Friday, December 31, 2010

Before He Was Famous: Tim Geithner On Informal Power Grabs At The FRBNY

EPJ's Bob English has recently commented on the role informal, off-the-record meetings between bankers and their regulators play in enhancing the lucre of their business models. And EPJ mastermind Bob Wenzel has also been tracking the way in which the new Dodd-Frank bill will create 122 new power centers in the federal government, power centers which have the task of creating their own rules and means of enforcement with heavy influence from lobbyists hired by the very firms that are meant to be regulated by the bill.

Along those lines, I came across a few quotes from (at the time president of FRBNY) Tim Geithner and former president of FRBNY Bill McDonough in my recent reading of Superclass which I found to be revealing. I reproduce them now in full below for your own perusal and consideration.

Tim Geithner, Superclass, pg. 174-175:
Recalling a situation in which he had to manage a crisis in the derivatives market, he said, "What we did is, we got the fourteen major firms in a room down the hall here with their primary supervisors, a group of the largest global institutions and their supervisors from five countries. And we said to them, 'You guys have got to fix this problem. Tell us how you are going to fix it and we will work out some basic regime to make sure there are no free riders to give you comfort, so you know that if you move individually everybody else will move with you.' And there is nothing written, no guidance, no regulation, no formal process. We did it without a formal request to us. We told everybody we were going to do it but we were not asked to do it."

"These fourteen firms," he continued, " accounted for something like 95 percent of all the activity in this market. The Fed, the SEC, the FSA, the Swiss, and the Germans were there. And those were the principals, and each firm brought three people, they had an executive committee of four firms that ran, almost weekly at the beginning, a conference call among the other firms. And the best thing about the process was that it was efficient, there was nothing written except letters from the firms laying out their commitments. There's no formal mechanism we could have used to force this on anybody so we had to invent it. I think the premise going forward is that you have to have a borderless, collaborative process. It does not mean it has to be universal, every jurisdiction or every institution. It just needs a critical mass of the right players. It is a much more concentrated world. If you focus on the limited number of the ten to twenty large institutions that have some global reach, then you can do a lot. It's interesting, actually. Of the fourteen big firms... [chairman and CEO of Goldman Sachs] Lloyd Blankfein jokingly called them 'the fourteen families,' like in The Godfather... The Japanese were not in it, which was interesting. It is really the Swiss, Germans, U.S., U.K. Really mostly the U.S. and Europe. No Asian firms."
It should be obvious what kind of bold-emphasis I would've added throughout those paragraphs so I won't bother.

Here's Bill McDonough, Superclass, pg. 182-183, at the time of this printing former president of FRBNY and current vice chairman at Merrill Lynch:
"There is a growing view," he remarked to me, "that the modern economy is benefiting the more successful at the expense of the less fortunate. In the United States, the lower half of income distribution has not been keeping up."

"I believe that in all societies, clearly in democracies where the electorate can change the government at the next election, more attention has to be paid to making it clear to all the people that they too can benefit, or at least that the educational system gives their children that opportunity. That is the American dream. But even in less democratic societies, governments govern over the longer term with the consent of the governed. If not, revolutions take place."

"In guiding globalization, government leaders, central bankers, and leaders of the business community simply have to do a better job of taking those actions needed to have all the people believe that the system benefits all."
Note that among other devious insinuations, this confidence man expounds on the importance of spreading faith in the system.

And never mind the fact of a man who is now a vice chairman for a company he once regulated, on the eve of its undoing (2007).

4 comments:

  1. "It just needs a critical mass of the right players." -Timmy G.

    And what better way to assemble a critical mass than through consolidation at the top. If this was indeed an extant goal pre-crisis, then any actions taken by the Fed, SEC or any one else that resulted in mergers or takeovers (Bear, Wamu, Merrill) should be re-examined with an eye toward conflicts of interest.

    Any more information regarding the derivatives situation (e.g., date)?

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  2. Hi BobE,

    No, he wasn't specific in the book as quoted, though this book was published in 2007, I believe, and I suppose one could look at Geithner's tenure at FRBNY pre-2007 and see what kind of derivative crises occurred on his watch which were publicized and then see if his comments fit any of them particularly well.

    I wish I could be more helpful than that.

    By the way, you raise a great point. Now, some would say "A-HA! So they engineered this crisis on purpose!" while others would say, "A-HA! Never waste a crisis once it happens on its own, eh?"

    Still others might say, "Good thing we have government and noble leaders like Tim G to rally those Wall St scum and clean up after big crises!"

    The first two comments represent a more reasonable interpretation of events, I believe.

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  3. This must be it:

    http://www.propublica.org/article/geithner-nyfed-tenure

    Good links within the article:

    http://s3.amazonaws.com/propublica/assets/docs/gao_regulators_risk_report_090318.pdf

    http://www.propublica.org/special/timeplot-geithner

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  4. BobE,

    Wow, nice work! You remain true to your "Bloodhound" name.

    ReplyDelete