Geithner must bloom as a leader, critics say
By YALMAN ONARAN and MICHAEL McKEE • Bloomberg News • March 1, 2009
It was 2004 and Tim Geithner, president of the Federal Reserve Bank of New York, had a message for the Federal Open Market Committee in Washington.
He told his 18 colleagues gathered around the long mahogany table that a clearinghouse was needed to monitor risks in the burgeoning $5 trillion market for credit-default swaps -- the over-the-counter derivatives that would later spin out of control and help take down Wall Street.
In a move that may have foreshadowed his role as President Barack Obama's Treasury secretary, Geithner over the next two years nudged financial firms to voluntarily clear a backlog of swap trades. They stopped short of creating a clearinghouse to bring more transparency to the market.
"Geithner was making noise on reining in derivatives, but he didn't push hard enough," said Jane D'Arista, a former economist at the Congressional Budget Office in Washington and a longtime Fed observer. "Maybe he'll be more forceful now that he's in a position with real power. But I'm not so sure."
From his years as a Dartmouth College student and midlevel Treasury official through his stint at the New York Fed, Geithner, 47, has thrived as a backroom negotiator and conciliator. Now, as he struggles to rescue Wall Street from a crisis that happened on his regulatory watch, investors and economists question whether the 75th Treasury secretary can transform himself into a bold leader equal to the challenges ahead.
The rookie secretary has already learned that the honeymoon won't last long. After Geithner presented a $2.5 trillion financial rescue plan on Feb. 10, the Dow Jones industrials tumbled 4.6 percent because investors found it bereft of details. Geithner also gave no indication that he would act quickly to dismantle the weakest of the banks, a move that Joseph Mason, a former bank regulator who teaches finance at Louisiana State University, said he should take now.
Japan prolonged its credit crunch and recession for almost a decade before it finally nationalized two of its biggest banks, the Long-Term Credit Bank of Japan and Nippon Credit Bank, in 1998.
"The key to all our problems is the zombie banks," Mason said. "We're giving them money, which is not going to solve anything. We're repeating the mistakes of Japan, which wasted a decade by not moving decisively against its zombie banks."
The Treasury secretary's experience at the New York Fed from 2003 to '08 gave him an inside view of Wall Street that will help him choose the best remedies for today's crisis, said Alex Pollock, resident fellow at the American Enterprise Institute in Washington and a former president of the Chicago Federal Home Loan Bank.
"He's very well qualified," Pollock said.
David Kotok, chief investment officer at Cumberland Advisors Inc., said Geithner's insider status -- he selected former Goldman Sachs Group Inc. lobbyist Mark Patterson as his chief of staff -- is a liability.
Geithner was at the helm of the New York Fed when Wall Street ran amok, and he had a seat at the table when Federal Reserve Chairman Ben Bernanke and former Treasury Secretary Henry Paulson came up with remedial measures that have not worked.
"He's not change, as Obama promised, but just the same old stuff," said Kotok, who manages $1 billion in Vineland, N.J.
Geithner declined to comment for this article.
Oversight of bull market 'lax'
As New York Fed chief during one of Wall Street's greatest bull markets ever, Geithner shared authority over some of the country's biggest commercial banks with the Comptroller of the Currency.
While the banks loaded up on mortgage-backed securities and derivatives, Geithner failed to use his power to force the firms to build adequate capital cushions and risk controls, said Allan Meltzer, a professor at Carnegie Mellon University in Pittsburgh who monitors the Federal Reserve.
Citigroup Inc. led the buying frenzy on Wall Street, holding $544 billion in securities and derivatives by 2007, before the bank unraveled under its weight.
"The oversight of Citi was shamefully lax," said Janet Tavakoli, founder of Chicago-based advisory firm Tavakoli Structured Finance and author of books on financial risk.
By 2008, the New York Fed president was forced to face the consequences of slack regulation. As Bear Stearns Cos. neared bankruptcy, he worked closely with Paulson and Bernanke on a bailout in March, and, after Lehman Brothers Holdings Inc. died six months later, the trio came up with TARP -- the $700 billion Troubled Asset Relief Program. Geithner told Congress in February that he took responsibility for not doing enough to prevent the financial crisis.
"There were systematic failures in supervision and regulation across our system," he said. "Every supervisor and regulator as part of the system could have done more to prevent this."
While the Treasury secretary has given his initiative a new name, the Financial Stability Plan, it's mostly an extension of TARP. The centerpiece is a $1 trillion Fed loan fund that will be used to induce hedge funds and buyout firms to purchase toxic assets from banks so they can begin lending again.
Before giving more capital to banks, Geithner is sending examiners into the 18-20 biggest firms to perform newly designed "stress tests." Nouriel Roubini, an economist at New York University, forecast in January that financial firms would write down another $2.5 trillion on top of the $1.1 trillion since 2007.
On Friday, the government boosted its stake in Citigroup -- 36 percent equity -- in exchange for up to $25 billion in emergency bailout money.
Geithner is too cautious and too protective of Wall Street to take over big banks, said Paul Miller, banking analyst at Friedman, Billings, Ramsey Group Inc. in Arlington, Virginia.
"His philosophy is don't wipe out the shareholders because they'll never come back," Miller said. "But the only way to get to the problem is to dilute shareholders away. These guys are unwilling to take these big steps."
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