I think I’m going to side with Sheila Bair on this one:
WASHINGTON — Senior regulators and some lawmakers clashed once again with the Obama administration on Thursday, finding fault with central elements of the White House’s latest plan to unwind large financial companies when their troubles imperil the financial system.
Describing the details of the legislation to the House Financial Services Committee, Treasury Secretary Timothy F. Geithner emphasized that the plan would give officials the tools to more tightly supervise the largest financial companies. The government would also have the authority to order companies to shed risky assets or limit trading activities if they posed a threat to the companies’ stability.
But after he completed his testimony, significant parts of the plan were challenged by Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation. She raised numerous objections about the structure of a proposed council of regulators, and said that it would fall short of its goal of protecting the system from the shock of a large failure.
“The oversight council described in the proposal currently lacks sufficient authority to effectively address systemic risks,” Ms. Bair said.
I really have no faith in Geithner at all, and that may be unfair, but right now all I see are half measures that really are not going to put in place a strict regime of tight regulation. Instead, it seems like we’re just setting ourselves up for another disaster and another round of hoocoodanode.
And why have there not been mass arrests at the ratings agencies yet?
Will
Our financial regulatory bodies are pretty much the definition of captured agencies. People – even well-meaning people with well-scrubbed kids who attend church three times a week – will contort themselves into knots to avoid putting their friends and former co-workers in prison. When your kids play with your good buddies Danny’s kids, you’d have to be a hard bastard to sign Danny’s arrest warrant.
This is why any regulatory scheme overseen by former high officials in the financial trade will fail. They do not have the distance needed to target those responsible and make decisions that will harm them financially, much less put them in prison.
Walker
I really have no faith in Geithner at all, and that may be unfair
No. Putting it that politely is being overly kind to Geithner.
The man is a disaster.
badgervan
Dylan Rattigan had a good piece this morning on Geithner vrs. Bair. I’m no financial expert, but for the first time I can now kind of understand the big picture.
Bair has my vote…. and Geithner should be replaced asap; the guy is Wall Street all the way, and he is putting too much effort into saving the bad guys instead of letting them fail and putting some tough safeguards into place for the taxpayer.
Our Prez best start acting rather than observing…. can’t just observe forever. Make the tough decisions ( his idol, Lincoln, did when necessary, and took the backlash without giving in ).
Anyone else get the feeling that every week that goes by now, we are losing our golden opportunity to make the changes so many of us voted for?
General Winfield Stuck
“unfair”
I don’t think so. And have said so since he was first nominated, and got some flaming for my trouble. Aside from the fact he was complicit in the Big Casino attitude on Wall Street, especially the past decade, and a true believer in de-regulation, my initial instinct was of high distrust, and nothing he has done has changed that opinion. And I would also add Summers to that mistrust, but less so.
People said, they are the smartest around, and while that may be true, that is not all that mattered in trying to fix the mess in our financial markets. And it seems to me that a lot of what is happening is applying Duck tape made of taxpayer money to patch up the leaky vessel that will certainly spring leaks again and cause the same, or worse calamity.
I would feel better about it all if new regs and laws were passed to reign in these moneygrubbers, but that hasn’t happened yet. It is my biggest disappointment with the Obama admin., and the dem controlled congress.
PaulW
The gravest sin right now in our nation is that there is no true accountability. We ship off Martha Stewart for 6 months for minor stock shenanigans: we let bankers and CEOs who nearly killed the entire global economy count up their bonuses.
Jay Andrew Allen
If you didn’t see the 60 Minutes piece on Bair and the FDIC, go watch it. Your respect for her and her co-workers will deepen.
Obviously, Bair & Co. are far too competent for anyone in Washington to take them seriously.
Egilsson
Not really related to this, but did you see Noonan talking to an anonymous friend about “going Galt” if his tax rate goes up?
It’s funny to see this stuff presented as if it’s a serious concern.
Walker
@badgervan:
Actually no. But that is because I believe this “recovery” is a temporary rise. 2010 will not be good. The CRE crash and continuing foreclosures are going to take some more big players out. BoA and Citi are not out of the woods yet.
Guster
Sure, Cole, but you’re just a Blairbot.
Walker
@Egilsson:
Job opening! I am sure the unemployed will be thrilled.
El Cruzado
@Will:
What you said. Tim won’t do THAT to his buddies, but THAT (and more) is what ought to be done to them.
Stooleo
Haven’t you heard? Ratings are a 1st amendment issue.
Trinity
@PaulW: This.
The Other Steve
As I understand it, what Geitner is proposing is that there be risk. That is, in the event a company does something stupid the Treasury will step in and dismantle the company. They wipe out shareholder value, and then spin off valuable aspects of the business, and write off the bad parts. Presumably the executives also get bumpkiss on their way out the door.
This would allow the Govt to negate contracts, such as credit default swaps, bonus payments, etc. While at the same time giving some confidence to the customers with accounts at the firm.
Also it mentions that they can step in and say “don’t do that” if they’re involved in something risky. That sounds like regulation to me.
Maybe I’m wrong. But this seems like a good approach. It’s certainly better then the socialized risk system we have today.
What do you expect them to do?
bystander
Ken Silverstein has an interesting piece up at Harper’s recounting a panel convened by the House Financial Services Committee (Barney Frank ) to examine reform for the market in which derivatives are traded last October 7th. They assembled the typical group of insiders, and would have left it at that, except the group Americans for Financial Reform complained. So, the night before, they invited Rob Johnson of the Roosevelt Institute (former managing director at Bankers Trust Company, etc) for “balance.”
As Silverstein tells it,
Johnson submitted his testimony five days later. But the House Financial Services Committee has refused to post it on their website because Johnson hadn’t submitted it at the meeting (with less than a day’s notice, recall). Silverstein has the details, and a link to where Johnson’s testimony can be found (.pdf).
Silverstein:
An Object Lesson in Governmental Failure: Derivatives reform
http://www.harpers.org/archive/2009/10/hbc-90006000
Seanly
We can also have Teh Greatest Regulatority in the Lands, but if there is no appropriation of funding for the enforcement and oversight arms of it then it doesn’t matter.
How often do we hear about underfunded or under-appropriated investigating arms of FDA, SEC, Medicare, etc. etc.
Fwiffo
It’s weird that they keep trying to tinker around the edges. The obvious lesson is that the radical deregulation of the last 20+ years was simply incorrect. I’m with Paul Volker – the too-big-to-fail institutions should be broken into small-enough-to-fail pieces, and banking activities should be divided from investment activities.
Banks get to produce new money. With great power comes great responsibility or some such.
El Cid
One of Reagan’s strategies of ending regulation was, when it was not easy to simply do away with the regulations themselves, to defund and overload the enforcement agencies.
This was something that really lightened those poor corporate poultry farmers of the South from that awful load of inspections, ’cause Reagan reduced the staffing down to like 2 dudes for 8,000 facilities (actual numbers forgotten).
jeffreyw
Describing the details of the proposed Mars mission to the House Contracting Servicing Committee, Treasury Secretary Timothy F. Geithner emphasized that the plan would give officials the tools to more tightly supervise the largest aerospace contractors. The government would also have the authority to order companies to shed heavy life support systems or limit the effects of gravity if they posed a threat to the mission.
But after he completed his testimony, significant parts of the plan were challenged by Sheila C. Bair, chairwoman of the Federal Space and Science Advisory Council. She raised numerous objections about the structure of a proposed council of regulators, and said that it would fall short of its goal of protecting the system from the shock of a large failure.
Comrade Darkness
I see another perfect storm coming. And this one may actually be worse than the last. Because the bailouts were not tied to reform, nothing the fuck happened. The bailouts (and yes, I realize this was 2008, not Obama, but he did not immediately move to rectify, either) made things worse. “But I do think because of the moral hazard, because of some systemic risks that are associated with making these institutions bigger and bigger … systemically we may be in a more dangerous place even then we were a year ago,”
This time when the system goes down–because banks finally realize the shadow defaulted residential real estate mortgages, and failing commercial real estate, and the newly minted instruments they chased WITH the bailout money– we leave the management of the institutions to lie in their own filth, instead of bowing and cleaning them off as if the government, and by proxy the taxpayer, is their fucking servant.
Hunter Gathers
Geithner sucks, I agree.
But Geithner isn’t the problem.
The Corporate Whores that populate the Senate are the problem.
Geithner just proposes what is politically possible.
Which probably won’t pass anyway.
Rick Taylor
There should be a thorough accounting of where all the money we gave to AIG ultimately went. I have nothing against speculators betting on the failure of corporations; I just don’t see why I should be the one to pay off their winnings.
It’s surprising how much resentment the administration has received from large banks, given how friendly it’s been. We’ve been played for suckers, giving them massive amounts of money, and with them feeling no sense of responsibility in return; it’s business as usual.
It seems to me that there’s space for a populist uprising, but no one lead it. The right wing is wedded to free market ideology, and so is whipping up anger against Acorn and the stimulus bill, which is nuts when you look at where the money is going. Meanwhile, with few exceptions, the Democrats are extremely friendly towards corporate interests. Atrios often argued we need to bail out the banks not necessarily the bankers, and our current administration doesn’t understand that.
tess
Terry Gross interviewed Andrew Ross Sorkin last week about his NYT reporting on the financial crisis last year and his new book, “Too Big to Fail.”
One of his conclusions is that last year “raises questions about the very nature of capitalism.” Who knew a financial reporter covering Wall Street for the NYT could come up with that?
When Gross brings up the bonuses going out now, and how so many people lost their jobs, therefore their health insurance, and then their homes from this crisis, that makes it offensive. He says no, what’s offensive is that they are creating their earnings from more of the same gambling.
(Wasn’t sure if this had been covered–been a long week or so on the feline-hospice-please-eat front.)
geg6
@General Winfield Stuck:
I agree with every word you wrote.
Except this:
I’d submit that my biggest is the lack of action on the dismantling of civil liberties and the lack of investigation/prosecution of Yoo, Addington, and Cheney for war crimes. But that’s just me and my priorities.
That said, Sheila Bair rocks.
ThatLeftTurnInABQ
@Fwiffo:
I keep thinking the same thing, but Yves Smith recently put up a pair of posts the real TBTF problem and not TBTF but TDTR pointing out the getting the structured finanace genie back into the Glass-Steagall bottle is going to require immense amounts of capital, far more than what we’ve already thrown at the financial sector just to stabilize it, and there is no evidence that capital on anything like that scale is available for the task of priming a re-regulated sector. In other words, there may be no going back, at least not without going thru a true Minsky moment, aka a global depression even more severe than the 1930s.
Her articles are a must read on this subject, so long as you don’t have suicidal tendencies. Anybody who is already taking or should be taking anti-depressants should probably steer clear, as it makes for grim reading.
Michael D.
I haven’t had time to read through the 24+ comments here, but I blame the gay people for not being nicer to Obama.
…and Cole, for being totally in the tank for him.
kay
@Hunter Gathers:
I would get rid of him for the single reason that no one has any faith in his ability to act on taxpayer’s behalf. We still don’t know who he’s working for, and it’s been almost a year.
I don’t know if it’s fair, but it’s a fact, and it’s a problem. He has failed at dispelling that perception. We don’t trust him.
Maybe the Obama team did not know how badly guys like Geithner were going to be discredited at the onset of the crisis, but that happened, and it has to be addressed.
Comrade Darkness
@The Other Steve: Oh oh, this is a really easy question. You force them to be small enough to fail without systematic risk. That’s number one. Everything else gets easier with this rule. Moral Hazard goes away, and the lobbying power of each entity gets manageable.
What you describe is unworkable on the surface. A regulator could not close down an entire company at the first sign of trouble. That all-or-nothing set up is the kind that the USDA supposedly uses, and our meat is full of filth. The regulator needs smaller sticks to beat companies with all the time, some medium sized sticks in case the small ones don’t work sufficiently, and a big one or two for worst case. Otherwise the regulator can never politically viably wield anything to keep companies in line.
General Winfield Stuck
@geg6:
There is a special prosecutor right now investigating the Bush/Cheney/Yoo et al torture stuff. I know it was announced that they were only focusing on the folks who exceeded the Bybee memos, but I do believe that was for political cover, as prosecutors are bound to follow pertinent evidence wherever it leads. But the civil liberties stuff I agree with that it could be more a priority. All I can say there are a number of bills backed up in congress dealing with much of it.
slippy
@Egilsson: I love the “Going Galt” infantasy. It’s the same kind of poutful reasoning that an attention-seeking suicide uses: “They’re gonna MISS ME when I’m GONE!”
Except, because the high and mighty are so removed from it all, we actually won’t. I guarantee this. Let the 100 wealthiest men in the country go Galt. Nobody will even notice because there will be someone of better talent and more ambition immediately behind them to take their place.
The hilarious overestimation these tools have of their talent and worth to society is part of the reason they think they’re entitled to all that filthy lucre.
The Other Steve
@Fwiffo: I agree. Companies like Citi should be split up.
The Other Steve
@Comrade Darkness:
Yes, ideally. But other then anti-trust what provision of law do we have to enforce that?
Perhaps this law doesn’t allow for that, which would be valid criticism.
I just think this is a delicate balancing act so I’m open to ideas.
turnipblood
Agreed, Geithner is a worthless piece of crap. Can Obama just get somebody else? Why was he picked in the first place?
Why is it that when it is screamingly obvious to those of us with half a brain that massive CHANGE is imperative (that would include the health insurance crisis) to save this country, you just get the feeling the administration is ineffectual and timid and just too damned scared to hurt the feelings of corporate interests? This is why I did not want Obama. Too conciliatory. That would be just peachy if this were the 90’s but it ain’t.
Don’t know whether to vomit or cry or just lay down and die.
flukebucket
Ayn Rand fans. Every god damn one of them.
Comrade Darkness
@The Other Steve: Oh, new law would definitely be required. No question of that. The beauty of using size in conjunction with the slide scales of capital requirements the Obama administration is discussing is you don’t have to necessarily unwind Glass Steagall. You can allow companies to mix risky businesses together but they have to be much smaller companies or their capital requirements will be astronomical.
The thing I think is most workable about this idea is it allows the institutions in violation to cut up across whatever lines they want to. Some of them will cut along business unit lines which will naturally reduce risk.
turnipblood
um, I meant to include the Dem-controlled Congress in that as well, sorry
wilfred
The reformer gives the capitalist what he wants and gets nothing in return. The politician at least tries to wheedle something for himself and his cronies.
Same as it ever was.
J. Michael Neal
@ThatLeftTurnInABQ: This.
As frustrating as it can be, watching everyone screech about this is fascinating. It’s a case study in how conspiracy theories get started. A lot of you, on other threads recently, have talked about how certain people (gays, right-wingers, what have you) either don’t take the time to understand something that the administration is doing, or can’t understand it. You then point out, perfectly reasonably, that they are letting their imaginations run away with them and concoct absurd theories that Obama hates them, and doesn’t care about their issues.
Then, I watch you do exactly the same thing when it comes to a subject that you don’t understand and don’t take the time to. It turns into a rant that Tim Geithner is a creature of Wall Street, that he has no interest in serious regulation, and that everything he does is a giveaway to the financial industry. Whenever anyone tries to point out how complicated this is, and how trying to unwind all of this is a nightmare of unintended consequences, you run them over with accusations of being in the tank.
kay apparently doesn’t trust Geithner, and argues that his inability to dispel her anxieties means he has to go; it doesn’t mean that she needs to stop and try to think through why he’s doing what he’s doing. John Cole doesn’t stop to realize that Geithner has already sent a set of regulation proposals to Congress that are significantly tougher than what the Senate would actually pass; the same guy who thinks through the implications of exactly the same dynamic when it comes to something like DADT loses his mind when the subject is finance.
Those of you who insist that no one in charge of the regulatory agencies should be connected to Wall Street don’t stop to think that, if you do that, there won’t be anyone around who can think through the issues and figure out the sorts of things that Yves Smith goes through at TLTABQ’s links.
You want to break up the too big to fail banks? What are you going to do about their balance sheets? You want to re-institute Glass-Steagel? What are you going to do about the European banks that have never had that structure? These, and a lot of other things, are hard, complicated, and interact in ways that means solving one of them tends to make others worse. I don’t know about you, but I want someone who has a certain amount of caution and professional understanding in charge who doesn’t decide t just see what would happen if he pulls this loose thread over here.
Of course, it’s just simpler to assume that the administration hates us all and wants to hand over everything we own to the bankers. It’s kind of reassuring to think that about subjects we don’t understand.
Perry Como
@The Other Steve: The biggest problem with the proposal is Geithner (is it okay to use Turbo Timmy yet? I hate that guy) is asking to give the Fed more power. The Fed is a huge problem with the system, not a solution. The Fed, under Greenspan, kept interest rates really low which was the catalyst for all of the insane lending. The New York Fed bailed out Goldman, Soc Gen and Deutsche Bank by paying off AIG’s obligations 100 cents on the dollar. There was even haircut provision in the settlements that was left blank. Hell, a Goldman Sachs director was a chairman at the NY Fed when all this shit was going down and he was buying stock in GS.
Geithner’s solution to the problem is to give the foxes in front of the hen house a table, a sommelier and some fine silverware.
Garbage Man
The amount of money that is being passed around here is so far beyond anyones ability to visualize that they actually look at each individual involved and ask,
“I wonder if we can trust them?”
Nobody can be trusted with this much money. The change dropped on the floor as this much money passes by is more than enough to buy Hawaii.
You wonder if so and so is a whore? Everyone would be a whore for this much money. Satan himself could not offer your soul this much temptaion.
So who cant be trusted? Everyone, including me or any of you if you were in their place and especially anyone who is telling you they can be trusted.
Perry Como
I do love when people start tossing around the term “conspiracy theory” when the behavior of Wall Street is discussed. Here’s some conspiracy theories for you:
– On March 11th, 2008 Fed Chairman Ben Bernanke and New York Fed Chairman Time Geithner held a luncheon with all of the big Wall Street firms at the NY Fed. Except Bear Stearns.
– On March 11th, 2008 someone (the SEC has yet to identify who) bought $1.7 million of put options against Bear Stearns, signaling that Bear’s stock would drop by half in the next nine days. On March 12th, 2008 Bear’s stock went into free fall. Whoever bought those options made $270 million dollars.
– In June 2008, Treasury Secretary Hank Paulson met in secret with the board of Goldman Sachs in Moscow. Paulson is the former CEO of Goldman Sachs.
– Stephen Friedman, a director at Goldman Sachs, served as the Chairman of the New York Fed. After the NY Fed decided to bail out AIG, and subsequently pay out $12 billion to Goldman Sachs through Maiden Lane, Friedman bought 50,000 shares in GS.
I can keep going on if you’d like. We can get into Galleon and how they were buying insider information from prime brokerages, or naked shorting (look at the Lehman collapse), or Madoff, or a whole host of other “conspiracy theories” involving Wall Street.
slag
@J. Michael Neal: According to this analysis, the chairwoman of the FDIC is a conspiracy theorist. Good to know.
I don’t trust Geithner either. But honestly, not trusting someone who has control over things I don’t fully understand is not a new thing for me. My instincts are liberal in so much as I think laws are relatively useful tools to keep people behaving in a way that facilitates the general well-being of our society. Lack of trust is the basis for laws. I’ve never understood why conservatives claim to be all for law and order except when it comes to the marketplace wherein, unless you’re dealing in porn, drugs, abortions, or “Happy Holidays” instead of “Merry Xmas”, you should have complete freedom to do whatever you want no matter the impact on people’s lives. And so far, I think Geithner is far too conservative.
My thinking on this starts from a simple premise: No company should be allowed to get Too Big To Fail. That may be my ignorance talking but it stems from the lack of trust I outlined above. Yes, these issues are complicated. And no, I’m not an economist. I’m an average person of average intelligence who doesn’t happen to believe that there are any Masters of the Universe in real life. But if you can’t explain to me why companies should be allowed to get Too Big To Fail and won’t advocate for laws that prevent them from becoming TBTF even after all the damage we’ve seen TBTF do to the general well-being of our society, then I don’t trust you. It’s fairly simple.
General Winfield Stuck
Zen Moment
Would anyone want the same brain surgeon to fix the lobotomy he just gave you?
Ohmmmmmmmmmmmmmmmmmmmmmmmm.
Mr Furious
@Perry Como: Word.
BombIranForChrist
1. I agree, we need a lot more perp walks. In fact, if Geithner wants to go soft on Wall Street, and he does, the best thing he can do to get away with it is to convince the justice department to start throwing people in jail. Americans will get their pound of flesh, and Geithner can continue to go soft. I don’t think this is good mind you, but I am surprised they aren’t feeding populist anger with arrests.
2. Geithner’s ideas are especially weak, because they rely too much on the whims of the executive branch. Sure, maybe Obama will wield the regulatory hammer with a mighty fist, although I doubt it, but get ole Jeb Bush in there, and he will just refuse to execute on his regulatory imperatives. I think the Fed has problems, but it needs independence from jokers like Jeb. And we probably need some kind of statutory authority that will not be as easily susceptible to the political whims of the executive.
3. Bair for president.
bago
I believe Alan Rickman said it best. “By the time they figure out what went wrong we’ll be sitting on a beach, earning twenty percent.”
J. Michael Neal
I bought about $12,000 of those put options, at almost exactly that time, which, for my portfolio, was a very large amount of money. I didn’t make anything like $270 million, but I did all right. It didn’t take a conspiracy theorist to realize that Bear was going under. *I* knew it was going under. By the Wednesday of that week, which is the day you are talking about, it was probably 50/50 that Bear was going out of business, and it was dead certain that we were going to know one way or another by expiration on that next Friday, so you didn’t have to pay a lot of theta to get your options. (Implied volatility was out of sight high, of course; I think I paid something like 200 vol for my options.) The problem for pricing the stock was that, if it survived the liquidity crunch, the estimates were that it was worth about $100 a share (this was before the markets understood the severity of the crisis), but if it went under, the shareholders would be lucky to get $10.
In that situation, of course there were ridiculously large option purchases. A lot of calls were sold, too. So many that, if the bailout had prevented Bear from going under, and the stock had rebounded, you’d be screaming about a conspiracy to make money for the people who went long, even if trading had been exactly the same.
Now, I’m far from a Hank Paulson fan, and I don’t have a lot of trouble believing that shenanigans went on, however:
1) Pretty much anyone who is anyone in the finance industry has connections to Goldman. That’s because, for whatever reason, they’ve consistently been the best shop around, so ex-Goldman employees tend to be rated very highly, and people hire them. I’m not saying that this means that there wasn’t some sort of conspiracy, but the fact that a former CEO of Goldman was at the center of things does not constitute evidence of one. Ex-Goldman honchos are going to be in the middle of everything, pretty much by default.
2) Tim Geithner is not Hank Paulson.
J. Michael Neal
You know what? So do I. My point is that getting from here to there isn’t as simple as a lot of people want to believe. Somehow, the entire finance world, American, British, European, commercial banks, investment banks, hedge funds, insurance companies, and everyone else, has to deal with their balance sheets. As I said, there are other problems, but the one that Yves Smith talks about is the fact that the interlocking derivatives contracts are so vast, and so interdependent, that you can’t just break them up into smaller piles; without the asset base of a huge branch, everyone would be carrying even more too much risk than they already are. This is even more true if you want to bring back Glass-Steagel, which would split much of the asset base off from *all* of those derivative contracts at a stroke, leaving everything else leveraged to the moon.
Even working full out on this, it will probably take a decade to get the financial system organized in a desirable way. The problem is that big. In the meantime, the proposals Geithner put forth a couple of weeks ago are actually pretty good. Increased capital requirements for larger institutions is a nice way to force them to streamline without doing it all at once and collapsing. Regulatory authority to shut down institutions that go bust is also good. Now lets see if Congress will pass even those.
J. Michael Neal
How the hell do you design a regulatory system that doesn’t rely on the whims of the regulators? I agree that this is a problem, but I don’t know that there’s a solution. Frankly, I don’t want the Fed getting more regulatory power. I’d prefer to see it lose the power it has, and leave it just with monetary policy. I think that the Fed is institutionally incapable of doing both. Of course, the SEC is a disaster at the moment, so I’m not sure where to put it; Mary Schapiro has been one of Obama’s worst appointments, not because she’s in the tank for anyone, but just because she isn’t skilled enough to run this big an organization.
Your fear is a valid one, but the only real answer to it is to not elect Jeb Bush, or anyone like him. Regulating the banks is fundamentally a political issue, and it has to be treated as such. The odd American imperative to remove the politics from our politics is not helpful.
kay
@J. Michael Neal:
I’ve been defending Geithner for a year.
I think that the idea that he ran the NY Fed so should never be in public service is ludicrous. I looked over his record and, he’s RIGHT, most of his work has been in public service. I think he’s (to a certain extent) the inevitable fall guy for a lot of very pissed off people.
My point is simply this: it is not enough for finance people to keep patting us on the head and saying they know better.
they have to admit to massive screw-ups and regain trust.
Don’t blame me if Geithner’s whole freaking (former) sector pissed away credibility. I didn’t have any part in that.
Geithner needs to explain to people why he did what he did, instead of moping around. He needs to explain why we should trust him with all that money. He needs to put conflict walls up, and show people how that works. He needs to be on the phone to the same banks we bailed out and insist they start lending money.
He’s in an extraordinary position. Just shaking his head ruefully at how stupid Kay the taxpayer is, is not enough. I don’t have to know the intricacies of his job. Part of his job is explaining to me what the hell he’s up to.
kay
@J. Michael Neal:
One of the most fascinating (and horrible) things to watch in the Bush Administration was the complete loss of credibility.
President Bush pissed it away. He, and the people around him, saw no need to explain anything.
By the end of his Presidency, he was using a series of surrogates (generals, Paulson) because no one believed anything he said.
I marveled at that, because trust seems to so central to me. That he would just blithely ignore the increasing doubts, until he was all but irrelevant, as a “leader”.
I get that from Geithner, and it worries me, because it plays so neatly into “arrogant Wall Streeter”, a theme that has stuck because there’s truth to it. I don’t want them to piss away credibility.
Left Coast Tom
@kay:
For me…especially so when they’ve just proven beyond any reasonable doubt that they don’t know better. If they knew better we wouldn’t need TARP, we wouldn’t have had the Great Recession, and financial institutions would be focused on their Financial Intermediary role rather than what Krugman called “Bernanke Banking” (where banks sell their loans to the Fed).
ThatLeftTurnInABQ
Thanks to J Michael Neal (with whom I am often in agreement on these issues) for taking the ball and running with it in these threads.
The point which I think is important is that while it is easy for us to imagine a system better than the one we have now, getting from here to there is another story altogether. We can’t just run the clock backwards. The example of FDR’s New Deal is misleading because in that case the architects of the new regulatory regime were able to build on the ashes of a system which had already gone thru something very close to systemic collapse. Obama and co. do not have that dubious luxury. 76 years ago they could start rebuilding the financial system without worrying too much about pulling down what was still working, but doing the same thing today means risking an economic crash and the human suffering which that means, far beyond anything we’ve seen thus far. We need to be very clear on that when discussing the merits of kicking down the existing financial system in order to put something better in its place.
I’m concerned that if we are careless or unlucky we could in fact trigger something much worse than the collapse of 1930-1935, giving the size of the financial imbalances which we have today and that fact that the world today is more urbanized and more economically dependent on sectors other than argiculture, than it was in 1930. In 1930, the worst aspect of the Great Depression in terms of human suffering (apart from the indirect geopolitical effects which led to WW2) was our inability to make sure that people could get shelter and enough to eat, in a society which was much closer to the land than we are today. How well is our more urbanized and complex society today going to hold up under circumstances like that? And this risk isn’t just for us alone here in the US, but also for other people all over the world – global urbanization is far advanced today compared with three quarters of a century ago. Crashing the global service economy which is in a state of interlocking dependence with the FIRE sector would impact a great many people all over the world, almost all of whom have no voice in our political debates. We need to remember that.
kay
@Left Coast Tom:
I have a natural disinclination towards mob pile-ons, so I give Geithner some benefit of the doubt. I think it’s true when he says he spent big chunks of his career in public service, and that he’s something of a fall guy, and has gotten a bad rap.
I think his problem goes to your point, though. He almost insists we rely on his competence in his chosen area of operations, and he doesn’t seem to realize this whole area of operations took a huge credibility hit.
When he says “I should have this job because I understand how these complicated instruments and mechanisms work” I fear a large part of the public thinks “Bullshit. None of you knew what you were doing last year, so how do you know now?”
His experience, incredibly, and maybe unfairly, makes him less credible. That wouldn’t ordinarily happen, but these aren’t ordinary times.
Left Coast Tom
@kay:
The question then becomes, having been a regulator during the critical time in question, why didn’t he regulate? I strongly suspect the real answer is “because Greenspan was running the Fed and didn’t want regulators to regulate”, but if so then that’s what I’d rather hear. If the regulators we’re supposed to trust today were ideologically captured in the past, when they failed, then I want that ideology repudiated.
kay
@Left Coast Tom:
I’ve been railing against Greenspan for a long time because I think he presided over an era where they loaded up consumers with debt like pack mules, and it was completely corrosive to anything good and true :)
I worry about this attitude: I read in the New Yorker than Larry Summers had a sort of epiphany when they (essentially) ran him out of Harvard. That’s what his friends say, anyway. He discovered “losing” so came to understand (I guess) that, well, people sometimes lose, so consumers might need some regulatory safeguards in place so they don’t take too much risk and lose everything. Even Larry Summers loses. Imagine that.
How the hell did Larry Summers get to adulthood without finding that out? Talk about a charmed life. Or, alternately, he’s an idiot.
What does that say about him? That he didn’t know that? Good God. What an ego.
J. Michael Neal
Kay,
If you want someone who is going to come out and publicly lead and provide explanation, Tim Geithner is the wrong guy. He really doesn’t do public speaking.
The bigger problem is that NO ONE can come out and explain what he is doing with the money and add to the level of trust. There are several reasons for this. One is that, as Matthew Yglesias has figured out and discussed, is that, to some extent, the ridiculous giveaway is a feature, not a bug.
The really big disaster here is bank balance sheets. Every step we want to take forward, both from an economic standpoint and from a regulatory standpoint, depends upon banks having more money. Absent that, none of the rest of it works. As a consequence, the Fed and the Treasury *have* just been shoveling money at the banks. The main vehicle for this has been interest rates; letting banks borrow at zero interest and then make positive value trades with it puts more money in their vaults. What people suspect, that the government is engaged in massive subsidies of bank profits, is exactly what is going on, and it is exactly what needs to go on.
As an aside, this is why the administration reacted with such anger to the recent bonus issue. There was if not an explicit agreement then at least a tacit one, that the government was going to *quietly* funnel money to the banks to restore the balance sheets. The bankers then violated that agreement by taking the government largesse and promising it to themselves as bonuses rather than leaving it on the balance sheet. We could argue all day long as to whether the administration was right to trust the bankers (my view is that they had to trust either the bankers or Congress to do their jobs, and neither is very appealing), but that was the deal, and the bankers screwed them. My guess is that the next set of bankers will find that this set screwed them, too, as the administration tightens the screws where they can, but this shouldn’t surprise anyone who knows people at the top of the finance world.*
There really is no way to be all of truthful, reassuring, and not politically stupid. The Bush administration would have opted to just lie through its teeth about it. I consider it quite an improvement to have a Treasury Secretary who is willing to just shut up, stay quiet, and let people trash him. If my interpretations of the administration’s actions are correct, I respect Geithner a hell of a lot, because his reputation is taking damage that no postscripted memoirs will be able to fix, and he’s prepared to live with that in order to do his job. If my interpretation is correct, you also aren’t going to see Obama toss him overboard for a while, because he needs someone to do the job Geithner is doing, and no one else is going to want it. I find the arguments to Geithner’s corruption to be absurd given his background and what his future prospects actually look like.
Perry Como
@J. Michael Neal: Fair enough. I don’t think Geithner is corrupt, I just think he’s been around the white shoe, old boys club too long. What Blankfein says is gold(man).
When people talk about conspiracy theories, they usually refer to some global cabal that pulls the strings and controls the world or something. Reality is much more banal, yet much more complex.
There isn’t a group of a half-dozen guys sitting in some smoky room deciding the fate of the world. Instead you have hundreds or thousands of people cutting deals and trading information to get an edge up. Normally a regulatory agency would take care of this sort of thing, but, alas, they don’t. Even when you have outside actors pointing out blatant fraud (Markopolos) regulators don’t give a shit thanks to the connections the perps have.
Sorry if I got my hackles raised, but it pisses me off a bit when someone brings up “conspiracy theories.” It’s too often used — especially in the case of Wall Street shenanigans — as a way to dismiss legitimate concerns about an issue. Conspiracies do exist: Madoff, Stanford, Galleon, et al. It’s not a global cabal; it’s various groups of people that take advantage of their power, connections and position to rip others off.
kay
@J. Michael Neal:
Thanks. I read your posts on this and they’re always really informative.
The bonus thing is so hard for me, because I listen to financial pundits go on and on about “contractual obligations” as if they are self-executing, and operate as Holy Writ, or something. As if two parties to a contract cannot modify a contract, by agreement.
But, two parties can, of course, agree to modify a contract, and the top tier at any of these financial entities could have done the decent thing and taken a personal financial hit, and foregone those bonuses, simply because millions who are essentially blameless in this mess have sacrificed so much.
They chose not to. They could have.
Left Coast Tom
@J. Michael Neal:
From the beginning I believed Krugman when he suggested that the big banks may be insolvent rather than illiquid; so therefore the purpose of TARP was to shovel unwarranted money at banks rather than help them through a rough patch. Without insisting upon sweeping the existing management aside, which is what really should have happened (the entire management team, not simply replacing the CEO with another failed member of the same team). In a way, this failure to go after the entire management teams of these banks is one of my larger sticking points.
I have no confidence that restoring Big Banks to financial health will cause them to start acting like financial intermediaries rather than gambling addicts, because they were addicts before this mess happened, when they were financially healthy. Since they haven’t received treatment for their addiction, I believe they’re addicted now.
So, in part, I think that what we’re doing now isn’t sufficiently different than the idiotic stuff we did with Paulson around. At the time Bernanke used the metaphor of someone’s house being on fire…one puts out the fire prior to inquiring as to the cause. My thought then was…perhaps not if one of the firemen happens to also be an arsonist.
The bonus stuff leads one to think that one (or more) of the firemen were among the arsonists.
Wile E. Quixote
@Kay
I look at Geithner and think “Bullshit! You can’t even use TurboTax properly and you lie clumsily about it.” Timmeh is a fuckup and he’s a fuckup who has the potential to destroy the Obama administration. Sure, in 2013 after President Palin takes over Timmeh’s friends on Wall Street will make sure that he’s taken care of, but the rest of us will be shit out of luck.
rikyrah
you are smart not to trust Fredo at Treasury.
and Summers either.
Blair is fast becoming a heroine in all of this.
kay
@Wile E. Quixote:
I have a question. If I understand this correctly, in broad terms, the largest investors ( like pension funds) were chasing profits on the sale of these “instruments of imagined value” for ten or so years.
Is there any sort of “opportunity cost” analysis on that?
In other words, large investors were putting money towards this crap instead of investing in other ventures, and pension funds have a sum total to invest, so that has to be a trade-off?
If that’s true, what opportunity did we lose over the last ten years, in terms of money that was not put towards the “tangible and valuable”?
Like a product or idea that adds something to the economy? did we starve that to feed this?
Or, am I just completely off in the weeds somewhere?