Should We Buy Geithner’s Resistance to Naming “Systemically Important” Firms?

According to the Financial Times, Treasury Secretary Timothy Geithner is trying to duck the assignment given the Financial Stability Oversight Council under the Dodd Frank legislation, namely, that of identifying “systemically important” financial institutions:

Tim Geithner, the Treasury secretary, has questioned the feasibility of identifying financial institutions as “systemically important” in advance of a crisis, just as the regulatory council he chairs is supposed to start doing precisely that…

People familiar with the discussion said that Mr Geithner was pointing out why it was important for regulators to retain discretion over the designation and that it was unwise to prescribe hard objective metrics because that would allow institutions to wriggle out of the designation…

Several people familiar with plans for the systemic designation said they did not expect a broad category of non-banks to be included. Officials have a strong preference for the consequences for systemically important institutions to be agreed internationally at the Basel committee to avoid giving overseas companies an advantage.

Note this take was precipitated by a new SIGTARP report that offered rather mild criticism of the bailout of Citigroup last fall, including that it was done ad hoc, based on qualitative considerations. We’ll discuss that report separately.

Of course, Geithner does seem to have a history of being slow to complete tasks assigned to him, and with the benefit of hindsight, there is usually an ulterior motive. For instance, when he took the Treasury Secretary role, his first task was to come up plan for how to deal with the floundering financial system, and it was appallingly bad. As we said then:

I cannot recall a major US policy initiative being met with as much immediate revulsion as the so-called Geithner plan…the man has a deadline to come up with a proposal, yet puts off presenting it twice (the “oh he has to work on the stimulus bill” is as close to “the dog ate my homework” as I have ever seen in adult life)….

This isn’t like trying to go the moon (which was a government initiative, lest we forget). There are plenty of models and lots of good proposals.

But it turns out the foot dragging was to allow him to come up with a way not to have to take out any of the floundering big banks (remember, Citi and BofA were clearly on the ropes). So Geithner resistance is usually a sign that he is caught between an actual or perceived obligation (in this case, the requirements of the FSOC) and doing the will of his financial masters.

Analytically, there is a really simple way to deal with the problem: be more inclusive in which players get put on the list and update it often to reflect changing market conditions. The “we don’t know who is important until the tide starts going out” is dubious. The usual argument for this is Lehman, that the fact that the authorities let it fail was a sign they didn’t recognize how damaging a collapse might be. But that’s not exactly accurate. Bear, which was a smaller player with the same profile, heavily exposed to real estate, was rescued, and the officialdom labored mightily to save Lehman only to see the deal collapse at the 11th hour. The failure was one of imagination and planning: they figured the industry could be pressured into a rescue of some sort, they missed to how Fuld has undermined the effort with his inept fundraising efforts (he managed to undo a deal with the Korean Development Bank) and had no Plan B.

And if financial regulators had done their jobs in the wake of the Bear collapse, priority number one would have been to understand who was exposed to the CDS market (that was the pressing reason for the bailout) and those roads would have led to AIG.

In other words, preparation of that sort of list is meant to force the FSOC to do its job. Now admittedly, identifying systemically important players is only one axis of risk, but that’s no reason to shirk the task. The Treasury devised a list of banks it subjected to stress tests; conceptually, how is this process any different?

It is noteworthy that Economics of Contempt posted on November 29 of last year that Treasury had “gotten the ball rolling” on identifying systemically important nonbank financial firms (a specific task set forth in Dodd Frank in some detail). But the page at Treasury to which he linked has been deleted. (I also searched for “systemically important” nonbank on the Treasury site from October 1 to November 30 in case the document had merely been renamed, this was the only remotely possible candidate, given that the removed document was a .pdf, and it does not seem to fill the bill).

Yet, ironically, the Bank of England, in its April 2007 Financial Stability report, discussed at some length the nature of risk posed by the growing role of “large complex financial institutions”:

The structure of the UK financial system has been changing in recent years as the major UK banks(1) have made greater use of financial markets to generate revenues, obtain funding for lending and manage credit risk. UK banks are syndicating more loans, securitising more of their on balance sheet assets and are engaging in more credit derivatives activity. There has been a gradual shift towards an ‘originate and distribute’ business model. This may point to more effective management by the major UK banks of their funding liquidity and credit risks, as on balance sheet exposures are increasingly likely to be hedged or held in the form of liquid, tradable assets. But it also exposes the major UK banks to the risk that liquidity is withdrawn from credit markets, where this is supported by LCFIs(2) and other financial institutions, including hedge funds. The major UK banks are further exposed tomarket and liquidity risks through their trading activities, which have grown rapidly in recent years

The Bank of England even dared to identify them:

LCFIs include the world’s largest banks, securities houses and other financial intermediaries that carry out a diverse and complex range of activities in major financial centres. The group of LCFIs is identified currently as: ABN Amro, Bank of America, Barclays, BNP Paribas, Citi (formerly Citigroup), Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan Chase & Co., Lehman Brothers, Merrill Lynch, Morgan Stanley, RBS, Société Générale and UBS.

So what is Geithner’s real reluctance? It’s not hard to understand. The FSOC ought to make life miserable for any systemically important firm. Designating an institution as a systemically important means the authorities will have a lot of explaining to do if it gets in trouble on their watch. So it should regulate intrusively, insist on stringent valuations of asset and liabilities, and understand the markets to which is it heavily exposed.

Of course, no firm will want this sort of proctological treatment, and that’s the point. Being TBTF should carry burdens as well as privileges, and having the government breathe down your neck now seems a small price to pay for being able to inject a drip needle into the US taxpayer every time you screw up on a large enough scale.

In other words, preparing and keeping this list will accomplish something Dodd Frank intended: to keep the minders and their charges under scrutiny. That is evidently something both camps are keen to evade.

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  1. vlade

    It’s easy. We know that some exist. If he won’t name, all of them should be considered systemically important and treated as such, as it’s the most prudent solution.

  2. Paul Repstock

    Perhaps in addition to not wanting responsiblity for policing strategic firms, The “List”, may be a moving target. One day you are important, the next, due to some faux pas or change of political wind, You Ain’t…:(

  3. Evaluator Speculator

    It’s like pornography – you can’t always describe it, but you know it when you see it (HT to Judge Potter Stuart).

    It’s an absolute disgrace for the Secretary of the Treasury to be acting in this manner. Bureaucratic double speak is a part of everyday life, but this is disingenuous.

  4. YankeeFrank

    I get the feeling if Lloyd Blankfreak and all of Geithner’s other masters at the TBTF banks wanted to create a reality show where they parade around in gladiator outfits or something, with Geithner as their “gimp”, he would gleefully don the pleather suit and begin supinely licking the bottoms of their boots all on national tv. The man knows no indignity he will not gladly heap on himself to protect these guys. Geithner is definitely a submissive in S&M parlance. Or, as he is known around my house, “the icky little elf”.

    1. monday1929

      He is clearly consumed by shame. he would be my prime candidate for suicide, assuming he is not a psychopath.

  5. Parvaneh Ferhad

    In other words, they are not going to use the tools they’ve been given to prevent crashes, but will deal with them ‘as they come up’. Not much has changed then.

    1. attempter

      Yup. We knew from the start that “resolution authority” was a scam. They simply won’t use it, just like they already refused to obey the existing PCA law. As always (e.g. with food safety), no new legislation was needed in the first place, actual enforcement of existing legislation would suffice, and therefore the call for new legislation in itself signals: Scam.

  6. aaron

    Admittedly, the systematically important firms will vary somewhat from crisis to crisis (so let’s just wait for the next crisis to happen and then figure it out, right?).
    It seems we have taken a good number of steps back since economists were discussing the importance of the Fed/Treasury keeping track of the complex web of financial interations and contracts.

    1. monday1929

      The fact that 600 trillion or so in off-exchange derivatives is still ticking out there ( with 10-20 trillion in unrecognized losses) makes ALL these discussions a bit pointless. But Yves does it so well that I hope she continues the evisceration.

      In the future, our descendents will assume that in 2011, everyone realized there was a great Depression in progress, like we assume everyone felt that way after the 1929 Crash. Yves archives will hopefully exist to set the record straight.

  7. ep3

    Yves, RE: Lehman and Fuld.

    From what I interpreted from Sorkin’s “Too Big to Fail”, Fuld was in constant contact with Paulson and Co. asking what he needed to do to stay alive and avert disaster. Paulson repeatedly gave vague answers and dodged giving him any assistance. Fuld was calling months before the crash. Yes, Paulson felt that if they blew up it wouldn’t be a big deal. But I think this was intentional on Paulson’s part, for personal and business reasons. Yes, Fuld was an idiot who mis-managed his company. But when you call up the Sec. of the Treasury and ask “what do I do to avoid blowing up my company and destroying the world economy?” and the Sec. says vague statements like “yeah, that might be a route you want to take” or “what do you think about that option?”, what’s Fuld supposed to do?
    I just don’t like the comments that Fuld blew up the company in the end. Paulson let it collapse by design. Another part of “shock and awe”.

  8. Max424

    Timmy should just look over the shoulder of the Bank of England, copy their list, due a quick edit, then hand the hastily revised list over to Mr. Dodd.

    With the assignment done, and the teacher none the wiser, Timmy can run along and play, being fairly certain he’s going to get at least a B.

  9. Paul Tioxon

    With Gay rights in the military established by law, can this be the new love that dares not speak its name?

  10. Hugh

    Geithner is a whore, just another footsoldier of kleptocracy. As attempter notes, the resolution authority was always a sham. By the time something systemic needs to be resolved, it will be way too late to resolve it with these goofs in charge. They won’t see it coming until it has already happened.

    As for the scrubbed page, I couldn’t find it on the waybackmachine but I did find this one concerning systemically important financial utilities from November 23, 2010.

  11. Economics of Contempt


    My link originally went to the FSOC’s “advanced notice of proposed rulemaking” (ANPR) regarding the designation of systemically important firms. The link got broken when Treasury switched to their new website, but the new link is here:

    There’s no delaying going on here at all — Treasury is going through the normal, statutorily-defined rulemaking process. This is how rulemaking works.

    And saying that Geithner is trying to “duck the assignment” is, shall we say, a bit of a stretch, no? — especially considering that heightened supervision for systemically important “Tier 1 FHCs” was Geithner’s idea. He’s not being at all inconsistent by saying that we can never know for sure ahead of time which institutions are systemically important. I mean, that’s a fairly banal statement actually, and it’s not even remotely the same as saying that we shouldn’t even try to identify systemically important firms ahead of time. Surely everyone understands that distinction.

    Much ado about nothing really.

    P.S. Also, you know that the Bank of England isn’t the only one that has publicly identifies a list of “large complex financial institutions,” right? US regulators do it too, only in the US we call them “large complex banking organizations.” Where do you think the BoE got the idea?

    1. Yves Smith Post author

      Thanks for weighing in, but your argument re the LCFI designation is not correct. The BoE designation, per the list above, included concerns that were then pure investment banks, and many firms that were not UK based. The report also had a very long discussion of the role of LCFIs as providers of liquidity to global debt markets and the impact that a withdrawal of liquidity might have on markets and derivatively, US banks. It also more generally discussed the growing size and role of these firms.

      By contrast, “large complex banking organization” is a designation used by the Fed for classification purposes for US banks. Those banks are subject to a more extensive scope of regulatory exam than other banks. This is a supervisory designation. The BofE designation, which includes many firms it did not supervise, is clearly a different beast, created for very different purposes.

      In addition, you saw no discussion of the sort that the BoE report contained in any report published by a major US regulator in the runup to the crisis.

      1. Economics of Contempt

        Ha, yes, I’m quite sure I understand what LCBOs and LCFIs are. I guess I’m misunderstanding your argument. Is it just that the Bank of England has published a study on global SIFIs, while Treasury hasn’t? If it is, then, well, fine, that’s true. But it also has very little to do with Geithner’s views on SIFIs.

  12. 60sradical

    I’m afraid the FSOC is regulatory body in name only. Just take a look at the cast of characters who surround this pipsqueak, yes-man, Geithner fellow. Ben Bernanke and his buddies whisper sadistic, neferious things into Tim’s ear on a daily basis. Benanke is listed as #2 man next to the acting chair(timmie boy). It seems clear that the the FSOC will be a subordinate, impotent office of the Fed and its fraudster banktsa freinds. I can smell Goldman Sachs all the way to California.
    From a Constitutional perspective(i.,e., “the supreme law of the land”). this FSOC is jammed into another cutout corner of the already intergalactic-sized Executive Branch. I wonder if Americans realize how huge the Executive Branch is? Some 3 million employees nationwide, I believe.
    So where are our elected representatives when it comes to the creation and regulation of money? Answer: nowhere–this financial duty is handed over to the private bankers and the essentially private, non-elected members of the Fed.
    Unless this spurious Financial matrix reaches the light of day and these s.o.b.s are dragged before Congress in handcuffs, we all have our work to do. Carry on!

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