Geithner’s Baa Humbug to Jobs and Labor
Geithner’s Baa Humbug to Job’s and Labor
“Ebenezer: Since you ask me what I wish sir, that is my answer. I help to support the establishments I have named; those who are badly off must go there.”
Daniel Gross at Slate interviews Tim Geithner here: “We Will Be Judged on How We Dealt with the Things that were Broken” Some rather revealing statements by Tim Geithner to Daniel Gross’s questions:
GROSS: There’s a perception that you regard your portfolio narrowly, as primarily focused on the health of Wall Street, with Main Street a distant second.
GEITHNER: “My first and essential responsibility was to fix and reform the financial system. That was necessarily going to be the principal part of what people saw. About half my time from the beginning has been spent on the design of the broader economic strategy. The idea that we did not do much for the broader challenges facing the country is completely unjustified. The Recovery Act itself was not just a sweeping, essential force for growth but included a bunch of targeted investments in education, energy, environment, health care that will have huge long-term benefits.”
(Run here: Geithner misses the point or makes the point that finance is the number one concern over Main Street, even though Main Street is financing the rescue of W$. The constituency doesn’t want charity in targeted investments in education, energy, education, and environment when it can pay for those investments itself if they are working. Main Street wants jobs? Main street is still waiting for that tsunami of job creation which is one of the broader challenges of any administration and no administration has put into play any package to stimuli it or companies to do more. Jobs are left to free market influences which is content with investing profits elsewhere other than job creating infrastructure.)
GROSS: So you don’t think the bailouts were too friendly to Wall Street?
GEITHNER: “The idea that the strategy was unfair and has principally benefited a small number of institutions in New York is a mischaracterization of the design and result of the strategy. I thought people would have understood this after the failure of Lehman Bros. But when you do too little and you leave the system with real fear that everything is going to fall apart, like any financial crisis, it hurts the poorest most. A just and fair strategy, even if it is politically hardest to explain and justify, is to use well-designed but massive force to stabilize the system.“
(Run here: Over at Naked Capitalism, they are debating whether Goldman Sachs drove the collapse of AIG by calling for the mark down of CDO by companies holding too many of them thereby forcing AIG to raise collateral after it was downgraded and eventually paying off on CDO that never were expected to payoff. While AIG is at fault for seeing too many pie in the sky dollars in risk and having too little collateral to cover it, one has to wonder why Goldman Sachs should have received 100% on the dollar on its CDS for its risk with AIG and not knowing how over leveraged AIG was at the time. Goldman Sachs certainly benefited by Geithner’s negotiated settlement of AIG’s liabilities at 100% on the dollar.)
GROSS: The biggest downside surprise?
GEITHNER: “The [high] level of unemployment relative to what was happening in the economy as a whole. I’m not an economist, but almost all forecasters missed that. And that’s hugely consequential, because it’s the prism through which most people view basic economic health.”
(Run here:He is kidding right? During every economic downturn, it has consistently been Main Street that has been shown the street from their jobs or homes.)
Geithner is from wall street. he doesn’t know anything about main street. We should have let wall street fail. The government should have created a banking entity to lend money and lets the banks fails. Wall street did not learn their lesson. They learned that the government will bail them out when they mess up and they will still get fat bonuses.
Re: Goldman vs. AIG and 100 cents on the dollar, I’d encourage you to read the SIGTARP report. A couple of items of note from my interpretation/understanding, Treasury’s only leverage in that negotiation was essentially the threat of AIG going bankrupt, which would have left Goldman as a senior secured creditor subject to bankruptcy court. But Treasury had just bailed out AIG and subsequently added to its bailout, so this threat would clearly have been BS. So in effect Treasury said “will you take 80 cents” and they said no, and then Treasury had no other levers.
Separately, UBS had agreed to take a slight haircut, but only if all other counterparties did as well. SocGen and BNP Paribas were essentially forbidden by the French government from taking a haircut, which meant UBS’ offer was worthless.
Finally, AIG, Merrill, Citi, were all criticized for failing to mark to market, and instead marking to model. Goldman claims they mark everything to market (at liquidation price, not some fictitious functioning market price), so the disputes between AIG and Goldman were essentially one party taking an optimistic view and the other taking a pessemistic view of the collateral value. Goldman bought protection in the form of CDS on AIG for the basis risk, which I believe, would have requried a technical default by AIG in order to collect. As a result, Goldman, at least their stance now, had no reason to negotiate with Treasury – if AIG defaults, they collect their collateral from AIG and on the CDS triggered by AIG’s default.
This Geithner character is the first person in fifty plus years that I have never heard or read anything thing that he has said or done, that does not make me want to slap that silly condesending smirk off of his face and send him to prison for life.
I don’t know about prison, but I’m with you re: the smirk. Every 60 days another quarter million Americans lose their jobs — how dare he?
Geithner’s policies have been, as Jim Rogers says, all about bailing out the incompetent at the expense of the competent. It disgusts me that people who should have been summarily fired and in some cases prosecuted and imprisoned for fraud are instead being treated to (in the case of Goldman) government guaranteed bonuses funded involuntarily by honest people of lesser means. Janet Tavakoli has the right approach: we should demand reparations.
“the disputes between AIG and Goldman were essentially one party taking an optimistic view and the other taking a pessimistic opportunistic view of the collateral value.”
I am assuming the strikeout lines up properly with the the appropriate firm.
Thank you for your well reasoned repy; however, I do not believe for one minute Sachs is innocent of any of the manipulation of the W$ events of the last couple of years. It is not impossible to see the tracks of their actions in creating tranched CDO/MBS designed to fail, securing a AAA rating, and then insuring it with a CDS from AIG a firm that was insuring W$ for pennies on the $ through its division, Financial Products, for pennies on the dollar. Does it seem plausible or reasonable to believe that no one had a clue as to what was happening on W$ with AIG or Sachs or other firms for that matter?
When does it stop? We are into AIG for ~$182 billion of which the initial input was to keep the market from a total freeze up after it did a “oh-crap” with the allowed bankruptcy with Lehmans. I will give you the initial input because of the hesitancy of W$; but where does it stop? The last installment of $12 billion conveniently funneled through AIG to Sachs is now a reserved bonus fund for Sachs employees.
And if they refuse to take 80 cents on the dollars? One has to wonder where the Senator Corker (senator from Toyota) and Senator Lieberman (senator from Aetna and Hartford) outrage was and what their vote was or could have been in 1999 for the Gramm, Leach, and Bililey Act. It is easy to get tough with main street and not so easy with W$. No one wants to stifle a growing market with regulations (Summers testifying to Congress – 1999) and keep W$ from speculating; but man, we can certainly kick some union ass and keep the street people in place. I do not believe Geithner tried hard enough then when he may have had little chance of giving them a haircut or much later when the opportunity to do so was much more in his favor. He had no incentive to do so as Congress had given him a “no-strings-attached” funding mechanism to rescue W$, a place from where he hailed.
As far as ending up in court? I do not believe they would have risked it. Doing so would have entailed an explanation much sooner than now. Imagine if they got a prying judge similar to federal Judge Ratkoff who is questioning the Merrill’s bonus package and why BofA did the old wink-wink rather than question them further. I do not believe Geithner wanted to go to court that early in the game either. Too risky.
Jed, I did read the story on AIG, Sachs, etc. a while back. 1 year ago, I knew zip on CDS, CDO, MBS, CRA. OTS, FDIC, Comptroller, LTCM, Born, Mack, Summers, Geithner, Rubin, Levitt, Weill, Theobald, Dorgan, etc. What a tangled mess.
Geithner is a protégée of Summers and worked for Summers the same as Elmendorf did under Clinton and also Greenspan. While not influenced by Martin Feldstein as Elmendorf was, Geithner and Summers are certainly a part of the Rubin clique.
Does it seem plausible or reasonable to believe that no one had a clue as to what was happening on W$ with AIG or Sachs or other firms for that matter?
The New Yorker wrote an aticle entitled something to the effect of Eight Days that Almost Ended the World. It describes the period between Fannie and Freddie going into conservatorship (which catalyzed the bank run on Lehman) and ending with the bailout of AIG. Chris Flowers, a Goldman alum currently a Private Equity bigwig specializing in financial services firms was apparently the one who alerted Paulson to the problems with AIG. He seemingly had no clue it was an issue in the midst of the crisis. Buffet didn’t understand the extent of the issues (and bought a bunch of Goldman in September through a privately negotiated transaction). So yes, it’s plausible that no one had a clue.
The other very important item to keep in mind, is despite all of the house price declines, subprime foreclosures, etc., absent mark-to-market and collateral posting, AIG had sufficient capital to pay what appears to be the economic losses (vs. accounting) of the CDS on CDOs they wrote.
As we watch the collapse of the rule of law in the US, the next cause for us to wail about will be the extension of the Bush tax cuts. We may as well start talking (whining) about it now because, guess what, the people controlling the country want an extension. To whit, Ben Bernanke opening the conversation with reductions in the social security and medicare “entitlements.”
My prediction for 2010 and beyond: The republicans will pick up house and senate seats, as incredible as it may seem. The world is not flat, Tom.
Geithner has a fairly poor record, all along the way. It was his idea, when representing the US at the IMF, to impose conditionality on lending to Asian nations going through rolling financial collapse. That was not only the wrong decision at the time, but also led Asian (and other ) nations to decide running a large current account surplus was their only insurance against another such episode, since the IMF clearly was unwilling to do anything helpful.
The imbalances he helped engineer are a big cause of the collapse we’ve just been through, so he gets double points.
That said, the critique offered here seems pretty pointless. This guy is the Treasury Secretary. He is asked if he sees his portfolio narrowly – finance ahead of jobs. The right answer is “Yes, because the tools at my disposal work through financial channels. It is only by working through those financial channels that the Treasury Department can have any impact on hiring, or any other real-sector activity.” Carping is fun and all, but what should a Treasury Secretary do to promote employment? It may well be that he has screwed up the job he has. It is certainly the case that he is an irritating salesman for his own and his bosses policies. He is not, however, the guy in charge of the labor market. We, as a culture, have more or less decided that we want the government to stay away from hiring to shore up labor demand, and to stick to macroeconomic management. As a result, not only Geithner, but just about everybody else in federal policy positions, is left without good labor-market tools. Blaming the wrong guy, however bad he may be, won’t fix a thing.
The informal agreement with W$ was that if the taxpayers saved W$, they in turn would react and invest in Main Street thereby creating jobs. While Geithner may not be the man in charge of Labor or Unemployment, Geithner was certainly the man to twist arms and get W$ and banks to loosen up on credit with the funds. My critique was correct and you read more into my diatribe then what was intended.
Thanks for your response.
You flatter yourself twice, once by claiming to be correct, once by assuming I was responding to you. I hadn’t read what you wrote, and still haven’t, other than down here while I was looking to see how the comments were progressing.
But you go on patting yourself on the back, if that does it for you.
My apology for answering you. If you notice, I start off with a salutation in an effort to identify the person I am addressing in my reply. I guess I am not that great of a guesser or min-reader? 🙂
Peace and I have deleted my wrongful response.