Is Geithner Toast?
The Treasury secretary testified Wednesday that he had no role in disclosures about AIG's payments to banks. Charlie Gasparino on his slim chance to save his job.
Treasury Secretary Tim Geithner’s job is on the line. That seems to be the consensus of just about every Wall Street executive who deals with the White House on economic matters, and congressional staffers involved in financial-policy issues. The lousy economy he inherited last January got even worse under his watch. And while Main Street continues to suffer with a staggering 10 percent unemployment, Wall Street was handing out record bonuses, the direct result of "too big to fail" policies Geithner has advocated, and the president’s flawed economic agenda of higher taxes on small businesses.
Why would Geithner have wanted to hide the size of the bailout? And who did this really benefit?
The only question is how much longer Geithner can hang on, and Wednesday’s AIG hearings, in which he is scheduled to testify, will give us all a big clue. In a perfect world, Geithner will be grilled by Congress on the inequity of the administration’s economic strategy: How can Wall Street prosper so mightily, as unemployment in the construction industry, for instance, tops 20 percent?
But Geithner is scheduled instead to discuss the much-debated bailout of AIG, the insurance giant that fell close to insolvency during the 2008 financial meltdown and threatened to take down the rest of the financial world with it.
Geithner was at the New York Fed at the time of the bailout, and in that role, he was in charge of pumping money into AIG to save the company. The question is whether Geithner put too much money into AIG, so much in fact that firms such as Goldman Sachs received 100 cents on the dollar for its bad investments, thanks to the American taxpayer.
The problem Geithner faces now is that so far he hasn’t been very good at explaining things in front of administration-friendly reporters. (As I hear it, Treasury was, at times, able to demand strict ground rules, including types of questions being asked, in exchange for access.) And the questions he’s likely to receive from the House Oversight and Reform Committee on the AIG bailout will likely be the least friendly yet. There is some evidence that Geithner himself knows that this is do-or-die time. On Tuesday, a congressional staffer told me Geithner has told the committee he wants a two-hour time limit on the questioning in an effort to manage the damage he could cause himself.
And that damage could be huge. It’s the ultimate irony that an administration grounded in class warfare (remember how the president called Wall Street executives “fat cats” during a recent 60 Minutes interview?) has earned the reputation with the general public for helping those same fat cats bulk up—and Geithner is one of the main reasons. He’s a longtime bureaucrat, part of the regulatory apparatus that Wall Street has molded for more than a decade to enhance its ability to take enormous risk, often at the expense of the taxpayer, and was one of the three top regulators, along with Fed Chairman Ben Bernanke and former Treasury Secretary Hank Paulson, who failed to see the financial meltdown coming before the system crashed in 2008.
While Bernanke and Paulson’s actions have been controversial (one reason why Bernanke is having difficulty getting reappointed, and Paulson sees the need to explain himself in an tell-all book scheduled to be released the first week of February), both have rightly received fairly high marks for their actions during the height of the crisis.
Geithner, though part of that same bailout effort, has found himself on the defensive, largely because in his role as head of the New York Fed, he took the lead in the enormous AIG bailout.
But recently released documents show that the size of the bailout—$180 billion, covering the banks' exposure to toxic debt at 100-cents on the dollar—was not only unnecessary, but hidden from the public on purpose, by the New York Fed itself.
Why would Geithner have wanted to hide the size of the bailout? And who did this really benefit? Geithner will say the financial system was saved, but based on previous testimony, Goldman Sachs and the other banks benefited beyond any reasonable expectation. Goldman CEO Lloyd Blankfein recently testified that his firm had enough cash and other guarantees known as “hedges” on hand to survive the financial crisis in late 2008, and yet he readily accepted 100 cents on the dollar from AIG once it was bailed out by taxpayers. Blankfein also testified that there was no request, as far as he knew, from the New York Fed, to have Goldman take less.
One question I’m sure Geithner will be asked is why Goldman wasn’t asked to take less. And based on emails uncovered by the committee, he’d better be asked why the New York Fed demanded that the terms of the deal be kept secret from the public—treated as a matter of national security. Thus far, the statements coming out Geithner’s office on these questions have been convoluted: He says that he recused himself from AIG decisions because at the time he was being tapped as the newly elected president’s Treasury secretary, but emails show he was clearly in the loop.
My feeling is that Geithner has nothing to gain and everything to lose in his testimony, particularly given the cluelessness he exhibited in the past when asked about the economy and government efforts to shore up the banking system. (I remember one speech he gave that sent the Dow down several hundred points) The betting on Capitol Hill and on Wall Street is that if Geithner bombs, as expected, the president will wait a few months before actually dropping him.
During the hearings, Geithner will be joined by former Treasury Secretary Hank Paulson, but he shouldn’t be counting on his predecessor for support. In advance of his book, Paulson has been silent of late, and it doesn’t take a genius to figure out that the best way for Paulson to make himself look like the hero of the financial crisis is to let his successor twist in the wind.
Charles Gasparino is CNBC's on-air editor and appears as a daily member of CNBC's ensemble. He is a columnist for The Daily Beast and a frequent contributor to the New York Post, Forbes, and other publications. His new book about the financial crisis, The Sellout, was published by HarperBusiness.