US slowdown intensifies global economic crisis
“Obama
used the event to reassert his pro-business credentials, all but groveling
before an organization whose CEOs head firms that control half of all US
corporate profits.”
On eve of health care summit
Obama courts US corporate elite
By Tom Eley
25 February 2010
25 February 2010
In
in a bid for corporate support on the eve of his televised health care summit
with Republicans, President Obama on Wednesday told top CEOs gathered at the
Business Roundtable that his health care reform would improve the
competitiveness of their firms.
Obama
used the event to reassert his pro-business credentials, all but grovelling
before an organization whose CEOs head firms that control half of all US
corporate profits.
“Contrary
to the claims of some of my critics, I am an ardent believer in the free
market,” Obama assured his audience. “I believe businesses like yours are the
engines of economic growth in this country. You create the jobs. ... I firmly
believe that America’s success in large part depends on your success.”
Far
from creating jobs, US corporations have shed them by the millions since 2007,
while the past year has made abundantly clear that the success of major
corporations has nothing to do with the well-being of the American people. The
former have enjoyed enormous profits as a result of trillions of dollars in
federal money pumped into the finance markets, while the population as a whole
continues to suffer through the worst social crisis since the Great Depression.
REASONABLE REWARDS?
Obama
reiterated his mantra that “most Americans—including myself—don’t begrudge
reasonable rewards for a job well done.” In fact, Americans not only “begrudge”
executives’ salaries that are hundreds of times greater than those of workers,
they wonder why the CEOs, whose predatory financial schemes triggered the
economic collapse, have not been arrested and prosecuted.
The
president stressed that any government intervention into the market would be
temporary, thereby reassuring the CEOs that the worst economic crisis since the
1930s would result in no reforms of the financial system. The highest elected
official, supposedly the democratic representative of the people, felt obliged
to justify the role of government before his audience of multi-millionaires and
billionaires, declaring that it served a “limited” and subordinate, but
necessary, function in enabling the financial elite to increase its wealth and
profits.
“Government
hasn’t stepped in to supplant private enterprise,” he declared, “but to
catalyze it, to create the conditions for entrepreneurs and new businesses to
adapt and to thrive.”His pro-business bona fides established, Obama moved to
his primary aim—to win support among the corporate elite for his health care
legislation, which has been stalled by Republican political maneuvering.
Republicans fully support the central purpose of Obama’ ;s “reform” agenda,
which is to slash Medicare spending and drive down health care costs through
the limitation of medical services to tens of millions. But they sense a
political opportunity to capitalize on widespread and justified fears over the
reform’s reactionary character.
Obama
called health care an “undeniable drag on our economy,” while hailing “the
willingness of the Business Roundtable to work with us” in addressing the
issue. “Still, I know there are many who have been skeptical of our reform
efforts,” he said. “[I]t’s been an easy political tactic to characterize any
effort at health reform as a ‘big government takeover.’”
“The
truth is just the opposite,” Obama continued, adding that the plan would
deliver “more customers” to insurers, and pointing out that the legislation had
“incorporated almost every serious idea from across the political spectrum
about how to contain the rising cost of health care,” resulting in a proposal
that “would reduce the deficit by as much as $1 trillion over the next two
decades.”
“One
of the benefits of health care reform is that by bringing down the cost of
Medicare and Medicaid, it would significantly reduce our deficit,” Obama added.
“I know this an issue of great concern to many of you. Believe me—it’s been on
my mind too.”
The
30 minute speech offered other revealing moments, among them a rather frank
admission that the Wall Street bailout now necessitated attacks on social
programs.
“The
steps we took to save the economy from depression last year have necessarily
added to the deficit,” Obama said. “But I’ve also said that we intend to pay
for what we added. My administration is doing what families and businesses all
across the country are doing during these difficult times: we’re tightening our
belts and making tough decisions. We’re investing only in what we need and
sacrificing what we can do without.”
He
boasted that the administration has “identified more than 120 programs for
elimination—a total of $20 billion in savings for next year,” and has imposed
“a freeze on non-security, discretionary government spending for three years.”
Obama
repeated his goal, first announced in his State of the Union address, to double
US exports in five years, a plan that presages trade war and the restructuring
of US manufacturing on the basis of near-poverty wages.
Obama
told the CEOs that the US cannot go back “to the pre-crisis status quo,” which
he described as “an economy too dependent on a housing bubble, consumer debt,
financial speculation, and growing deficits.”
“We
will pursue a more strategic and aggressive effort to open up new markets for
our goods,” he said. The US economy must “send more products overseas” and
“borrow less and produce more.”
(OBAMA,
ALWAYS A BACK SLIDER WHEN IT COMES TO THE SPECIAL INTERESTS. THEY NOW CAN KEEP
THEIR CORPORATE PROFITS ABROAD TO AVOID TAXES!)
At
the same time that he promised a vigorous expansion of exports, Obama partially
reversed another of his campaign pledges—to eliminate loopholes that allow US
corporations that make money abroad to avoid paying taxes. “Mr. Obama said he
modified his proposal, originally designed to raise as much as $210 billion,
after listening to complaints from businesses, which say the deferral rule lets
them better compete against overseas competition,” the Wall Street Journal reported.
Obama
also pointed to his proposal to create a two-tier system of public education in
the US, which has won widespread Republican support. By pitting states and
school districts in competition for limited funding, the plan aims to tear up
teachers’ work rules and promote charter schools. “Race to the Top,” as the
administration dubs its plan, “is one of those rare issues where both Democrats
and Republicans are enthusiastic,” Obama said.
The
Business Roundtable is among the most influential of US business organizations.
“The group’s support is seen as crucial to Obama’s agenda as he faces a rough
road heading toward November’s midterm elections,” the New York Times
wrote. “Obama has wooed the Roundtable’s leaders since the start of his
presidency.”The Wall Street Journal noted that “administration officials
say they have been inviting chief executives to the White House for months, and
prefer meeting company leaders to their lobbyists.”
(BANKSTER
J. P MORGAN AT THE WHITE HOUSE. ONE OF THE BANKSTER PRESIDENT’S BIGGEST DONORS,
AND BIGGEST BENEFICIARIES OF OBAMA’S SELLOUT TO BIG BANKSTER DONORS!)
Obama’s
wooing of the nation’s top CEOs included a private White House dinner on
Tuesday evening attended by 17 leading executives, including JPMorgan Chase CEO
Jamie Dimon.
Obama
well understands the decisive power asserted by the financial elite over the
political life of the nation. His career was taken in hand early on by powerful
financial interests in Chicago, and in the 2008 elections the finance sector
gave him far more in campaign contributions than any other candidate.
THE REASON WHY OBAMA BROUGHT IN BUSH’S ARCHITECT FOR BANKSTER WELFARE,
TIM GEITHNER, WAS TO ASSURE HIS BIG BANKSTER DONORS THAT THEIR LOOTING WOULD
CONTINUE, THERE WOULD BE NO REGULATION TO INTERFERE AND THEIR INVESTMENT IN
OBAMA WOULD BE REPAID WITH MASSIVE BAILOUTS, NO INTERESTS LOANS, AND NO PRISON
TIME FOR BANKSTERS!
IT’S WORKED JUST FINE! ALL OF OBAMA’S BANKSTER DONORS HAVE PILLAGED THIS
NATION EVEN MORE UNDER OBAMA THAN BUSH!
April 27, 2009
Geithner, Member and Overseer of Finance Club
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 Davis,
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.
“People thought, ‘Wow,
that’s kind of out there,’ ” said John C. Dugan, the comptroller of the
currency, who heard about the idea afterward. Mr. Geithner says, “I don’t
remember a serious discussion on that proposal then.”
But in the 10 months
since then, the government has in many ways embraced his blue-sky prescription.
Step by step, through an array of new programs, the Federal Reserve and
Treasury have assumed an unprecedented role in the banking system, using
unprecedented amounts of taxpayer money, to try to save the nation’s financiers
from their own mistakes.
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.
Today, Mr. Geithner is
Treasury secretary, and as he seeks to rebuild the nation’s fractured financial
system with more taxpayer assistance and a regulatory overhaul, he finds
himself a locus of discontent.
Even as banks complain
that the government has attached too many intrusive strings to its financial
assistance, a 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 started to collapse.
Mr. Geithner said his
actions in the bailout were motivated solely by a desire to help businesses and
consumers. But in a financial crisis, he added, “the government has to take risk, and we are going to
be doing things which ultimately — in order to get the credit flowing again —
are going to benefit the institutions that are at the core of the problem.”
The New York Fed is, by
custom and design, clubby and opaque. It is charged with curbing banks’ risky
impulses, yet its president is selected by and reports to a board dominated by
the chief executives of some of those same banks. 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.
Mr. Geithner was
particularly close to executives of Citigroup, the largest bank under his
supervision. Robert E. Rubin, a senior Citi executive and a former Treasury secretary, was Mr.
Geithner’s mentor from his years in the Clinton administration, and the two
kept in close touch in New York.
Mr. Geithner met
frequently with Sanford I. Weill, one of Citi’s largest individual shareholders and its former
chairman, serving on the board of a charity Mr. Weill led. As the bank was
entering a financial tailspin, Mr. Weill approached Mr. Geithner
about taking over as Citi’s chief executive.
But 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. Problems with the risky and opaque derivatives
market later amplified the economic crisis.
As late as 2007, Mr.
Geithner advocated measures that government studies said would have allowed
banks to lower their reserves. When the crisis hit, banks were vulnerable
because their financial cushion was too thin to protect against large losses.
In fashioning the
bailout, his drive to use taxpayer money to backstop faltering firms overrode
concerns that such a strategy would encourage more risk-taking in the future.
In one bailout instance, Mr. Geithner fought a proposal to levy fees on banks
that would help protect taxpayers against losses.
The bailout has left the
Fed holding a vast portfolio of troubled securities. To manage them, Mr.
Geithner gave three no-bid contracts to BlackRock, an asset-management firm
with deep ties to the New York Fed.
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.
“I don’t think that Tim
Geithner was motivated by anything other than concern to get the financial
system working again,” Mr. Stiglitz said. “But I think that mindsets can be
shaped by people you associate with, and you come to think that what’s good for
Wall Street is good for America.”
In this case, he added,
that “led to a bailout that was designed to try to get a lot of money to Wall
Street, to share the largesse with other market participants, but that had
deeply obvious flaws in that it put at risk the American taxpayer
unnecessarily.”
But Ben S. Bernanke, the chairman of the Federal Reserve, said in an interview that
Mr. Geithner’s Wall Street relationships made him “invaluable” as they worked
together to steer the country through crisis.
“He spoke frequently to
many, many different players and kept his finger on the pulse of the
situation,” Mr. Bernanke said. “He was the point person for me in many cases and
with many individual firms so that we were prepared for any kind of emergency.”
An Alternate Path
A revolving door has
long connected Wall Street and the New York Fed. Mr. Geithner’s predecessors,
E. Gerald Corrigan and William J. McDonough, wound up as investment-bank executives. The current president, William C. Dudley, came from Goldman Sachs.
Mr. Geithner followed a
different route. An expert in international finance, he served under both
Clinton-era Treasury secretaries, Mr. Rubin and Lawrence H. Summers. He impressed them with his handling of foreign financial crises
in the late 1990s before landing a top job at the International Monetary Fund.
When the New York Fed
was looking for a new president, both former secretaries were advisers to the
bank’s search committee and supported Mr. Geithner’s candidacy. Mr. Rubin’s
seal of approval carried particular weight because he was by then a senior
official at Citigroup.
Mr. Weill, Citigroup’s
architect, was a member of the New York Fed board when Mr. Geithner arrived.
“He had a baby face,” Mr. Weill recalled. “He didn’t have a lot of experience
in dealing with the industry.”
But, he added, “He
quickly earned the respect of just about everyone I know. His knowledge, his
willingness to listen to people.”
At the age of 42, Mr.
Geithner took charge of a bank with enormous influence over the American
economy.
Sitting like a fortress
in the heart of Manhattan’s financial district, the New York Fed is, by dint of
the city’s position as a world financial center, the most powerful of the 12
regional banks that make up the Federal Reserve system.
The Federal Reserve was
created after a banking crisis nearly a century ago to manage the money supply
through interest-rate policy, oversee the safety and soundness of the banking
system and act as lender of last resort in times of trouble. The Fed relies on
its regional banks, like the New York Fed, to carry out its policies and
monitor certain banks in their areas.
The regional reserve
banks are unusual entities. They are private and their shares are owned by
financial institutions the bank oversees. Their net income is paid to the
Treasury.
At the New York Fed, top
executives of global financial giants fill many seats on the board. In recent
years, board members have included the chief executives of Citigroup and
JPMorgan Chase, as well as top officials of Lehman Brothers and industrial companies like General Electric.
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.”
Mr. Geithner took office
during one of the headiest bull markets ever. Yet his most important task, he
said in an interview, was to prepare banks for “the storm that we thought was
going to come.”
In his first speech as
president in March 2004, he advised bankers to “build a sufficient cushion
against adversity.” Early on, he also spoke frequently about the risk posed by
the explosion of derivatives, unregulated insurancelike products that many
companies use to hedge their bets.
But Mr. Geithner
acknowledges that “even with all the things that we took the initiative to do,
I didn’t think we achieved enough.”
Derivatives were not an
altogether new issue for him, since the Clinton Treasury Department had battled
efforts to regulate the multitrillion-dollar market. As Mr. Geithner shaped his
own approach, records and interviews show, he consulted veterans of that fight
at Treasury, including Lewis A. Sachs, a close friend and tennis partner who
managed a hedge fund.
Mr. Geithner pushed the
industry to keep better records of derivative deals, a measure that experts
credit with mitigating the chaos once firms began to topple. But he stopped
short of pressing for comprehensive regulation and disclosure of derivatives
trading and even publicly endorsed their potential to damp risk.
Nouriel Roubini, a
professor of economics at the Stern School of Business at New York University, who made early predictions of the crisis, said Mr. Geithner
deserved credit for trying, especially given that the Fed chairman at the time,
Alan Greenspan, was singing the praises of derivatives.
Even as Mr. Geithner was
counseling banks to take precautions against adversity, some economists were
arguing that easy credit was feeding a more obvious problem: a housing bubble.
Despite those warnings,
a report released by the New York Fed in 2004 called predictions of gloom
“flawed” and “unpersuasive.” And as lending standards evaporated and the
housing boom reached full throttle, banks plunged ever deeper into risky
mortgage-backed securities and derivatives.
The nitty-gritty task of
monitoring such risk-taking is done by 25 examiners at each large bank. Mr.
Geithner reviewed his examiners’ reports, but since they are not public, it is
hard to fully assess the New York Fed’s actions during that period.
Mr. Geithner said many
of the New York Fed’s supervisory actions could not be disclosed because of
confidentiality issues. As a result, he added, “I realize I am vulnerable to a
different narrative in that context.”
The ultimate tool at Mr.
Geithner’s disposal for reining in unsafe practices was to recommend that the
Board of Governors of the Fed publicly rebuke a bank with penalties or cease
and desist orders. Under his watch, only three such actions were taken against
big domestic banks; none came after 2006, when banks’ lending practices were at
their worst.
The Citigroup Challenge
Perhaps the central
regulatory challenge for Mr. Geithner was Citigroup.
Cobbled together by Mr.
Weill through a series of pell-mell acquisitions into the world’s largest bank,
Citigroup reached into every corner of the financial world: credit cards, auto loans, trading, investment banking, as well as mortgage securities and
derivatives. But it was plagued by mismanagement and wayward banking practices.
In 2004, the New York
Fed levied a $70 million penalty against Citigroup over the bank’s lending
practices. The next year, the New York Fed barred Citigroup from further
acquisitions after the bank was involved in trading irregularities and
questions about its operations. The New York Fed lifted that restriction in
2006, citing the company’s “significant progress” in carrying out risk-control
measures.
In fact, risk was rising
to dangerous levels at Citigroup as the bank dove deeper into mortgage-backed
securities.
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.
Any intelligence Mr.
Geithner gathered in his meetings does not appear to have prepared him for the
severity of the problems at Citigroup and beyond.
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.
While waiting for a
breakfast meeting with Mr. Weill at the Four Seasons Hotel in Manhattan, Mr.
Geithner phoned Mr. Dugan, the comptroller of the currency, according to both
men’s calendars. Both Citigroup and JPMorgan Chase were pushing for the new
standards, which they said would make them more competitive. Records show that
earlier that week, Mr. Geithner had discussed the issue with JPMorgan’s chief,
Mr. Dimon.
At the Federal Deposit Insurance
Corporation, which insures bank
deposits, the chairwoman, Sheila C. Bair, argued that the new standards were tantamount to letting the
banks set their own capital levels. Taxpayers, she warned, could be left
“holding the bag” in a downturn. But Mr. Geithner believed that the standards
would make the banks more sensitive to risk, Mr. Dugan recalled. The standards
were adopted but have yet to go into effect.
Callum McCarthy, a
former top British financial regulator, said regulators worldwide should have
focused instead on how undercapitalized banks already were. “The problem is
that people in banks overestimated their ability to manage risk, and we
believed them.”
By the fall of 2007,
that was becoming clear. Citigroup alone would eventually require $45 billion
in direct taxpayer assistance to stay afloat.
On Nov. 5, 2007, Mr.
Prince stepped down as Citigroup’s chief in the wake of multibillion-dollar
mortgage write-downs. Mr. Rubin was named chairman, and the search for a new
chief executive began. Mr. Weill had a perfect candidate: Mr. Geithner.
The two men had remained
close. That past January, Mr. Geithner had joined the board of the National
Academy Foundation, a nonprofit organization founded by Mr. Weill to help
inner-city high school students prepare for the work force.
“I was a little worried
about the implications,” Mr. Geithner said, but added that he had accepted the
unpaid post only after Mr. Weill had stepped down as Citigroup’s chairman, and
because it was a good cause that the Fed already supported.
Although Mr. Geithner
was a headliner with Mr. Prince at a 2004 fundraiser that generated $1.1
million for the foundation, he said he did not raise money for the group once
on the board. He attended regular foundation meetings at Mr. Weill’s Midtown
Manhattan office.
In addition to charity
business, Mr. Weill said, the two men often spoke about what was happening at
Citigroup. “It would be logical,” he said.
On Nov. 6 and 7, 2007,
as Mr. Geithner’s bank examiners scrambled to assess Citigroup’s problems, the
two men spoke twice, records show, once for a half-hour on the phone and once for
an hourlong meeting in Mr. Weill’s office, followed by a National Academy
Foundation cocktail reception.
Mr. Geithner also went
to Citigroup headquarters for a lunch with Mr. Rubin on Nov. 16 and met with
Mr. Prince on Dec. 4, records show.
Mr. Geithner
acknowledged in an interview that Mr. Weill had spoken with him about the
Citigroup job. But he immediately rejected the idea, he said, because he did
not think he was right for the job.
“I told him I was not
the right choice,” Mr. Geithner said, adding that he then spoke to “one other board
member to confirm after the fact that it did not make sense.”
According to New York
Fed officials, Mr. Geithner informed the reserve bank’s lawyers about the
exchange with Mr. Weill, and they told him to recuse himself from Citigroup
business until the matter was resolved.
Mr. Geithner said he
“would never put myself in a position where my actions were influenced by a
personal relationship.”
Other chief financial
regulators at the Federal Deposit Insurance Company and the Securities and
Exchange Commission say they keep officials from institutions they supervise at
arm’s length, to avoid even the appearance of a conflict. While the New York
Fed’s rules do not prevent its president from holding such one-on-one meetings,
that was not the general practice of Mr. Geithner’s recent predecessors, said
Ernest T. Patrikis, a former general counsel and chief operating officer at the
New York Fed.
“Typically, there would
be senior staff there to protect against disputes in the future as to the
nature of the conversations,” he said.
Coping With Crisis
As Mr. Geithner sees it,
most of the institutions hit hardest by the crisis were not under his
jurisdiction — some foreign banks, mortgage companies and brokerage firms. But
he acknowledges that “the thing I feel somewhat burdened by is that I didn’t
attempt to try to change the rules of the game on capital requirements early
on,” which could have left banks in better shape to weather the storm.
By last fall, it was too
late. The government, with Mr. Geithner playing a lead role alongside Mr.
Bernanke and Mr. Paulson, scurried to rescue the financial system from
collapse. As the Fed became the biggest vehicle for the bailout, its balance
sheet more than doubled, from $900 billion in October 2007 to more than $2 trillion
today.
“I couldn’t have cared
less about Wall Street, but we faced a crisis that was going to cause enormous
damage to the economy,” Mr. Geithner said.
The first to fall was Bear Stearns, which had bet heavily on mortgages and by mid-March was
tottering. Mr. Geithner and Mr. Paulson persuaded JPMorgan Chase to take over
Bear. But to complete the deal, JPMorgan insisted that the government buy $29
billion in risky securities owned by Bear.
Some officials at the
Federal Reserve feared encouraging risky behavior by bailing out an investment
house that did not even fall under its umbrella. To Mr. Geithner’s supporters,
that he prevailed in the case of Bear and other bailout decisions is testament
to his leadership.
“He was a leader in
trying to come up with an aggressive set of policies so that it wouldn’t get
completely out of control,” said Philipp Hildebrand, a top official at the
Swiss National Bank who has worked with Mr. Geithner to coordinate an
international response to the worldwide financial crisis.
But others are less
enthusiastic. William Poole, president of the Federal Reserve Bank of St. Louis
until March 2008, said that the Fed, by effectively creating money out of thin
air, not only runs the risk of “massive inflation” but has also done an end-run
around Congressional power to control spending.
Many of the programs
“ought to be legislated and shouldn’t be in the Federal Reserve at all,” he
contended.
In making the Bear deal,
the New York Fed agreed to accept Bear’s own calculation of the value of assets
acquired with taxpayer money, even though those values were almost certain to decline
as the economy deteriorated. Although Fed officials argue that they can hold
onto those assets until they increase in value, to date taxpayers have lost
$3.4 billion. Even these losses are probably understated, given how the Federal
Reserve priced the holdings, said Janet Tavakoli, president of Tavakoli
Structured Finance, a consulting firm in Chicago. “You can assume that it has
used magical thinking in valuing these assets,” she said.
Mr. Geithner played a
pivotal role in the next bailout, which was even bigger — that of the American International Group, the insurance giant whose derivatives business
had brought it to the brink of collapse in September. He also went to bat for
Goldman Sachs, one of the insurer’s biggest trading partners.
As A.I.G. bordered on
bankruptcy, Mr. Geithner pressed first for a private sector solution. A.I.G.
needed $60 billion to meet payments on insurance contracts it had written to
protect customers against debt defaults.
A.I.G.’s chief executive
at the time, Robert B. Willumstad, said he had hired bankers at JPMorgan to help it raise capital.
Goldman Sachs had jockeyed for the job as well, but because the investment bank
was one of A.I.G.’s biggest trading partners, Mr. Willumstad rejected the idea.
The potential conflicts of interest, he believed, were too great.
Nevertheless, on Monday,
Sept. 15, Mr. Geithner pushed A.I.G. to bring Goldman onto its team to raise
capital, Mr. Willumstad said.
Mr. Geithner and Mr.
Corrigan, a Goldman managing director, were close, speaking frequently and
sometimes lunching together at Goldman headquarters. On that day, the company’s
chief executive, Lloyd C. Blankfein, was at the New York Fed.
A Goldman spokesman
said, “We don’t believe anyone at Goldman Sachs asked Mr. Geithner to include
the firm in the assignment.” Mr. Geithner said he had suggested Goldman get
involved because the situation was chaotic and “time was running out.”
But A.I.G.’s search for
capital was fruitless. By late Tuesday afternoon, the government would step in
with an $85 billion loan, the first installment of a bailout that now stands at
$182 billion. As part of the bailout, A.I.G.’s trading partners, including
Goldman, were compensated fully for money owed to them by A.I.G.
Analysts say the New
York Fed should have pressed A.I.G.’s trading partners to take a deep discount
on what they were owed. But Mr. Geithner said he had no bargaining power
because he was unwilling to threaten A.I.G.’s trading partners with a bankruptcy
by the insurer for fear of further destabilizing the system.
A recent report on the A.I.G. bailout by the Government Accountability Office found that taxpayers may never get their money
back.
The Debt Guarantee
Over Columbus Day
weekend last fall, with the market gripped by fear and banks refusing to lend
to one another, a somber group gathered in an ornate conference room across
from Mr. Paulson’s office at the Treasury.
Mr. Paulson, Mr.
Bernanke, Ms. Bair and others listened as Mr. Geithner made his pitch,
according to four participants. Mr. Geithner, in the words of one participant,
was “hell bent” on a plan to use the Federal Deposit Insurance Corporation to
guarantee debt issued by bank holding companies.
It was a variation on
Mr. Geithner’s once-unthinkable plan to have the government guarantee all bank
debt.
The idea of putting the
government behind debt issued by banking and investment companies was a
momentous shift, an assistant Treasury secretary, David G. Nason, argued. Mr.
Geithner wanted to give the banks the guarantee free, saying in a recent
interview that he felt that charging them would be “counterproductive.” But Ms.
Bair worried that her agency — and ultimately taxpayers — would be left vulnerable
in the event of a default.
Mr. Geithner’s program
was enacted and to date has guaranteed $340 billion in loans to banks. But Ms.
Bair prevailed on taking fees for the guarantees, and the government so far has
collected $7 billion.
Mr. Geithner has also
faced scrutiny over how well taxpayers were served by his handling of another
aspect of the bailout: three no-bid contracts the New York Fed awarded to
BlackRock, a money management firm, to oversee troubled assets acquired by the
bank.
BlackRock was well known
to the Fed. Mr. Geithner socialized with Ralph L. Schlosstein, who founded the
company and remains a large shareholder, and has dined at his Manhattan home.
Peter R. Fisher, who was a senior official at the New York Fed until 2001, is a
managing director at BlackRock.
Mr. Schlosstein said
that while he and Mr. Geithner spoke frequently, BlackRock’s work for the Fed
never came up.
“Conversations with Tim
were appropriately a one-way street. He’d call you and pepper you with a bunch
of questions and say thank you very much and hang up,” he said. “My experience
with Tim is that he makes those kinds of decisions 100 percent based on
capability and zero about relationships.”
For months, New York Fed
officials declined to make public details of the contract, which has become a
flash point with some lawmakers who say the Fed’s handling of the bailout is
too secretive. New York Fed officials initially said in interviews that they
could not disclose the fees because they had agreed with BlackRock to keep them
confidential in exchange for a discount.
The contract terms they
subsequently disclosed to The New York Times show that the contract is worth at
least $71.3 million over three years. While that rate is largely in keeping
with comparable fees for such services, analysts say it is hardly discounted.
Mr. Geithner said he
hired BlackRock because he needed its expertise during the Bear
Stearns-JPMorgan negotiations. He said most of the other likely candidates had
conflicts, and he had little time to shop around. Indeed, the deal was cut so
quickly that they worked out the fees only after the firm was hired.
But since then, the New
York Fed has given two more no-bid contracts to BlackRock related to the A.I.G.
bailout, angering a number of BlackRock’s competitors. The fees on those
contracts remain confidential.
Vincent Reinhart, a
former senior Federal Reserve official, said a more open process might have
yielded a better deal for the taxpayers.
“They may have been able
to convince themselves that this was the only way to go, but it sounds to me
like nobody stepped back and said, ‘What’s this going to look like to the
outside world,’” he said.
Rescues Revisited
As Mr. Geithner runs the
Treasury and administration officials signal more bailout money may be needed,
the specter of bailouts past haunts his efforts.
He recently weathered a
firestorm over retention payments to A.I.G. executives made possible in part by
language inserted in the administration’s stimulus package at the Treasury Department’s insistence. And his new efforts to
restart the financial industry suggest the same philosophy that guided Mr.
Geithner’s Fed years.
According to a recent
report by the inspector general monitoring the bailout, Neil M. Barofsky, Mr.
Geithner’s plan to underwrite investors willing to buy the risky
mortgage-backed securities still weighing down banks’ books is a boon for
private equity and hedge funds but exposes taxpayers to “potential unfairness”
by shifting the burden to them.
The top echelon of the
Treasury Department is a common destination for financiers, and Mr. Geithner
has also recruited aides from Wall Street, some from firms that were at the
heart of the crisis. For instance, his chief of staff, Mark A. Patterson, is a
former lobbyist for Goldman Sachs, and one of his top counselors is Lewis S.
Alexander, a former chief economist at Citigroup.
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. Treasury officials said that is because they would use the rescue powers
only in rare and extreme cases that might require flexibility. Karen Shaw
Petrou, managing director of the Washington research firm Federal Financial
Analytics, said it essentially gives Treasury “a blank check.”
One year and two
administrations into the bailout, Mr. Geithner is perhaps the single person
most identified with the enormous checks the government has written. At every
turn, he is being second-guessed about the rescues’ costs and results. But he
remains firm in his belief that failure to act would have been much more
costly.
“All financial crises
are a fight over how much losses the government ultimately takes on,” he said.
And every decision “requires we balance how to achieve the most benefits in
terms of improving confidence and the flow of credit at the least risk to
taxpayers.”
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