article

10.08.09

Timmy's Telephone Travesty

New revelations about Tim Geithner’s phone records show an appallingly small Wall Street circle. With a probe likely, Simon Johnson says the Treasury secretary needs a bailout—from Larry Summers.

Treasury Secretary Tim Geithner faces a major public-relations problem. His phone records and broader calendar, obtained by the Associated Press, indicate that most of his contacts with the financial sector in the first seven months of this year were in fact with just three mega-banks: Goldman Sachs, Citigroup, and J.P. Morgan Chase.

While such skewed access to a top policymaker would raise eyebrows at any time, this disclosure is particularly difficult for Geithner. He is known to have deep contacts with a small number of banks, partly from his time at the New York Fed (as reported by The New York Times in April) and partly from his mentor, Robert Rubin, formerly of Goldman and Citi.

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Geithner himself has confronted this issue directly before, and always insists that his policies are intended to help the entire financial system and thus the whole economy. “I've been in public service all my life…” he told PBS in May. “And I would never do anything and be part of any policy that's designed to benefit some piece of our financial system. The only thing that we care about and the only obligation I have is try to make sure this financial system is doing a better job of meeting the needs of businesses and families across the country."

Such statements are hard to square with the fact that, in the height of the crisis, he actually talked primarily with only three big banks—not even representative of the entire field of large banks (e.g., Wells Fargo and Bank of America), let alone the small and medium-size banking sector that is now getting hammered.

In addition, while there are ordinarily many safeguards around officials’ private sector contacts, none of these function effectively during a financial crisis. For example, Henry Paulson, Jr., the previous Treasury secretary, was initially scrupulous about keeping his distance from Goldman Sachs, but as soon as the crisis broke in September 2008, he immediately obtained a waiver allowing him to talk early and often with his former employer.

In any crisis, policymakers need to get information direct from the markets and to understand fast-moving developments. But precisely because the exact issues are hard to comprehend and even basic facts are open to many interpretations, it’s an incredible advantage for any banker to have near exclusive access to a top official decision maker—they can shape world view at the very top (including in the Oval Office) and skew any rescue efforts massively in their own favor.

Presumably, there will now be a great deal of scrutiny—including congressional subpoenas—regarding actions of the Big Three that had the inside track to Secretary Geithner. Investigators will likely focus on follow-on phone calls and emails from the respective CEOs to managers of their trading desks and other people responsible for moving money around. Did any of these banks or individuals benefit in any measurable way (e.g., in terms of their stock price or the perceived risk of bankruptcy) from specific pieces of information gleaned or general tone inferred in exchanges with the secretary?

If a diligent prosecutor brings to bear the latest statistical tools of financial pathology (which now allow more accurate determination of who did and did not benefit in this kind of situation), what he or she will uncover? More to the point, there will presumably now be a mini-industry muckraking through this material and putting pressure on Secretary Geithner for further disclosures, testimony, and the like.

If Geithner can argue that his contacts with Wall Street were part of a diversified portfolio of interactions on the part of the president’s inner circle, this would take the edge off his current predicament.

There will also be strong pressure on Geithner’s colleagues to come to his rescue, specifically by providing records of their own private-sector conversations. If those calendars show, for example, that Larry Summers—head of the White House National Economic Council—was in regular contact with a broader or at least different set of bankers, this would help Geithner to no end.

Summers is close to the financial sector, but his network of strongest connections does not overlap exactly with that of Geithner—for example, Summers is closer to hedge funds, where he used to work. If Geithner can argue that his contacts with Wall Street were part of a diversified portfolio of interactions on the part of the president’s inner circle, this would take the edge off his current predicament.

But Summers’ records have a greater degree of protection from Freedom of Information Act requests or from congressional inquiry. As Karl Rove’s lawyers are happy to explain, existing interpretations of “executive privilege” include anyone close to the president in the White House, e.g., Summers—but not the secretary of the Treasury.

Summers can still voluntarily release his calendar and presumably will do so if that would help—after all, Geithner is a protégé, they work closely together, and the administration’s banking policy is really their joint effort.

And Summers must reckon, correctly: If he refuses to release his records, that would imply their content is actually very damaging.

Simon Johnson is a professor at MIT’s Sloan School of Management, and a senior fellow at the Peterson Institute for International Economics.