Evans Politics, November 25, 2009
Tim Geithner Out, J.P. Morgan’s Jamie Dimon In, at Treasury?
Looking back at Tim Geithner’s less than a year at the helm of Treasury, one can point to rather considerable successes: the economy is growing again (+3.2 percent for the third quarter), and the Dow stands at over 10,400, a remarkable comeback. Even housing is picking up nicely (albeit artificially fueled by the Federal $8,000 exemption for first time buyers), which caused the market to go up some 130 points Monday when the announcement on housing for October came out. However in terms of the employment situation (10.2 percent unemployment, the highest in 26 years) there is growing nervousness about the 2010 elections among Democrats, and monetary policy has not been terribly effective. Even the Republicans, to whom unemployment is not a matter to lose sleep over when profits are up, are grousing about Geithner, as Asim Shah of Bob’s Guide reports:
Mr Geithner has faced a barrage of criticism from the Republican Party in recent weeks over his failure to cut unemployment, improve the strength of the dollar and speed up the pace of economic recovery.
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Dick Bove, a banking industry analyst at Rochdale Securities, said that it was vital the US had a Treasury secretary who had the necessary experience in the sector and the full support of Congress.
“That is not Timothy Geithner,” he said.
“It is Jamie Dimon.”
There is a definite upwell of calls for Geithner to be replaced, and J.P. Morgan’s Jamie Dimon seems to be atop of the list of those considered to replace him. Why the big push to oust Geithner now?
Partly directly because of the employment situation and Democratic nervousness about the elections: if Geithner goes, then the Obama administration is ‘making changes’ to help Americans get jobs (since Geithner’s leadership saw rather poor results in that area). But the reasons go much deeper, including a series of moves which have been rather unpopular and unsuccessful, and also some blowback about the AIG bailout and Geithner and his pals’ deep ties to Goldman Sachs. From Forbes’ Thomas Cooley:
As president of the New York Fed from 2003 until January of this year, Secretary Geithner has been in the midst of the maelstrom from the beginning. But he has been performing triage, making quick, instinctive decisions to stop the bleeding. Now it is time for more thoughtful decisions, for reconstructive surgery if you like, and so far that hasn’t seemed to be his forte.
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Secretary Geithner has seemingly been wrong-footed on financial reform as well. In June the Treasury put forth its list of financial reform proposals. They were far reaching and covered virtually all of the important issues that need to be addressed: systemic risk regulation, regulation of the consumer mortgage market, regulation of derivatives, the structure of the regulatory system. But the devil was in the details, and the details were at best vague. The basic structure drew immediate objections from many.
A centerpiece of the reform plan was to give the Federal Reserve responsibility for monitoring system risk–that is, risk to the stability of the whole financial system caused by the activities of an individual institution. That scheme met with almost immediate objections from many, because it would have changed and broadened the mandate of the Federal Reserve in ways that made it more connected to the Treasury and threatened its independence. And it risked diverting the focus of the Federal Reserve away from its primary task of conducting monetary policy and insuring the integrity of the payments system.
The reform proposals also set off a turf war among regulators. Even the Fed argued that it was the institution to regulate mortgages and consumer credit, a job it had manifestly failed at over the past decade.
More recently, Geithner and the Treasury lost an argument in the House Financial Services Committee over how to structure a resolution fund for large complex financial institutions that fail.
Cooley then explains for us Geithner’s involvement in a growing anger over the AIG bailout, at least among those liberal-minded people in the know:
The most recent bump in the road has been the scathing criticism of Geithner by Neil Barofsky, the TARP special inspector, over the funneling of taxpayer funds intended to bailout AIG (AIG – news – people) to its counterparties including Goldman Sachs (GS – news – people ). As the report put it: “There is no question that the effect of the FRBNY’s decisions–indeed, the very design of the federal assistance to AIG–was that tens of billions of Government money was funneled inexorably and directly to AIG’s counterparties.” And the report was particularly critical of the fact that there was no attempt to extract haircuts from the counterparties–they were all paid 100 cents on the dollar.
The overall giveaway bailout to AIG amounted to a whopping $62 billion. Ouch.
Cooley continues:
As a result, the conspiracy theorists are having a field day. Consider their fuel:
As president of the Federal Reserve Bank of New York, Geithner worked very closely with Henry Paulson (THAT b*stard, you know, Bush’s …well, let’s not call names) –his predecessor as Treasury Secretary and before that head of Goldman Sachs –as was warranted by the situation.
Geithner’s primary deputy at the New York Fed was William Dudley, a former Goldman Sachs economist.
The chairman of the Board of the Federal Reserve Bank of New York until May 2009 was Stephen Friedman, former Chairman of Goldman Sachs, and a member of the Goldman’s board at the time of his New York Fed service.
Friedman also chaired the search committee that selected Geithner’s replacement (at the N.Y. Fed) –William Dudley.
At the time his former Goldman Sachs colleague Dudley was appointed–December 2008–Friedman purchased an additional $3 million of Goldman stock in violation of the rules.
Now ask yourself, surrounded by this crowd of influences, how likely is it that Geithner would have asked Goldman Sachs to take a serious haircut on their AIG positions?
You don’t have to be a black helicopter fan to recognize that the proximity of the small world that is Wall Street to the very institutions and public servants who are meant to regulate them can seriously compromise their credibility. This proximity and the fact that Wall Street ran amok on Geithner’s watch as president of the Federal Reserve Bank of New York–the top regulator–has damaged his credibility in his current role.
Apparently, even for the Wall Street crowd, even at the top, Limburger cheese can only smell so bad before you realize that it’s rotten and replace it….
The days ahead will see if Tim Geithner weathers the storm, or if Jamie Dimon of J.P. Morgan is Obama’s new knight in shining armor. Bob’s Guide gives us J.P. Morgan’s bottom line with Dimon at the helm, which is so appealing as a model of success: “Last month, JPMorgan Chase reported third quarter net income of $3.6 billion, up from $527 million in the same period in 2008.” Forbes reports that Dimon’s “JPMorgan Chase, (is) the largest bank in the country by market capitalization ($168 billion)” and “is the best-capitalized large bank in America ($31.5 billion of loan loss reserves and $162 billion of shareholder equity as of Sept. 30).” That looks pretty good after the debacle of 2008, where insufficient reserves and risky gambles with derivatives based on shaky mortgages brought down the economy.
Plus Dimon “is on nobody’s hate list,” is “a longtime Democrat” and “has connections inside the beltway.” (Forbes) He gained a lot of “stock” (no pun intended) with the government when he helped out by rescuing Bear Stearns and Washington Mutual, too.
But does he have the right ideas for America? As the following YoungTurks video points out, he has come out “against every single regulatory measure proposed, not just by the White House, but by Congress as well” and is for pure market capitalism, unvarnished. For example he is the leading proponent of the “no bank is too big to fail” argument. He also seems dead set against consumer protections and regulation of derivatives. Maybe as CEO of J.P.Morgan Chase HE is capable of managing the large risk of derivatives successfully, but what of other institutions, and how will ordinary American consumers be protected?
His perspective is purely that of the predatory professional banker, and ordinary Americans will fall by the wayside. Is this supposed to be some kind of improvement?
Tim Geithner Replacement – Could He be Worse?
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