11.18.09

Geithner's Stock Plummeting

Tim Geithner hotly defended his job Thursday in front of angry Republican congressmen who asked him to step down. "What I can't take responsibility is for the legacy of crises you've bequeathed this country," he shot back.

It is not easy being the secretary of the Treasury in the midst of so much economic turmoil. But even under current conditions, Tim Geithner’s credit is running exceptionally low. He is already in serious danger of being ranked with the most ineffectual Treasury secretaries in recent history—along with David Kennedy under Nixon, Michael Blumenthal under Carter, Don Regan under Reagan and Paul O’Neill under George W. Bush. This time, however, the stakes are much higher; a president in crisis will and should run out of patience with a floundering Treasury secretary. So far, Geithner shows few signs of recovering as unemployment continues to rise, ongoing defaults may still hamper the credit of the U.S., Wall Street pays itself huge bonuses, and China refuses to budge on its undervalued currency.

This week, Geithner was dealt a major personal blow when the special inspector general who was auditing the bank bailout plan known as TARP (Troubled Asset Relief Plan) announced that he “caved in,” to use The Wall Street Journal’s phrase, to demands from the financial community. Geithner was president of the New York Federal Reserve Bank when it saved AIG last fall; by all accounts, he was the principal decision maker. The huge insurance company wrote trillions of dollars worth of complex derivatives—credit default swaps—that were about to put it out of business without government aid. Geithner feared its counterparties—those it owed money on these trades—would also go down with it. But he could have forced these creditors to take significantly less and did not. The government acquiesced to their demands and paid them off in full. These creditors included, most notably, Goldman Sachs, who also took government funds and recently paid them back, only to announce enormous bonuses for its traders.

“Geithner now looks to many serious observers like a mug. But his personal history is consistent.”

Geithner now looks to many serious observers like a mug. But his personal history is consistent. Doubts about Geithner were raised early in the nomination process, when it was discovered that he failed to report his taxes fully, not once but on several occasions. Democrats insisted it was a minor oversight—or two or three. More to the point, he presided over the greatest financial debacle of our time as the nation’s chief of open market operations and its main on-the-ground bank regulator. While he did warn about derivatives to some degree, he took no serious action to reign them in. To the contrary, in 2004, he assured the nation that the banks were strong. As late as 2007, when the Street was already on the brink, he made a speech in Atlanta championing the rise in derivatives trading as a healthy way to spread risk, a favorite theme of his boss, Alan Greenspan, the Fed chairman. According to The New York Times, he also favored a plan that same year to reduce capital requirements further for banks; thankfully, it was dropped. The New York Times reporters, Jo Becker and Gretchen Morgenson, also determined from his daily diaries that he often met alone with top financial executives like Jamie Dimon of JP Morgan Chase, and even Sandy Weill, typically a practice that is avoided. In the past, the Fed president usually met with bankers in the presence of another Fed official to avoid any possibility of undue influence. Weill, former CEO of Citigroup, offered him the job as chairman, which he wisely turned down.

Now the bank bailouts are widely criticized for not requiring more of Wall Street –at least a serious equity stake—in a deal under George W. Bush to which Geithner had been a party. All of this might have been forgiven if he came out charging once he was on the job. But his first speech on financial re-regulation in February was overbilled by President Obama and turned out to be a remarkable dud, flagrantly lacking in details or much hard-thinking. The market tanked the next day. His plan to start a public-private partnership to buy the threatening toxic assets on the balance sheets of financial institutions was laughably rigged in favor of private investors and against taxpayers. The long-awaited white paper on financial reform issued in June, apparently co-authored by Larry Summers, the head of President Obama’s National Economic Council, was a shallow work of conventional wisdom and deliberately light touch that could have been put together in two weeks by smart seniors at Dartmouth (where Geithner graduated). Reform, such as it is, is being carved up in Congress and any bill passed will surely be inadequate.

In the meantime, unemployment continues to rise—and is unlikely to fall anytime soon, according to most observers, including Federal Reserve chairman Ben Bernanke, who said as much this week. Geithner’s voice may be muffled by the ubiquitous Summers, but he has a megaphone, and he could use it. Only now has the Obama team begun talking about a jobs program.

How did Geithner get so far so fast? He was 42 years old when he was named the bank president. The consensus answer is that one of his chief qualities for rising has been respect for his superiors. He was an international affairs graduate student at Johns Hopkins who later worked under Robert Rubin and Summers at the Treasury; he rose rapidly, some say by loyally and competently doing their bidding. He spent several years at a handsome job at the International Monetary Fund, where he forgot to pay his U.S. taxes. Rubin and the Blackstone Group’s Pete Peterson backed him for the top slot at the New York Fed. He is called bright, but no one accuses him of gravitas. As a habit he does not run against the conventional wisdom.

If the economy does not bounce back, Obama will have to consider a change. When crisis descended, other ineffectual Treasury secretaries did not last. Reagan replaced the befuddled Don Regan, former head of Merrill Lynch, with his trusted and intelligent adviser, James Baker, who immediately engineered a devaluation of the dollar to restart the economy. Nixon replaced the mild-mannered David Kennedy in 1971, as inflation began to rise in the nation, with the flamboyant John B. Connally—who famously told anyone who would listen that he could play it anyway they wanted. With Connally as his strong man, Nixon was able to deal with his great fear, losing his chance for a second term due to a weak economy. Connally got the job done, with measures not all to the good—cutting the nation loose from Bretton Woods, imposing price-wage controls, devaluing the dollar, and enabling Nixon to set off on a spending spree to assure his reelection in 1972 (the easy monetary policy at the Fed under the helm of his good friend Arthur Burns also helped).

Other Treasury secretaries have been quietly strong. George Shultz, an economist, served Nixon solidly as a man who spoke his mind and did not try merely to parrot his superior. Bob Rubin stood tall when he took over from Lloyd Bentsen, and engineered the bailout of Mexico during its currency crisis in 1994 and the Asia economic crisis in 1998.

On the other hand, Michael Blumenthal, Carter’s Treasury secretary, could not help his president get past his own ambivalence about fighting inflation. Paul O’Neill was let go by George W. Bush for talking back, but he probably sleeps well at night. John Snow, his successor, was at best forgettable. Henry Paulson, a stronger man but one who engineered the giveaway to Wall Street, will not be looked upon kindly by history.

Recall that few thought Geithner was seasoned enough to be Treasury secretary when Obama picked him. Rubin wasn’t ready to be Treasury secretary when Clinton was elected and he had run Goldman Sachs. Was Geithner’s main attraction that he could easily be controlled by Summers and the White House political advisers? It’s a good bet. A better strategy, some argued, would have been to name Paul Volcker, the former Fed chairman, for a year’s worth of service and give Geithner as his deputy time to grow. But Volcker would have been far harder to control by the White House.

But now the president needs a Treasury Secretary who is respected enough to stand up to Wall Street, restabilize the world’s trade flows and currencies, and persuade Congress to join a battle to get the economic recovery on a strong path. He also needs someone with enough economic understanding to be a counterweight to the White House advisers, led by Summers, who have consistently been behind the curve, except for the $800 billion stimulus. And now that is looking like it was too little. The best guess is that Geithner is not telling the president anything that the president does not know or doesn’t hear from someone down the hall.

The problem for Geithner and his boss, is that the stakes if anything are higher than ever. Is this the man who can bring Wall Street into line, to herd an international consensus on financial reform, to convince the increasingly bold Chinese they must revalue their currency against the dollar, and to sell Congress on the next jobs stimulus program?

Obama is a patient man. And if the economy muddles through, and there is a small chance it will, Geithner will survive the president’s first term. But unless Geithner finds his form, the nation will pay the price. Over the long run, prosperity will suffer.

Jeff Madrick is a contributor to the New York Review of Books and a former economics columnist for the New York Times. He is editor of Challenge Magazine, visiting professor of humanities at Cooper Union, and senior fellow at the New School's Schwartz Center for Economic Policy Analysis. He is the author of Taking America, The End of Affluence (Random House) and The Case for Big Government.