatives — with strong support from Geithner and the Obama Administration — has passed a financial-reform bill designed to address all those problems”

The legislative and regulatory responses have been pathetic on the part of Congress, Treasury, the SEC, and the President himself, none of whom have the guts to introduce genuinely tough measures to target the break-up of today’s destructive financial behemoths and restrict the range of activities that created the crisis in the first place. Potemkin-like reforms and pinprick tax increases do not solve the problem. Why not regulate the banks like utilities? If we are to continue the practice of securitization (not my first choice, as I would prefer to maintain a ‘hold to maturity’ standard for the banks), why not rescind SEC rule 3a-7 which exempted securitized structures – the main elements of the so-called shadow banking system – from registration and regulation under the Investment Companies Act, as Professor Jan Kregel has suggested?

Yes, Mr. Grunwald, let’s demand some real fireproofing from our government. If they actually provided that, then we could probably even stomach the notion of Tim Geithner staying on in Treasury, although it’s hard to imagine the architects of our current misfortune suddenly metamorphosing from a wrecking crew into the financial/regulatory architectural equivalent of Frank Lloyd Wright, building safe, sound structures, which last for generations and are admired, rather than reviled.

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  1. Richard Green

    Please don’t take this comment as snarky, because I like the post. But you need a better metaphor than FLW, who was notorious for not paying his bills, abandoning his children, and designing buildings that, while beautiful, don’t actually hold up physically all that well (it is, for example, a challenge to keep Falling Water from falling into the water).

    How about Louis Sullivan? H.H. Richardson. Daniel Burnham and John Root? Just a thought.

    1. jest

      in defense of FLW, he did do very high quality buildings; the Imperial Hotel in Tokyo was one of the few buildings that withstood a massive 8.3 quake with very little damage.

      he has a plethora of buildings across the country that are still in pretty good shape.

  2. Hugh

    As in all these cases where the media plays handmaiden to the powers that be, Upton Sinclair said it best:

    “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”

    What Grunwald is doing is not analysis, history, or even reporting. It is the construction of an alternate narrative where our elites acted heroically and saved the day (Cue applause and throwing of rose petals). It has nothing to do with facts or common sense but says more about how our elites view themselves and would like us to see them. What we should take away from this is how divorced from reality those elites are and, consequently, how unlikely they are to keep us from depression.

  3. danny

    IMO the cause of the crisis was the FRB. The regulatory system should be redesigned in order to ensure maximum transparency of this institution. Think about it all the banks that created the massive derivatives markets obtain financing from the fed.

  4. attempter

    Time magazine sure has gone all in for the administration and the Bailout regime.

    Once again the standard trail of lies.

    1. Completely omit the question of whether e.g. AIG should have been bailed out at all as opposed to going bankrupt.

    We know by now that it was a lie that AIG needed to be bailed out, that this bailout helped anyone other than Wall St., and that it was ever intended to help anyone other than Wall St.

    2. Then the endlessly tedious and stupid “sanctity of contracts” garbage. On every level, from the fact that in such contingencies contracts are renegotiated all the time, all the way up to the unilaterally broken social contract, broken by the government and Wall St., it’s clear “contracts” never played any role whatsoever in any of this other than to the extent that criminals could use them to benefit at the people’s expense.

    Anyone who still cites the “sanctity” of contracts in this arena is simply a pro-bank flunkey.

    And who, having any shred of integrity, wouldn’t be absolutely ashamed to even introduce the concept “sanctity” into such an infernal sewer, other than as an aggressive totally external force come to sweep that sewer clean once and for all?

    Needless to say, such a force would have nothing at all to do with existing “contracts”.

    3. Finally the really stupid lie that the Bailout “worked”, when it has worked only to loot the people for the benefit of the same criminals who caused the crash.

    The government and banks wage war on the people, who meanwhile sink into permanent Depression. The middle class is gone forever under this system. Jobs are gone forever, and no one, not Obama, not his little flunkeyboys like Grunwald, can even try to offer a coherent explanation for where new jobs are supposed to come from.

    A program which could have helped Main Street would have gone directly to help Main Street.

    A program which conveyed loot to Wall Street, with the promise that some of the stolen wealth would then trickle down to Main Street (and that sums up the Bailout premise very precisely), was obviously a lie on its face, and subsequent events prove that it could never have worked and was never meant to work.

    (Of ocurse it can’t work for long even at propping up monopoly financialization. Exponential debt is finished. There’s no economic basis for it. The middle class American “consumer” is finished, and no Chinese consumer is going to arise to take his place.

    All of this is just globalized extend-and-pretend.)

    It was meant only to steal. As much as possible for as long as possible.

    And the job of the MSM, then as now, is to lie on behalf of history’s greatest economic crime.

  5. Doug Terpstra

    Thank you, Marshall (and Yves) for setting the record straight with sharp analysis, rare common sense, and an appropriate tone.

    Geithner “forgot” who he works for; he’s still captured by Wall Street and the NY Fed. Time, too has lost its journalist mission.

    Contracts, what frigging contracts? The loot went down with the shipwreck when taxpayers saved these reckless pirates from certain death. They were lucky just to keep their scalps, but instead they are back to raiding and gambling with public money. Now we want their heads. And no, the blatant hyprocrisy of honoring bankster contracts while shredding those of unions was never lost on the people, not for a minute. With obsequious articles, including the puff piece on Bernanke, perhaps Time is trolling for its own bailout as it runs its own ship aground.

  6. Doc Holiday

    Time Magazine is a piece of shit and will be out of the business of pumping garbage — so thanks for a great read (honest) here. Blogging is the future and obviously their paid pumpers are a dying breed!! Even Dixie knows!

  7. fiscalliberal

    The essence of the discussion is that the public does not see progress in terms of the economy and regulation. The Health Care fiasco just confirms the lobbyists are still in charge and we have regulation comming up. I think the public knows that has to be fixed and is not seeing it. Of course the Republican have not solutions and the Democrats are on the lobbyists payroll. Only solution might be o just vote out all of the incumbents untill something gets fixed. This is not a good scenario.

    1. Robespierre

      “Only solution might be o just vote out all of the incumbents untill something gets fixed.”

      Not really. Here is an idea:
      Stop consuming and spread the word about consuming just the minimum. Shopping has become the new gluttony in this country anyway.
      The goal here is to deprive credit card companies of fees and to lower sales tax receipt to the states until their governors band together and start to exert political pressure on the federal government. Change will not come from the Federal government (too corrupted) regardless of who do we vote for (I’m voting against the current “bosses”, however). Governors seem to be cleaner and they may be encourage to band together and demand change.
      3) Put political pressure to local state level politicians to act for the people.

      1. Jason C. Rines

        You have hit the nail on the head in a round about way. Begin paying attention at the local level in your own town. Today’s town councilman is tomorrows Congressman. At the national level all the citizenship can do is vote out every incumbent and get gridlock. This idea mirrors supporting your local economy and beginning to starve the beast.

  8. Robespierre

    “Why is Congress being so dilatory in subpoenaing JP Morgan Chase, Goldman Sachs, Bank of America, Lehman Brothers, Bear Sterns or any other financial institution that pushed toxic mortgage-related securities? Do they too have something to hide?”

    This question is only a mystery to gullible Americans. The answer is very simple. Bankers have paid or will paid handsomely and probably legally (but then again what’s illegal when there are no investigation?) our government officials (all branches, both parties) and the bankers have kept their receipts.

    1. alex

      Well said. Any discussion about why the administration and congress are so bankster friendly is silly if it doesn’t follow the first rule of any investigation: follow the money.

      As for the legal vs. illegal aspect, a giant perfectly legal aspect is available for all to see at opensecrets.org The finance industry ponied up nearly $500 million in the 2008 elections alone (D’s leading R’s only slightly). Number two was health care at a paltry $167 million. That explains both finance and health care “reform”. It follows the principle of Occam’s Razor: the simplest explanation is usually right.

      Without serious campaign finance reform our government will continue to be anything but representative.

  9. rd

    FDR’s 100 days didn’t start until four years after the crash. We are only a couple of years in. The S&P 500 is already back up to a 10-yr real PE of 20, the banks are engaging in risky behavior, and everybody says that the drisis is over. Could it be 1930 all over again?

    Unfortunately, we are probably in for at least a small-scale repeat of 2008 because everybody thinks it won’t happen again. If it occurs before Nov 4, 2010 then we will probably have a completely different Congress than we have today and the 1933 100 days with a real Pecora Commission followed by a Glass-Steagal act could follow in 2011 and 2012.

  10. Siggy

    Nice rebuttal. Clearly Geithner is a pawn in a much larger drama. What happened and what should have happened are so different as to be glaringly obvious in pointing toward the bailout of ‘primary dealer’ banks which required the bailout of AIG which itself is a fraud in the sense that proper course of action would have been by way of the bankruptcy court or its equivalent.

  11. clawback

    Grunwald’s whole essay brought me to a rage, but just to make one point: Grunwald insinuates that we “had” to save AIG which insures thousands upon thousands of Americans, etc. What specious BS — the insurance units would have gone into statutory receivership at the state level and be handled by state insurance regulators there. As I understand it, the AIG parent would then be left holding the flaming sack of CDS that came out of AIG FP. And besides, what BK court is going to allow AIG’s insurance units to be cannibalized just to pay out on CDS that were likely fraudulent in the first place? Demonstrably, AIG wrote contracts that it could never hope to make good on.

    While I’m at it, one more point: Grunwald insists that all of these back-door bailouts were made during the “panic” of mid-September. To the contrary, many of these decisions were made during DECEMBER. Was there really a “panic” going on in December like the one that we had in September? Even if you argue that the same panic prevailed, then why, pray tell, did FRBNY president Stephen Friedman (who sat concurrently on the GS BOD) take time away from panicking in order to make not one, but two purchases of Goldman Sachs stock — BEFORE it was publicly known that AIG would make good on the back-door bailouts? And why, pray tell, would Treasury officials bother to cover up their nasties if there was so much doggone panic going on? Further, why would the SEC still be colluding with Treasury in an attempt to continue the cover-up until 2018?

    Grunwald: FAIL.

    1. Doug Terpstra

      Great points. The timing is material and often overlooked. I can vividly recall weeks of pubic outrage and loud protests against bailouts, not once, but twice, until is was deliberately jammed through under threat of martial law.

      I had forgotten the blatant conflict and (alleged) insider-profiteering of FRBNY Stephen Friedman (who sat concurrently on the GS BOD). Geithner’s successor and protégé?

      Speaking of clawbacks, Joe Cassano (AIGFP) is supposedly under investigation (under a rug no doubt), but a Bnet article “Gunning for AIG’s Joe Cassano? Good Luck!”, tells the story. Fraud is hard to prove of course (by design) but it’s well nigh impossible if Treasury won’t release relevant emails. This is sickening.

  12. flow5

    “The brightest and most combative…was Walter Wriston…the former Citicorp chairman:”

    “A sworn fore of bureaucrats, Mr. Wriston often joked: “REGULATORS SIT BY WHILE SNAILS GO BY LIKE ROCKETS”. He devoted much of his career to diving through loopholes in bank holding-company legislation or wriggling free of interest-rate restrictions. As Mr. Zweig shows, Mr. Wriston presided over an encyclopedic range of innovations-among them negotiable CDs, term loans, syndicated loans, floating-rate notes and currency swaps-that ended forever the moribund bonking of the 1950s and ushered in our razzle-dazzle age of finance.

    The banking lobby is the most dominant and well funded lobby. It wields absolute power over all of our political processes. It would seem that some methodical bureaucratic slowdown would be welcomed. I.e., as Krugman advises, nationalize our banks, or otherwise brace for additional orgies & hemorrhaging.

  13. Jon

    great new post at Zero – picking up on Yves’s theme of the Bonus distraction

    Guest Post: The Banker Bonus Diversion


  14. Justicia

    The bailouts are a success, says Time mag’s Greunwald. Apparently not, if you accept Bloomberg’s analysis of the market’s response to JPM Chase’s earnings report. Yes, the banks are off of life supports but they’re not out of the ICU:


    Jan. 16 (Bloomberg) — U.S. stocks fell, pulling the Standard & Poor’s 500 Index down from a 15-month high, after profits at Alcoa Inc. and JPMorgan Chase & Co. disappointed investors and China took actions to slow economic growth.

    […] JPMorgan Chase, the second-biggest U.S. financial company, slumped 2.2 percent after posting a loss in its retail banking unit.

    JPMorgan, the first of the largest U.S. banks to report fourth-quarter results, declined $1 to $43.68. The New York- based lender’s retail unit posted its first quarterly loss since the beginning of 2008, and the company boosted reserves for consumer loans by $1.9 billion.

    Goldman Sachs Group Inc. fell 5.2 percent on the week to $165.21. Bank of America Corp. lost 3.1 percent to $16.26.

  15. Jeremy Johnson

    The mark to market change did almost nothing for reported capital positions. SFAS 167 which comes into effect for 2010 will take at least 2x times more capital away from a money center bank than the mark to market change gave which begs the question: where is the headline saying “JP Morgan Takes 40 bps Capital Hit Due to Tough New Accounting Rules”

    Moreover, you can easily go to the notes of any bank financial statement and see the carrying value of loans and securities versus fair value and make your own adjustment.

    Hindsight has already proven that many securities were being at marked at unrealistic levels, because there was no market. To have a market, you need a willing buyer and seller and in many markets there was neither.

    1. Yves Smith Post author

      The mark to market change was gutted almost as soon as it was implemented. FAS 157 was required for financial statements filed after Nov 2007. It was effectively suspended (I don’t know the term of art here) as of March 2008 (Bear crisis). Level 3 assets jumped sharply for all firms during that reporting period.

      Similarly, the FDIC has agreed to delay implementation of FAS 167, see


      1. Jeremy Johnson

        Thank you for the link. I don’t think the key here is what the final capital numbers say but what is disclosed so that individuals can really know what it going on. SFAS 167 capital requirements are being disclosed by banks and implemented by many which gives a cleaner look at the master trusts.

      2. Jeremy Johnson

        Thought I would update my earlier comments.

        The phase-in discussed in that article gives a very limited benefit to capital, it is not a 100% delay for a year. The way Bank of America described it, choosing the phase-in option would have a very limited impact on capital.

        From what I can see, WFC, BAC and JPM are all phasing in immediately. I’m not sure what C is doing, but they did disclose the full impact, which for them is very big — 140 bps on tier 1 common.

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